<PAGE>
As filed with the Securities and Exchange Commission on December 30, 1998
Registration No. 333-67255
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO.1 TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
WORONOCO BANCORP, INC.
WORONOCO SAVINGS BANK
401(K) EMPLOYEE BENEFIT PLAN
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6036 BEING APPLIED FOR
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
31 COURT STREET
WESTFIELD, MASSACHUSETTS 01085-0978
(413) 568-9141
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
CORNELIUS D. MAHONEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WORONOCO SAVINGS BANK
31 COURT STREET
WESTFIELD, MASSACHUSETTS 01085-0978
(413) 568-9141
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
DOUGLAS P. FAUCETTE, ESQUIRE
KENT M. KRUDYS, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
----
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
----
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
----
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
----
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of each Class of Amount to Offering Price Aggregate Offering Registration
Securities to be Registered be Registered Per Unit Price (2) Fee
- --------------------------- ------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock 5,998,860
$.01 par value Shares(1) $10.00 $59,988,600 (3)
- --------------------------- ------------- ---------------- ------------------ ------------
Participation (4) _______ $726,478 (5)
Interests
====================================================================================================
</TABLE>
(1) Includes shares of Common Stock to be issued to the Woronoco Savings
Charitable Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The registration fee of $16,677 was previously paid upon the initial filing
of the Form S-1 on November 13, 1998.
(4) In addition, pursuant to Rule 416(c) under the Securities Act, this
registration statement also covers an indeterminate amount of interests to
be offered or sold pursuant to the employee benefit plan described herein.
(5) The securities of Woronoco Bancorp, Inc. to be purchased by Woronoco Savings
Bank 401(k) Employee Benefit Plan are included in the amount shown for
Common Stock. Accordingly, no separate fee is required for the participation
interests. In accordance with Rule 457(h) of the Securities Act, as amended,
the registration fee has been calculated on the basis of the number of
shares of Common Stock that may be purchased with the current assets of such
Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
PROSPECTUS SUPPLEMENT
- ---------------------
INTERESTS IN
WORONOCO SAVINGS BANK
401(K) PLAN
AND
OFFERING OF 72,647 SHARES OF
WORONOCO BANCORP, INC.
COMMON STOCK ($.01 PAR VALUE)
________________________
This prospectus supplement relates to the offer and sale to participants in
the Woronoco Savings Bank 401(k) Plan of participation interests and shares of
common stock, par value $.01 per share of Woronoco Bancorp.
In the conversion of Woronoco Savings and the simultaneous offering of
Woronoco Bancorp common stock, Woronoco Savings has amended the 401(k) Plan to
permit participants to direct the trustee of the 401(k) Plan to invest their
401(k) Plan accounts in the common stock through the Woronoco Bancorp Stock
Fund. Based upon the value of the 401(k) Plan assets at September 30, 1998, the
trustee of the 401(k) Plan could purchase up to 72,647 shares of the common
stock (assuming a purchase price of $10.00 per share). This prospectus
supplement relates to the initial election of 401(k) Plan participants to direct
the trustee of the 401(k) Plan to invest all or a portion of their 401(k) Plan
accounts in the common stock at the time of the Conversion of Woronoco Savings.
The prospectus dated _______________________________, 1999, of Woronoco
Bancorp, which we have attached to this prospectus supplement, includes detailed
information regarding the conversion, the common stock and the financial
condition, results of operations and business of Woronoco Savings. This
prospectus supplement provides information regarding the 401(k) Plan. You should
read this prospectus supplement together with the prospectus and keep both for
future reference.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 7 OF THE PROSPECTUS.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS ____________________, 1999.
<PAGE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE MASSACHUSETTS DIVISION
OF BANKS, THE FEDERAL DEPOSIT INSURANCE CORPORATION, NOR ANY OTHER STATE OR
FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, HAS APPROVED OR DISAPPROVED
THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
This prospectus supplement may be used only in connection with offers and
sales by Woronoco Bancorp of interests or shares of common stock pursuant to the
401(k) Plan. No one may use this prospectus supplement to reoffer or resell
interests or shares of common stock acquired through the 401(k) Plan.
Woronoco Savings has not authorized any person to give any information or
to make any representations other than those contained in the prospectus or this
prospectus supplement, and, if given or made, no one may rely on such
information or representations as having been authorized by Woronoco Savings or
the 401(k) Plan. This prospectus supplement does not constitute an offer to sell
or solicitation of an offer to buy any securities in any jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this prospectus supplement and the
prospectus nor any sale of common stock shall under any circumstances create any
implication that there has been no change in the affairs of Woronoco Savings or
the 401(k) Plan since the date of this prospectus supplement, or that the
information contained in this prospectus supplement or incorporated by reference
is correct as of any time subsequent to the date hereof.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
THE OFFERING 1
Securities Offered 1
Election to Purchase the Common Stock in the Conversion 1
Value of Participation Interests 2
Method of Directing Transfer 2
Time for Directing Transfer 2
Irrevocability of Transfer Direction 2
Direction to Purchase the Common Stock After the Conversion 2
Purchase Price of the Common Stock 3
Nature of a Participant's Interest in the Common Stock 3
Voting and Tender Rights of the Common Stock 3
DESCRIPTION OF THE PLAN 3
Introduction 3
Eligibility and Participation 4
Contributions Under the Plan 5
Limitations on Contributions 5
Investment of Contributions 7
Benefits Under the Plan 10
Withdrawals and Distributions From the Plan 10
Administration of the Plan 11
Reports to Plan Participants 11
Plan Administrator 11
Amendment and Termination 11
Merger, Consolidation or Transfer 12
Federal Income Tax Consequences 12
ERISA and Other Qualification 14
Restrictions on Resale 14
SEC Reporting and Short-Swing Profit Liability 15
Financial Information Regarding Plan Assets 16
</TABLE>
CONTRIBUTION AND INVESTMENT FORM 18
<PAGE>
THE OFFERING
SECURITIES OFFERED
The securities offered in connection with this prospectus supplement are
participation interests in the 401(k) Plan. Assuming a purchase price of $10.00
per share, the trustee may acquire up to 72,647 shares of common stock for the
common stock fund. Woronoco Bancorp, the proposed holding company for Woronoco
Savings, is the issuer of the common stock. Only employees of Woronoco Savings
may participate in the Plan. The interests offered under this prospectus
supplement are conditioned on the consummation of the conversion. Your
investment in the common stock fund in connection with the conversion is subject
to priorities set forth in the plan of conversion of Woronoco Savings.
This prospectus supplement contains information regarding the 401(k) Plan.
The attached prospectus contains information regarding the conversion and the
financial condition, results of operations and business of Woronoco Savings. The
address of the principal executive office of Woronoco Savings is 31 Court
Street, Westfield, Massachusetts 01086-0978. The telephone number of Woronoco
Savings is (413) 568-9141.
ELECTION TO PURCHASE THE COMMON STOCK IN THE CONVERSION
In connection with the conversion of Woronoco Savings, Woronoco Savings has
amended the 401(k) Plan to permit you to direct the trustee to transfer all or
part of the funds which represent your beneficial interest in the assets of the
401(k) Plan to the common stock fund. The trustee of the 401(k) Plan will
subscribe for Common Stock offered for sale in connection with the conversion in
accordance with each participant's direction. In the event the conversion
offering is oversubscribed and some or all of your funds cannot be used to
purchase common stock in the conversion offering, the trustee will reallocate
the amount not invested in common stock on a proportionate basis to the other
investment options you have selected. If you fail to direct the investment of
your account, your account balance will remain in the other investment options
of the 401(k) Plan.
Your ability to invest in the common stock fund is based on your status as
an eligible account holder or supplemental eligible account holder. An eligible
account holder is a (depositors whose account totalled $50.00 or more on July
31, 1997. A supplemental
1
<PAGE>
eligible account holder is a depositor whose account totalled $50.00 or more on
June 30, 1998. No eligible account holders or supplemental eligible account
holders may purchase in the subscription offering more than $200,000 of the
common stock. To the extent you fall into one of the subscription offering
categories, you have subscription rights to purchase shares of common stock in
the subscription offering and you may use funds in the 401(k) Plan account to
pay for the common stock for which you subscribe.
VALUE OF PARTICIPATION INTERESTS
As of September 30, 1998, the market value of the assets of the 401(k)
Plan equaled $726,478. The plan administrator informed each participant of
the value of his or her beneficial interest in the 401(k) Plan as of September
30, 1998. The value of plan assets represents the past contributions to the
401(k) Plan by the participants of Woronoco Savings, plus or minus earnings or
losses on the contributions, less previous withdrawals.
METHOD OF DIRECTING TRANSFER
The last page of this prospectus supplement contains a form for you to
direct a transfer to the common stock fund (the "Contribution and Investment
Form"). If you wish to transfer all or part (in multiples of not less than 1%)
of your beneficial interest in the assets of the 401(k) Plan to the common stock
fund, you should complete the Contribution and Investment Form. If you do not
wish to make such an election at this time, you do not need to take any action.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the common
stock fund in connection with the conversion is ten (10) days prior to
____________________ (the "Expiration Date") of the offering. You should return
the Contribution and Investment Form to the Human Resources Department of
Woronoco Savings by __:__ p.m. on _______________.
IRREVOCABILITY OF TRANSFER DIRECTION
Your direction to transfer amounts credited to such account in the 401(k)
Plan to the common stock fund cannot be changed.
DIRECTION TO PURCHASE THE COMMON STOCK AFTER THE CONVERSION
After the conversion, you may direct the trustee of the 401(k) Plan to
transfer a certain percentage (in multiples of not less than 1%) of the net
value of your interests in the trust fund to the common stock fund, or to the
other investment funds available under the 401(k) Plan. Alternatively, you may
direct the trustee of the 401(k) Plan to transfer a certain percentage of your
2
<PAGE>
interest in the common stock fund to the trust fund and invested in accordance
with the terms of the 401(k) Plan. You may direct the trustee to invest future
contributions made to the 401(k) Plan on your behalf in the common stock fund.
Following your initial election, you may change the allocation of your interest
in the common stock fund on the first day of any calendar quarter by submitting
an appropriate form to the plan administrator. You may obtain a form from the
Human Resources Department of Woronoco Savings. Special restrictions may apply
to transfers directed by those participants who are officers, directors and
principal shareholders of Woronoco Savings who are subject to the provisions of
Section 16(b) of the Securities Exchange Act of 1934.
PURCHASE PRICE OF THE COMMON STOCK
The trustee will use the funds transferred to the common stock fund to
purchase shares of common stock in the conversion. The trustee will pay the same
price for shares of common stock as all other persons who purchase shares of the
common stock in the conversion.
After the conversion, the trustee will acquire common stock after the
conversion in open market transactions. The prices paid by the trustee for
shares of the common stock will not exceed "adequate consideration" as defined
in of the Employee Retirement Income Security Act, the primary federal law
governing retirement plans. The trustee will pay transaction fees associated
with purchase, sale or transfer of the common stock after the conversion common
stock fund.
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The trustee will hold common stock in the name of the Plan. The trustee
will allocate shares of common stock acquired at your direction to your account
under the 401(k) Plan. Therefore, earnings with respect to your account should
not be affected by the investment designations of other participants in the
401(k) Plan.
VOTING AND TENDER RIGHTS OF THE COMMON STOCK
The plan administrator generally will exercise voting rights attributable
to all of the common stock held by the common stock fund. With respect to
matters involving tender offers for Woronoco Bancorp, the plan administrator
will vote shares allocated to participants in the 401(k) Plan, as directed by
participants with interests in the common stock fund. The trustee will allocate
you voting instruction rights reflecting your proportion interest in the
3
<PAGE>
common stock fund. The number of shares of the common stock held in the common
stock fund that the trustee votes in the affirmative and negative on each matter
shall be proportionate to the number of voting instruction rights exercised in
the affirmative and negative, respectively. For matters not involving a tender
offer, the plan administrator will direct the vote allocated shares and
Participants will not have an opportunity to direct the voting of shares.
DESCRIPTION OF THE PLAN
I. INTRODUCTION
Effective July 1, 1994, Woronoco Savings adopted the Woronoco Savings Bank
401(k) Plan in SBERA Trust. On ______, 1998, Woronoco Savings amended the 401(k)
Plan to include a common stock fund as an investment choice. Woronoco Savings
intends for the 401(k) Plan to comply, in form and in operation, with all
applicable provisions of the Internal Revenue Code and the Employee Retirement
Income Security Act, most commonly referred to as "ERISA." Woronoco Savings may
amend the 401(k) Plan from time to time in the future to ensure continued
compliance with these laws. Woronoco Savings may also amend the 401(k) Plan from
time to time in the future to add, modify, or eliminate certain features of the
plan, as it sees fit. As a plan subject to ERISA, federal law provides you with
various rights and protections as a plan participant. Although the 401(k) Plan
is subject to many of the provisions of ERISA, your benefits under the plan are
not guaranteed by the Pension Benefit Guaranty Corporation.
4
<PAGE>
APPLICABLE FEDERAL TAX LAW REQUIRES THE 401(K) PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON YOUR RIGHT TO WITHDRAW AMOUNTS HELD UNDER THE PLAN PRIOR TO YOUR
TERMINATION OF EMPLOYMENT WITH WORONOCO SAVINGS. FEDERAL LAW MAY ALSO IMPOSE AN
EXCISE TAX ON WITHDRAWALS MADE FROM THE 401(K) PLAN PRIOR TO YOUR ATTAINMENT OF
AGE 59-1/2, REGARDLESS OF WHETHER THE WITHDRAWAL OCCURS DURING YOUR EMPLOYMENT
WITH WORONOCO SAVINGS OR AFTER TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following portions of this prospectus
------------------------------
supplement summarize certain provisions of the 401(k) Plan. Woronoco Savings
qualifies these summaries in their entirety by the full text of the 401(k) Plan.
You may obtain copies of the 401(k) Plan document by sending a request to: Plan
Administrator, Thomas Forese, Jr., Savings Banks Employees Retirement
Association, 69 Cummings Park, Woburn, Massachusetts 01801. You should carefully
read the full text of the 401(k) Plan document to understand your rights and
obligations under the plan.
II. ELIGIBILITY AND PARTICIPATION
Any employee of Woronoco Savings may participate in the 401(k) Plan as of
the first day of the month following completion of one "year of service" and
attainment of age twenty-one. For purposes of the 401(k) Plan, you generally
complete one "year of service" if you complete 1,000 hours of service with
Woronoco Savings within a twelve-consecutive-month period.
As of September 30, 1998, approximately 102 out of 116 then eligible
employees had elected to participate in the 401(k) Plan.
III. CONTRIBUTIONS UNDER THE PLAN
401(k) Plan Participant Contributions. The 401(k) Plan permits each
-------------------------------------
participant to annually defer receipt of up to 15% of compensation that Woronoco
Savings would otherwise currently pay. For purposes of calculating deferrals,
the 401(k) Plan considers compensation to include your total pay reportable on
IRS Form W-2 for purposes of income-tax
5
<PAGE>
withholding. However, by law, the 401(k) Plan may not consider more than
$160,000 of compensation for purposes of determining deferrals for 1999.
Participants in the 401(k) Plan may modify the amount contributed to the plan,
effective on the first day of the month, by filing a new deferral agreement with
the plan administrator at least 15 days prior to the effective date of the
modification.
Woronoco Savings Contributions. Woronoco Savings has discretion
------------------------------
under the 401(k) Plan whether or not to make matching contribution. Woronoco
Savings currently makes matching contributions to the 401(k) Plan equal to 3% of
your deferred compensation for the plan year.
IV. LIMITATIONS ON CONTRIBUTIONS
Limitation on Employee Salary Deferral. Although the 401(k) Plan permits
--------------------------------------
you to defer up to 15% of your compensation by law your total deferrals under
the 401(k) Plan, together with similar plans, may not exceed $10,000 for 1999.
The IRS will periodically increase this annual limitation. Contributions in
excess of this limitation ("excess deferrals") will be included in an
affected participant's gross income for federal income tax purposes in the year
they are made. In addition, any such excess deferral will again be subject to
federal income tax when distributed by the 401(k) Plan to the participant,
unless the excess deferral (together with any income allocable thereto) is
distributed to the participant not later than the first April 15th following the
close of the taxable year in which the excess deferral is made. Any income on
the excess deferral that is distributed not later than such date shall be
treated, for federal income tax purposes, as earned and received by the
participant in the taxable year in which the distribution is made.
Limitations on Annual Additions and Benefits. Pursuant to the requirements
--------------------------------------------
of the Internal Revenue Code, the 401(k) Plan provides that the total amount of
contributions and forfeitures (annual additions) allocated to participants
during any plan year may not exceed the lesser of 25% of the participant's
compensation for the plan year, for 1999, or $30,000. The 401(k) Plan will also
limit annual additions to the extent necessary to prevent the limitations set
forth in the Internal Revenue Code for all of the qualified defined benefit
plans and defined contribution plans maintained by Woronoco Savings from being
exceeded.
Limitation on Plan Contributions for Highly Compensated Employees.
-----------------------------------------------------------------
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
that may be made to the Plan
6
<PAGE>
in any Plan Year on behalf of Highly Compensated Employees (defined below) in
relation to the amount of deferred compensation made by or on behalf of all
other employees eligible to participate in the Plan. Specifically, the
percentage of elective deferrals made on behalf of a Participant who is a Highly
Compensated Employee shall be limited so that the Average Actual Deferral
Percentage for the group of such Highly Compensated Employees for the Plan Year
does not exceed the greater of (i) the Average Actual Deferral Percentage for
the group of eligible Employees who are Non-Highly Compensated Employees for the
Plan Year multiplied by 1.25; or (ii) the Average Actual Deferral Percentage for
the group of eligible Employees who are Non-Highly Compensated Employees for the
Plan Year, multiplied by two (2); provided that the difference in the Average
Actual Deferral Percentage for eligible Non-Highly Compensated Employees does
not exceed two percent (2%). Use of this alternative limitation shall be subject
to the provisions of Income Tax Regulations Section 1.401(m)-2 regarding the
multiple use of the alternative deferral test set forth in Sections 401(k) and
401(m) of the Code.
In general, a Highly Compensated Employee includes any employee who, (1)
was a five percent owner of the Employer at any time during the year or
preceding year; or (2) had compensation for the preceding year in excess of
$80,000 and, if the Employer so elects, was in the top 20% of employees by
compensation for such year. The dollar amounts in the foregoing sentence are
for 1998. Such amounts are adjusted annually to reflect increases in the cost
of living.
In addition, the compensation of an employee who is a family member of a
5% owner, or one of the ten most highly compensated employees during the
relevant period is aggregated with that of the Highly Compensated Employee. All
such family members are treated as a single employee with respect to the
application of the limitations on Highly Compensated Employees.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Employer will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
---------------------------
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to the
combination of annual additions to the Plan and projected annual benefits under
any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance of
the Accounts of participants who are Key Employees (as defined below) exceeds
60% of the aggregate balance of the Accounts of all participants. Key Employees
generally include any employee who, at any time during the Plan Year or any of
the four preceding Plan Years, is (1) an officer of the Bank having annual
compensation in excess of $60,000 who is in an administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owning, directly
7
<PAGE>
or indirectly, the largest interests in the Bank, (3) a 5% owner of the Bank,
(i.e., owns directly or indirectly more than 5% of the stock of the Bank, or
stock possessing more than 5% of the total combined voting power of all stock of
the Bank) or (4) a 1% owner of the Bank having annual compensation in excess of
$150,000. The dollar amounts in the foregoing sentence are for 1998.
V. INVESTMENT OF CONTRIBUTIONS
All amounts credited to participants' accounts under the 401(k) Plan are
held in trust. A trustee appointed by the Board of Directors of Woronoco Savings
administers the trust.
Immediately prior to [INSERT DATE OF PROSPECTUS HERE], the 401(k) Plan
offered the following choices:
MONEY MARKET ACCOUNT: The money market account seeks to maximize current
income while preserving capital and liquidity. The money market account intends
to maintain a consistent net cash value of $1.00 per share. The objective of the
money market account is to consistently out-perform the Donoghue Money Fund
Average. The Savings Bank Employees Retirement Association manages the money
market account.
ASSET ALLOCATION ACCOUNT: The asset allocation account seeks to offer a
competitive long-term total return and below-average volatility through a
balanced and diversified investment approach. The asset allocation account
invests in a carefully selected portfolio of mutual funds that emphasizes either
equity, fixed income, or money market securities, both foreign and domestic.
Putnam Investments manages the asset allocation account.
EQUITY ACCOUNT: The equity account seeks long-term growth of capital and
income by investing in common stocks of domestic and foreign companies. Five
investment advisors selected by the Board of Trustees of the Savings Bank
Employees Retirement Association manage the equity account.
BOND ACCOUNT: The bond account seeks to produce a positive real rate of
return after inflation with a high degree of stability and limited volatility.
The entire portfolio of the bond account consists of United States Treasury
obligations, Government National Mortgage Association mortgage-backed
certificates, other United States Agency obligations and cash equivalents. The
bond account seeks to exceed the returns of the Lehman Brothers Mortgage Backed
securities Index. Putnam Investment Management manages the bond account.
ENHANCED INDEX ACCOUNT: The enhanced index account is a domestic common
stock portfolio. The enhanced index account seeks to consistently provide excess
returns over the Standard & Poor's 500 Index. The enhanced index account
controls risk by maintaining portfolio characteristics and industry weights
similar to
8
<PAGE>
those of the S&P 500 Index. Fidelity Management Trust Company manages the
enhanced index account.
INDEX 500 ACCOUNT: The Index 500 account attempts to provide investment
results that parallel the performance of the Standard & Poor's 500 Composite
Stock Price Index. The portfolio holds all of the 500 underlying securities in
proportion to their weighting in the index. The Index 500 account expects to
provide investors with long-term growth of capital and income. The Vanguard
Group manages the Index 500 account.
INTERNATIONAL EQUITY ACCOUNT: The international equity account seeks to
obtain long-term growth through a diversified portfolio of marketable equity
securities of foreign companies. The international equity account looks to
outperform the Morgan Stanley Capital International EAFE (Europe, Australia, Far
East) Index in U.S. dollars over a market cycle. Putnam International Equity
Management manages the international equity account.
SMALL CAP EQUITY ACCOUNT: The small cap equity account seeks capital
appreciation. The small cap equity account is designed for investors willing to
assume above-average risk in exchange for above-average capital potential. The
account invests primarily in common stocks of small to medium-sized companies
that the account's investment advisor believes have potential for capital
appreciation significantly greater than the market average. Putnam Investment
Management manages the small cap equity account.
The 401(k) Plan, as amended, provides a common stock fund as an additional
choice to these investment alternatives. The common stock fund will invest
primarily in the common stock of Woronoco Bancorp. Participants in the 401(k)
Plan may direct the trustee to invest all or a portion of their 401(k) Plan
account balance in the common stock fund.
On the first day of any calendar quarter you may elect (in increments of
1%), to have both past and future contributions and additions to your accounts
invested in the common stock fund. Your election becomes effective as of the
last day of the calendar quarter for which you make the election, provided you
file written notice with the plan administrator at least 15 days before it is to
become effective. Any amounts credited to your 401(k) plan account for which you
have not given investment directions will be invested in the Money Market
Account.
9
<PAGE>
A. Previous Funds.
--------------
Prior to the conversion and implementation of the common stock fund,
contributions under the 401(k) Plan were invested in the Funds specified below.
The annual percentage return on these funds for the prior three years was:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------
<S> <C> <C> <C>
a. Money Market Account 5.45% 5.43% 5.83%
b. Asset Allocation Account 14.57 12.17 28.92
c. Equity Account 21.99 21.09 29.49
d. Bond Account 8.79 5.10 16.28
e. Enhanced Index Account 29.03 22.51 39.47(1)
f. Index 500 Account 33.28 22.91 37.41
g. International Equity Account 12.61 15.43 4.85
h. Small Cap Equity Account 17.20 28.72 38.18
</TABLE>
__________________
(1) Fidelity Select Equity Account
B. The Common Stock Fund.
-------------------------
The common stock fund will consist of investments in the common stock of
Woronoco Bancorp made on and after the effective date of the conversion. After
the conversion, the trustee of the 401(k) Plan will, to the extent practicable,
use all amounts held by it in the common stock fund, including cash dividends
paid on the common stock held in the fund, to purchase shares of common stock of
Woronoco Bancorp. Woronoco Savings expects that the trustee will make all
purchases of common stock at prevailing market prices. Pending investment in
common stock, the trustee will place assets held in the common stock fund the
money market account.
As of the date of this prospectus supplement, none of the shares of common
stock have been issued or are outstanding and there is no established market
for the common stock. Accordingly, there is no record of the historical
performance of the common stock fund. Performance of the common stock fund
depends on a number of factors, including the financial condition and
profitability of Woronoco Bancorp and Woronoco Savings and market conditions for
the common stock generally.
INVESTMENTS IN THE COMMON STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS IN
INVESTMENTS IN THE COMMON STOCK OF WORONOCO BANCORP. FOR A DISCUSSION OF THESE
RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
10
<PAGE>
VI. BENEFITS UNDER THE PLAN
Vesting. At all times, you have a fully vested,
-------
nonforfeitable interest in your accounts under the 401(k) Plan.
VII. WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
Withdrawals Prior to Termination of Employment. You may receive
----------------------------------------------
in-service distributions from the 401(k) Plan under limited circumstances in the
form of hardship distributions and loans. You can apply for a loan from the
401(k) Plan by contacting the Human Resources Department of Woronoco Savings.
All loans from the 401(k) Plan are repaid by payroll withholding. You cannot
have more than one loan outstanding at a time. You can apply for a minimum loan
of $1,000 and a maximum loan of the lesser of $50,000 or 50% of your total
vested account balance. You may also be eligible for hardship withdrawals. In
order to qualify for a hardship withdrawal, you must have an immediate and
substantial need to meet certain expenses and have no other reasonably available
resources to meet the financial need. If you qualify for a hardship
distribution, the trustee will make the distribution pro rata, from the
investment funds in which you have invested your account balances. You may not
receive more than one hardship withdrawal in any calendar year.
Distribution Upon Retirement or Disability. Unless you have elected an
------------------------------------------
optional form of benefit, the automatic form of benefit payable to you upon
retirement or disability shall be a life annuity (for married participants, a
qualified joint and survivor annuity). However, you may elect to receive a lump
sum payment from the 401(k) Plan.
Distribution Upon Death. If you die prior to your benefits being paid
-----------------------
from the 401(k) Plan, your benefits will be paid to your surviving spouse or
beneficiary under one or more of the forms available under the 401(k) Plan.
Distribution Upon Termination for Any Other Reason. If you terminate
--------------------------------------------------
employment for any reason other than retirement, disability or death and your
account balance exceeds $5,000, the trustee will make your distribution on your
normal retirement date, unless you request otherwise. If your account balances
does not exceed $5,000, the trustee will generally distribute your benefits to
you as soon as administratively practicable following termination of employment.
11
<PAGE>
Nonalienation of Benefits. Except with respect to federal income tax
-------------------------
withholding and as provided with respect to a qualified domestic relations
order, benefits payable under the Plan shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution, or levy of any kind, either voluntary or
involuntary, and any attempt to anticipate, alienate, sell, transfer, assign,
pledge, encumber, charge or otherwise dispose of any rights to benefits payable
under the Plan shall be void.
ADMINISTRATION OF THE PLAN
The trustee with respect to the Plan is the named fiduciary of the 401(k)
Plan for purposes of ERISA.
Trustees. The board of trustees of Woronoco Savings appoints
--------
the trustee to serve at its pleasure. The board of trustees has appointed
Savings Bank Employees Retirement Association as trustee of the common stock
fund.
The trustee receives, holds and invests the contributions to the 401(k)
Plan in trust and distributes them to participants and beneficiaries in
accordance with the terms of the plan and the directions of the plan
administrator. The trustee is responsible for investment of the assets of the
trust.
REPORTS TO PLAN PARTICIPANTS
The plan administrator will furnish you a statement at least quarterly
showing (i) the balance in your account as of the end of that period, (ii) the
amount of contributions allocated to your account for that period, and (iii) the
adjustments to your account to reflect earnings or losses (if any).
PLAN ADMINISTRATOR
Currently, the plan administrator of the 401(k) Plan is Thomas Forese, Jr.,
SBERA, 69 Cummings Park, Woburn, Massachusetts 01801, (781) 938-3500. The plan
administrator is responsible for the administration of the 401(k) Plan,
interpretation of the provisions of the plan, prescribing procedures for filing
applications for benefits, preparation and distribution of information
explaining the plan, maintenance of plan records, books of account and all other
data necessary for the proper administration of the plan, and preparation and
filing of all returns and reports relating to the Plan which are required to be
filed with the U.S. Department of Labor and the Internal Revenue Service, and
for all disclosures required to be made to participants, beneficiaries and
others under ERISA.
AMENDMENT AND TERMINATION
Woronoco Savings intends to continue the 401(k) Plan indefinitely.
Nevertheless, Woronoco Savings may terminate the 401(k) Plan at any
12
<PAGE>
time. If Woronoco Savings terminates the 401(k) Plan in whole or in part, then
regardless of other provisions in the plan, all participants affected by such
termination shall become fully vested in their accounts. Woronoco Savings
reserves the right to make, from time to time, any amendment or amendments to
the 401(k) Plan which do not cause any part of the trust to be used for, or
diverted to, any purpose other than the exclusive benefit of participants or
their beneficiaries; provided, however, that Woronoco Savings may amend the plan
as it determines necessary or desirable, with or without retroactive effect, to
comply with ERISA or the Internal Revenue Code.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the 401(k) Plan with another
plan, or the transfer of the trust assets to another plan, the plan requires
that you would (if either the plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit you would have been entitled to receive
immediately before the merger, consolidation or transfer (if the plan had then
terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax aspects
of the 401(k) Plan. You should not rely on this survey as a complete or
definitive description of the federal income tax consequences relating to the
401(k) Plan. Statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. YOU ARE URGED TO CONSULT
YOUR TAX ADVISORS WITH RESPECT TO ANY DISTRIBUTION FROM THE 401(K) PLAN AND
TRANSACTIONS INVOLVING THE PLAN.
As a "qualified retirement plan," the Internal Revenue Code affords the
401(k) Plan special tax treatment, including: (1) The sponsoring employer is
allowed an immediate tax deduction for the amount contributed to the plan each
year; (2) participants pay no current income tax on amounts contributed by the
employer on their behalf; and (3) earnings of the plan are tax-deferred thereby
permitting the tax-free accumulation of income and gains on investments.
Woronoco Savings will administer the 401(k) Plan to comply in operation with the
requirements of the Internal Revenue Code as of the applicable effective date of
any change in the law.
13
<PAGE>
Woronoco Savings will receive from the IRS an adverse determination
letter regarding its tax exempt status, all participants would generally
recognize income equal to their vested interest in the Plan, the participants
would not be permitted to transfer amounts distributed from the Plan to an IRA
or to another qualified retirement plan, and the Bank may be denied certain
deductions taken with respect to the Plan.
Lump Sum Distribution. A distribution from the 401(k) Plan to a
---------------------
participant or the beneficiary of a participant will qualify as a lump sum
distribution if it is made: (i) within one taxable year; (ii) on account of the
participant's death, disability or separation from service, or after the
participant attains age 59 1/2; and (iii) consists of the balance to the credit
of the participant under this plan and all other profit sharing plans, if any,
maintained by Woronoco Savings. The portion of any lump sum distribution that is
required to be included in your taxable income for federal income tax purposes
(the "total taxable amount") consists of the entire amount of such lump sum
distribution less the amount of after-tax contributions, if any, you have made
to any other profit sharing plans maintained by Woronoco Savings which is
included in the distribution.
Averaging Rules. The portion of the total taxable amount of a lump sum
---------------
distribution that is attributable to participation after 1973 in the 401(k) Plan
or in any other profit-sharing plan maintained by Woronoco Savings (the
"ordinary income portion") will be taxable generally as ordinary income for
federal income tax purposes. However, if you have completed at least five (5)
years of participation in the 401(k) Plan before the taxable year in which the
distribution is made, or receives a lump sum distribution on account of your
death (regardless of the period of your participation in this plan or any other
profit-sharing plan maintained by the Woronoco Savings), you may elect to have
the ordinary income portion of such lump sum distribution taxed according to a
special averaging rule ("five-year averaging"). The election of the special
averaging rules may apply only to one lump sum distribution you or your
beneficiary receive, provided such amount is received on or after the date your
turn 59-1/2 and the recipient elects to have any other lump sum distribution
from a qualified plan received in the same taxable year taxed under the special
averaging rule. Under a special grandfather rule, individuals who turned 50 by
1986 may elect to have their lump sum distribution taxed under either the five-
year averaging rule or under the prior law ten-year averaging rule. These
individuals also may elect to have that portion of the lump sum distribution
attributable to the participant's pre-1974 participation in the plan taxed at a
flat 20% rate as gain from the sale of a capital asset.
The Common Stock Included in Lump Sum Distribution. If a lump sum
--------------------------------------------------
distribution includes the common stock, the distribution generally will be taxed
in the manner described above, except that the total taxable amount will be
reduced by the amount of any net unrealized appreciation with respect to the
common stock that is the excess of the value of the common stock at the time of
the distribution over its cost or other basis of the securities to the trust.
The tax basis of the common stock for purposes of computing gain or loss on its
subsequent sale equals the value of the common stock at the time of distribution
less the amount of net unrealized appreciation. Any gain on a
14
<PAGE>
subsequent sale or other taxable disposition of the common stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
constitute long-term capital gain regardless of the holding period of the common
stock. Any gain on a subsequent sale or other taxable disposition of the common
stock in excess of the amount of net unrealized appreciation at the time of
distribution will be considered long-term capital gain regardless of the holding
period of the common stock. Any gain on a subsequent sale or other taxable
disposition of the common stock in excess of the amount of net unrealized
appreciation at the time of distribution will be considered either short-term,
mid-term or long-term capital gain depending upon the length of the holding
period of the common stock. The recipient of a distribution may elect to include
the amount of any net unrealized appreciation in the total taxable amount of the
distribution to the extent allowed by the regulations to be issued by the
Internal Revenue Service.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
---------------------------------------------------------------------------
to an IRA. Due to recent changes in the law, effective January 1, 1993, you
- ----------
may roll over virtually all distributions from the 401(k) Plan to another
qualified plan or to an individual retirement account without regard to whether
the distribution is a lump sum distribution or a partial distribution. You have
the right to elect to have the trustee transfer all or any portion of an
"eligible rollover distribution" directly to another qualified retirement plan
qualified Individual Retirement Account. If you do not elect to have an
"eligible rollover distribution" transferred directly to another qualified plan
or to an Individual Retirement Account, the distribution will be subject to an
mandatory federal withholding tax equal to 20% of the taxable distribution. An
"eligible rollover distribution" means any amount distributed from the plan
except: (1) a distribution that is (a) one of a series of substantially equal
periodic payments (not less frequently than annually) made for your life (or
life expectancy) or the joint lives of you and your designated beneficiary, or
(b) for a specified period of ten years or more; (2) any amount required to be
distributed under the minimum distribution rules; and (3) any other
distributions excepted under applicable federal law. The tax law change
described above did not modify the special tax treatment of lump sum
distributions, that you do not roll over or transfer. In other words the change
does not impact forward averaging, capital gains tax treatment and the
nonrecognition of net unrealized appreciation, discussed earlier.
ERISA AND OTHER QUALIFICATION
As noted above, the 401(k) Plan is subject to certain provisions of ERISA
and is intended to be a qualified retirement plan under the Internal Revenue
Code.
WE HAVE PROVIDED YOU WITH A BRIEF DESCRIPTION OF CERTAIN FEDERAL INCOME TAX
ASPECTS OF THE 401(K) PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE. IT
IS NOT INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME
TAX CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, YOU ARE IS URGED TO CONSULT A TAX ADVISOR CONCERNING
15
<PAGE>
THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Any person receiving a distribution of shares of common stock under the
401(k) Plan who is an "affiliate" of Woronoco Bancorp under Rules 144 and 405
under the Securities Act of 1933, as amended (the "Securities Act") (e.g.,
directors, officers and substantial shareholders of the Bank) may reoffer or
resell such shares only pursuant to a registration statement filed under the
Securities Act assuming the availability of a registration statement, pursuant
to Rule 144 or some other exemption of the registration requirements of the
Securities Act. Any person who may be an "affiliate" of Woronoco Savings may
wish to consult with counsel before transferring any common stock they own. In
addition, participants are advised to consult with counsel as to the
applicability of Section 16 of the 1934 Act which may restrict the sale of
common stock acquired under the 401(k) Plan, or other sales of common stock.
Persons who are not deemed to be "affiliates" of Woronoco Savings
---
at the time of resale will be free to resell any shares of common stock
distributed to them under the 401(k) Plan, either publicly or privately, without
regard to the registration and prospectus delivery requirements of the
Securities Act or compliance with the restrictions and conditions contained in
the exemptive rules under federal law. An "affiliate" of Woronoco Savings is
someone who directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control, with Woronoco Savings.
Normally, a director, principal officer or major shareholder of a corporation
may be deemed to be an "affiliate" of that corporation. A person who may be
deemed an "affiliate" of Woronoco Savings at the time of a proposed resale will
be permitted to make public resales of common stock only pursuant to a "reoffer"
prospectus or in accordance with the restrictions and conditions contained in
Rule 144 under the Securities Act or some other exemption from registration, and
will not be permitted to use this prospectus in connection with any such resale.
In general, the amount of the common stock which any such affiliate may publicly
resell pursuant to Rule 144 in any three-month period may not exceed the greater
of one percent of the common stock then outstanding or the average weekly
trading volume reported on the National Association of Securities Dealers
Automated Quotation System during the four calendar weeks prior to the sale.
Such sales may be made only through brokers without solicitation and only at a
time when Woronoco Bancorp is current in filing the reports required of it under
the 1934 Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the 1934 Act imposes reporting and liability requirements on
officers, directors and persons beneficially owning more than ten percent of
public companies such as Woronoco Bancorp. Section 16(a) of the 1934 Act
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a Form
3 reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission. Certain changes in beneficial ownership, such as purchases,
sales, gifts and participation in savings and retirement plans must be reported
16
<PAGE>
periodically, either on a Form 4 within ten days after the end of the month in
which a change occurs, or annually on a Form 5 within 45 days after the close of
Woronoco Savings' fiscal year. Participation in the common stock fund of the
401(k) Plan by officers, directors and persons beneficially owning more than ten
percent of common stock of Woronoco Bancorp must be reported to the SEC annually
on a Form 5 by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the 1934 Act provides for the recovery by Woronoco Bancorp of profits realized
by any officer, director or any person beneficially owning more than ten percent
of the common stock ("Section 16(b) Persons") resulting from the purchase and
sale or sale and purchase of the common stock within any six-month period.
The SEC has adopted rules that exempt many transactions involving the
401(k) Plan from the "short-swing" profit recovery provisions of Section 16(b).
The exemptions generally involve restrictions upon the timing of elections to
buy or sell employer securities for the accounts of Section 16(b) Persons.
Except for distributions of the common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons may, under limited circumstances involving the
purchase of common stock within six months of the distribution, be required to
hold shares of the common stock distributed from the 401(k) Plan for six months
following such distribution.
FINANCIAL INFORMATION REGARDING PLAN ASSETS
The financial statements and schedules of the 401(k) Plan as of October 31,
1997 and 1996 and for the years then ended have been included herein.
LEGAL OPINIONS
The validity of the issuance of the common stock will be passed upon
by Muldoon, Murphy & Faucette, Washington, D.C. Muldoon, Murphy & Faucette acted
as special counsel for Woronoco Savings in connection with the conversion.
17
<PAGE>
WORONOCO SAVINGS BANK
401(K) PLAN FINANCIALS
(AS REPORTED ON THE PLAN'S FORM 5500)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
--------------------
1997 1996
--------------------
<S> <C> <C>
ASSETS:
Cash.............................................................. -- --
Receivables....................................................... -- --
Investments:
U.S. Government securities...................................... -- --
Corporate debt and equity instruments........................... -- --
Real estate and mortgages (other than to participants).......... -- --
Loans to participants:
Mortgages..................................................... -- --
Other......................................................... $ 4,552 $ 1,108
Other........................................................... 524,593 311,766
-------- --------
Total investments............................................. 529,145 312,874
Buildings and other property used in plan operations.............. -- --
Other assets...................................................... -- --
-------- --------
Total assets.................................................... 529,145 312,874
LIABILITIES:
Payables.......................................................... -- --
Acquisition indebtedness.......................................... -- --
Other liabilities................................................. -- --
-------- --------
Total liabilities................................................. -- --
-------- --------
Net assets........................................................ 529,145 312,874
INCOME:
Contributions received or receivable in cash from:
Employer(s)..................................................... -- --
Employees....................................................... -- --
Other........................................................... -- --
-------- --------
Total......................................................... -- --
Noncash contributions............................................. 184,869 162,798
Earnings from investments......................................... -- --
Net realized gain (loss) on sale or exchange of assets............ -- --
Other income...................................................... 68,195 33,002
-------- --------
Total income.................................................... 253,064 195,800
EXPENSES:
Distribution of benefits and payments to provide benefits:
Directly to participants or their beneficiaries................. -- --
Other........................................................... -- --
-------- --------
Total distribution of benefits and payments to provide benefits. 36,793 28,443
Administrative expense............................................ -- --
Other expenses.................................................... -- --
-------- --------
Total expenses.................................................. 36,793 28,443
-------- --------
Net income (loss)............................................. $216,271 $167,357
</TABLE>
<PAGE>
WORONOCO SAVINGS BANK
401(K) PLAN
Contribution and Investment Form
--------------------------------
Name of Plan participant: ________________________________
Social Security Number: ________________________________
1. INSTRUCTIONS. In connection with the proposed Conversion, the Woronoco
------------
Savings Bank 401(k) Plan ("Plan") has been amended to permit participants to
direct their current account balances into a new fund: the Employer Stock Fund.
The percentage of a Participant's Account transferred at the direction of the
Participant into the Employer Stock Fund will be used to purchase shares of
common stock of Woronoco Bancorp, Inc. (the "Common Stock").
To direct a transfer of all or a part of the funds credited to your accounts
to the Employer Stock Fund, you should complete and file this form with the
Human Resources Department, no later than 10 days prior to the expiration date
of the Offering. A representative for the Plan Administrator will retain a copy
of this form and return a copy to you. If you need any assistance in completing
this form, please contact the Human Resource Department. If you do not complete
and return this form to the Plan Administrator by ____________, 1999, the funds
credited to your accounts under the Plan will continue to be invested in
accordance with your prior investment direction, or in accordance with the terms
of the Plan if no investment direction has been provided.
2. INVESTMENT DIRECTIONS. I hereby authorize the Plan Administrator to direct
the Trustee to invest the following percentage (in multiples of not less than
1%) of my accounts in the Employer Stock Fund:
<TABLE>
<S> <C> <C>
a. Money Market Account _______%
b. Equity Account _______%
c. Bond Account _______%
d. Asset Allocation Account _______%
e. Index 500 Account _______%
f. Enhanced Index Account _______%
g. Small Cap Equity Account _______%
h. International Equity Account _______%
</TABLE>
3. PURCHASER INFORMATION. The ability of participants in the Plan to
purchase common stock in the Conversion and to direct their current account
balances into the Employer Stock Fund is based upon the participant's status as
an Eligible Account Holder or Supplemental Eligible Account Holder. Please
indicate your status.
a. [ ] Eligible Account Holder - Check here if you were a depositor with
$50.00 or more on deposit with Woronoco Savings Bank, July 31, 1997.
b. [ ] Supplemental Eligible Account Holder - Check here if you were a
depositor with $50.00 or more on deposit with Woronoco Savings Bank
as of June 30, 1998, but are not an Eligible Account Holder.
c. [ ] Trustees, Corporators, directors, officers and employees of Woronoco
Savings Bank and Woronoco Bancorp, Inc. who do not otherwise qualify
as an Eligible Account Holder or Supplemental Eligible Account
Holder.
4. ACKNOWLEDGMENT OF PARTICIPANT. I understand that this Contribution and
Investment Form shall be subject to all of the terms and conditions of the Plan.
I acknowledge that I have received a copy of the Prospectus and the Prospectus
Supplement.
- --------------------------------------------------------------------------------
Signature of Participant Date
- -------------------------------------------------------------------------------
ACKNOWLEDGMENT OF RECEIPT BY ADMINISTRATOR. This Contribution and Investment
Form was received by the Plan Administrator and will become effective on the
date noted below.
- --------------------------------------------
By:______________ Date
THE PARTICIPATION INTERESTS REPRESENTED BY COMMON STOCK OFFERED HEREBY ARE NOT
DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE BANK INSURANCE FUND OR THE SAVINGS
ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR BANK. THE
COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL INVESTED.
<PAGE>
[TO BE USED IN CONNECTION WITH THE SYNDICATED COMMUNITY OFFERING ONLY]
PROSPECTUS SUPPLEMENT FOR SYNDICATED COMMUNITY OFFERING
[LOGO] WORONOCO BANCORP, INC.
(Proposed Holding Company for Woronoco Savings Bank)
31 COURT STREET
WESTFIELD, MASSACHUSETTS 01085
(413) 568-9141
================================================================================
Woronoco Bancorp is offering for sale shares of common stock in the
conversion of Woronoco Savings Bank from the mutual to stock form of
organization. Woronoco Savings will become a wholly owned subsidiary of
Woronoco Bancorp. Woronoco Bancorp has already received subscriptions for the
remaining _________ shares of the aggregate of up to ________ shares to be sold
in the conversion. No stock will be sold unless additional subscriptions are
received for at least the minimum number of shares in the offering. All funds
submitted to Woronoco Savings to purchase shares of stock will be placed in a
deposit account at Woronoco Savings until the shares are issued or the funds are
returned.
There is currently no public market for the common stock. The common stock
is expected to be listed on the American Stock Exchange, under the symbol
"____."
================================================================================
TERMS OF THE OFFERING
THIS OFFERING WILL EXPIRE NO LATER THAN 12:00 NOON, EASTERN TIME, ON
_____________, 1999, UNLESS EXTENDED.
. Price Per Share $10.00
. Number of Shares
Minimum/Midpoint/Maximum
. Underwriting Commissions and Other Expenses
Minimum/Midpoint/Maximum
. Net Proceeds to Woronoco Bancorp
in the Offering
Minimum/Midpoint/Maximum
. Net Proceeds per Share to Woronoco Bancorp
in the Offering
Minimum/Midpoint/Maximum
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE __ OF THE ATTACHED PROSPECTUS.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Massachusetts Division of Banks, nor any other state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representations to the contrary is a
criminal offense.
SANDLER O'NEILL & PARTNERS, L.P.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS _______________, 1999
<PAGE>
THE SYNDICATED COMMUNITY OFFERING
Following this prospectus supplement is the prospectus in the form used in
the subscription and community offerings. The purchase price for all shares
sold in this offering will be the same as the price paid by subscribers in the
subscription and community offerings.
We reserve the right, in our absolute discretion, to accept or reject, in
whole or in part, any or all subscriptions in this offering.
We have engaged Sandler O'Neill & Partners, L.P. as financial advisors to
assist us in the sale of the common stock in this offering. It is anticipated
that Sandler O'Neill will use the services of other registered broker-dealers
and that fees to Sandler O'Neill and such selected dealers will not exceed 7.0%
of the sales price of the shares sold in this offering. Neither Sandler O'Neill
nor any selected dealer shall have any obligation to take or purchase any shares
of common stock in this offering.
2
<PAGE>
PROSPECTUS
[LOGO] WORONOCO BANCORP, INC.
(Proposed Holding Company for Woronoco Savings Bank
31 COURT STREET
WESTFIELD, MASSACHUSETTS 01086
(413) 568-9141
================================================================================
Woronoco Savings Bank is converting from the mutual to the stock form of
organization. This conversion must be approved by the Massachusetts Division of
Banks and Woronoco Savings' corporators and is subject to the requirements of
the Federal Deposit Insurance Corporation. As part of this conversion, Woronoco
Savings will become a wholly owned subsidiary of Woronoco Bancorp, Inc.
================================================================================
TERMS OF THE OFFERING
Woronoco Bancorp is offering shares of its common stock for sale in a
subscription offering and, to the extent shares are not subscribed, in a direct
community offering or syndicated community offering. IN ORDER TO PURCHASE
SHARES PURSUANT TO A SUBSCRIPTION RIGHT, YOU MUST SUBMIT A PROPERLY COMPLETED
STOCK ORDER AND CERTIFICATION FORM, TOGETHER WITH PAYMENT FOR THE SHARES, TO
WORONOCO SAVINGS BY 12:00 NOON, EASTERN TIME, ON ____________, 1999, UNLESS
EXTENDED. No shares will be sold if Woronoco Savings' conversion to stock form
is not approved as required or if at least a minimum number of shares are not
sold. All funds submitted to Woronoco Savings to purchase shares of stock will
be placed in a deposit account at Woronoco Savings until the shares are issued
or the funds are returned.
An independent appraiser has estimated the aggregate pro forma market value
of the common stock to be sold in the conversion to be between $35,700,000 and
$48,300,000. If the aggregate estimated pro forma market value of the stock is
increased, then the maximum number of shares to be sold may also be increased by
up to 15%, to an adjusted maximum of 5,554,500 shares.
<TABLE>
<S> <C>
. Price Per Share $10.00
. Number of Shares
Minimum/Midpoint/Maximum 3,570,000 to 4,200,000 to 4,830,000
. Underwriting Commissions and Other Expenses
Minimum/Midpoint/Maximum $1,261,000 to $1,334,000 to $1,406,000
. Net Proceeds to Woronoco Bancorp
Minimum/Midpoint/Maximum $34,439,000 to $40,666,000 to $46,894,000
. Net Proceeds per Share
Minimum/Midpoint/Maximum $9.65 to $9.68 to $9.71
</TABLE>
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE __ OF THIS DOCUMENT.
There is currently no public market for the common stock. The common stock is
expected to be listed on the American Stock Exchange, under the symbol "____",
upon completion of the conversion.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental
agency.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Massachusetts Division of Banks, nor any other state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representations to the contrary is a
criminal offense.
SANDLER O'NEILL & PARTNERS, L.P.
_______________, 1998
<PAGE>
MAP PAGE
[Map of the State of Massachusetts, with enlarged inset of Hampden and Hampshire
Counties located in Western Massachusetts, which contains the location of the
Bank's eleven banking offices and one stand-alone automatic teller
machine("ATM"). The map also lists the names and addresses of each banking
office. The banking offices are located in Westfield, Southwick, Feeding Hills,
South Hadley, Springfield, Ludlow and West Springfield, Massachusetts.]
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: WHAT IS THE PURPOSE OF THE OFFERING?
A: The offering means that you will have the chance to become a stockholder of
our newly formed holding company, Woronoco Bancorp, Inc., which will allow
you to share in our future as a stock savings institution. The stock
offering will increase our capital and funds for lending and investment
activities. As a stock savings institution operating through a holding
company structure, we will have greater flexibility for investments.
Q: AS A DEPOSITOR OF WORONOCO SAVINGS, AM I OBLIGATED TO PURCHASE STOCK?
A: No. You are not required to purchase stock.
---
Q: WHAT SHOULD I CONSIDER WHEN DECIDING WHETHER TO BUY THE STOCK?
A: Before you decide to purchase shares, you should read the Risk Factors
section beginning on page __ of this prospectus.
Q: HOW DO I PURCHASE THE STOCK?
A: You must complete and return the stock order form to us together with your
payment so that we receive your order by 12:00 noon, Eastern time,
on________________, 1999.
Q: HOW MUCH STOCK MAY I PURCHASE?
A: The minimum purchase is 25 shares, which equals $250. The maximum purchase
for any individual person or persons ordering through a single account is
20,000 shares or $200,000. No person, related person or persons acting
together, may purchase more than 1% of the amount of stock sold, exclusive
of any increase above the maximum number of shares to be sold. We may
decrease or increase this purchase limitation without notifying you. In
the event that the offering is oversubscribed, shares will be allocated
based upon a formula.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A: You might not receive any or all of the shares you want to purchase. If
there is an oversubscription in the subscription offering, the stock will
be allocated in the following order of priority:
. Depositors who held at least $50 with us on July 31, 1997.
. Depositors who held at least $50 with us on June 30, 1998.
. The Woronoco Savings Bank Employee Stock Ownership Plan.
. Woronoco Savings' trustees, corporators, officers and employees.
If the above persons do not subscribe for all of the shares, the remaining
shares may be offered in a direct community offering or in a syndicated
community offering.
3
<PAGE>
Q: WHO CAN HELP ANSWER ANY QUESTIONS THAT I MAY HAVE ABOUT THE STOCK
OFFERING?
A: In order to make an informed investment decision, you should read this
entire prospectus. In addition, you may contact:
CONVERSION CENTER
WORONOCO SAVINGS BANK
31 COURT STREET
WESTFIELD, MASSACHUSETTS 01086
(413) __________________
Q: WILL THE STOCK BE TRADED ON A MARKET?
A: It is anticipated that the stock will be traded on the American Stock
Exchange. However, it is not assured or guaranteed that the stock will be
traded on the American Stock Exchange or on any market.
4
<PAGE>
SUMMARY
. This summary highlights selected information in this prospectus but does
not contain all of the information that you need to know before making an
informed investment decision. You should read carefully this entire
prospectus, including the consolidated financial statements and the notes
to the consolidated financial statements of Woronoco Savings.
THE COMPANIES
WORONOCO BANCORP, INC.
31 Court Street
Westfield, Massachusetts 01085
(413) 568-9141
Woronoco Bancorp is not an operating company and has not engaged in any
significant business. It was formed to be the holding company for Woronoco
Savings. The holding company structure will provide greater flexibility in
terms of operations, expansion and diversification. See page __.
WORONOCO SAVINGS BANK
31 Court Street
Westfield, Massachusetts 01085
(413) 568-9141
Woronoco Savings is a Massachusetts mutual savings bank. At August 31,
1998, Woronoco Savings had assets of $366.2 million, deposits of $273.6 million
and surplus of $33.4 million.
Woronoco Savings operates 11 banking offices in Hampden and Hampshire
Counties in western Massachusetts. Woronoco Savings historically has operated
as a community-oriented banking institution primarily offering mortgage loans
and consumer loans and a variety of deposit products.
IMPACT OF THE CONVERSION ON CORPORATE GOVERNANCE
Currently, corporators of Woronoco Savings possess all voting rights in
Woronoco Savings, including the election of members to its board of trustees.
After the conversion, corporators will cease to exist and will no longer be
entitled to vote at meetings of Woronoco Savings. Woronoco Bancorp, as sole
stockholder of Woronoco Savings, will possess all voting rights of Woronoco
Savings. Voting rights of Woronoco Bancorp will be vested in the holders of
Woronoco Bancorp's common stock.
The conversion will occur only if two-thirds of Woronoco Savings'
corporators approve the conversion at a meeting of corporators called for that
purpose. Woronoco Savings is required to send to its corporators prior to the
meeting a notice and information statement which describes the conversion.
5
<PAGE>
THE STOCK OFFERING
Woronoco Bancorp is offering for sale between 3,570,000 and 4,830,000
shares of its common stock at $10.00 per share. As a result of changes in
market and financial conditions prior to completion of the conversion, the
offering may be increased to 5,554,500 shares without further notice to you. In
that event, you will not have the opportunity to change or cancel any stock
order previously delivered to us.
THE OFFERING RANGE AND DETERMINATION OF THE $10.00 PRICE PER SHARE
The offering range is based on an independent appraisal by Keller & Co.,
Inc. dated as of October 23, 1998. This appraisal was based upon our financial
condition and operations and the effect of the additional capital to be raised
in this offering. The $10.00 price per share was determined by our boards of
trustees and directors and is the price most commonly used in stock offerings
involving conversions of mutual savings institutions. The appraisal will be
updated prior to the consummation of the conversion.
TERMS OF THE OFFERING
The shares of common stock are being offered pursuant to subscription
rights in the following order of priority:
(1) Depositors who held at least $50 with us on July 31, 1997.
(2) Depositors who held at least $50 with us on June 30, 1998.
(3) The Woronoco Savings Bank Employee Stock Ownership Plan.
(4) Woronoco Savings' trustees, corporators, officers and employees.
Shares of common stock not subscribed for in the subscription offering will
be offered to the general public in a direct community offering and, if
necessary, a syndicated community offering. See pages ___ to ___.
SUBSCRIPTION RIGHTS
You may not sell or transfer your subscription rights. Any transfer of
subscription rights is prohibited by law.
PAYMENT FOR SHARES
Payment for your subscriptions may be made:
(1) in cash, if delivered in person at any full-service banking office of
Woronoco Savings;
(2) by personal check, official bank check or money order; or
(3) by authorization of withdrawal from your deposit account(s) maintained
at Woronoco Savings.
6
<PAGE>
TERMINATION OF THE OFFERING
The subscription offering will terminate on __________, 1999. If all of
the shares are not subscribed for in the subscription offering and we are unable
to obtain orders for the remaining shares by __________, 1999, we will:
. promptly return any payment you made to us, with interest, or cancel
any withdrawal authorization you gave us; or
. give you notice of an extension of the offering and of your rights to
cancel or change your subscription.
NO BOARD RECOMMENDATION
Our boards of trustees and directors make no recommendation to you
regarding whether you should purchase the common stock. You should make an
evaluation of your best interests and financial capabilities in deciding whether
or not to purchase stock.
CONVERSION CENTER
If you have any questions regarding the conversion, please call the
Conversion Center at (413) ___-____.
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
Woronoco Bancorp intends to use 50% of the net proceeds from the sale of
its stock to purchase all of the common stock to be issued by Woronoco Savings
in the conversion. Woronoco Bancorp may also use a portion of the net proceeds
to form and capitalize a wholly owned subsidiary so that the subsidiary can make
a loan to the employee stock ownership plan to fund the plan's purchase of stock
in the conversion. The balance of the funds will be retained as Woronoco
Bancorp's initial capitalization. These funds retained by Woronoco Bancorp will
initially be invested in short- to intermediate-term mortgage-backed securities.
Woronoco Savings will use the net proceeds that it receives from the sale of its
stock to Woronoco Bancorp for investment in loans, primarily for the origination
of fixed-rate mortgage loans secured by residential properties. To a lesser
extent, Woronoco Savings will also invest its share of the net proceeds in
investment-grade equity securities and may also possibly repay Federal Home Loan
Bank borrowings. See page __.
DIVIDENDS
Woronoco Bancorp has not made any decisions concerning the payment of
dividends.
BENEFITS TO MANAGEMENT FROM THE CONVERSION
We intend to establish the Woronoco Savings Bank Employee Stock Ownership
Plan which will purchase stock in the conversion. The employee stock ownership
plan will buy stock in an amount equal to 8% of the total of the shares to be
issued in the conversion. The employee stock ownership plan will provide a tax
qualified retirement benefit to all eligible employees. We also intend to adopt
a stock-based incentive plan for the benefit of directors, officers and
employees.
The following table presents information regarding the total value of the
shares of common stock, at the maximum of the shares proposed to be sold, which
would be acquired by the employee stock ownership plan and the total value of
all shares available for award and issuance upon the granting of awards and
exercise of options under the stock-based incentive plan. The value of the
shares in the table assumes that their value is the same as the sales price of
the shares in the offering. No value can be given for options because their
exercise price will be equal to the fair market value of the common stock on the
day the options are granted. As a result, value can be received under an option
only if the market price of common stock increases.
7
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
ESTIMATED SHARES ISSUED
VALUE OF SHARES IN THE CONVERSION
--------------- -----------------
<S> <C> <C>
Employee Stock Ownership Plan.. $4,173,120 8.0%
Stock-Based Incentive Plan:
Stock Awards.............. 2,086,560 4.0
Stock Options............. -- 10.0
---------- ----
Total................. $6,259,680 22.0%
========== ====
</TABLE>
Additionally, some of our employees will receive employment agreements or
change in control agreements which could provide those employees with cash
payments upon their termination of employment following a change in control of
Woronoco Bancorp or Woronoco Savings. The stock-based incentive plan may also
provide participants with benefits upon a change in control.
WORONOCO SAVINGS CHARITABLE FOUNDATION
In furtherance of our long-standing commitment to our local community, we
intend to establish a charitable foundation, the Woronoco Savings Charitable
Foundation, and fund the foundation with shares of our common stock equal to 8%
of the shares sold. See pages __ to __. It is anticipated that the foundation
will make grants and donations to nonprofit organizations and community groups
within the communities served by Woronoco Savings. If we do establish the
foundation, this will result in a lower aggregate estimated pro forma market
value of the common stock than if the conversion were completed without the
foundation. For a further discussion of the financial impact of the foundation,
see "Woronoco Savings Charitable Foundation," "Pro Forma Data" and "Comparison
of Valuation and Pro Forma Information With No Foundation."
8
<PAGE>
RISK FACTORS
The following risk factors, in addition to the other information discussed
elsewhere in this Prospectus, should be considered by you in deciding whether to
purchase our common stock.
INCREASING INTEREST RATES MAY HURT OUR PROFITS
To be profitable, we have to earn more money in interest and fees than we
pay to our depositors in interest. In a rising interest rate environment, our
net interest income could be negatively affected if interest paid on interest-
bearing liabilities, such as deposits, increases more quickly than interest
received on interest-bearing assets, such as loans and investment securities.
This will cause profits to decrease. In addition, rising interest rates may
adversely affect our earnings because they may cause a decrease in the demand
for loans and a reduction in value of our investment securities. For a further
discussion of how changes in interest rates could impact us, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk and Market Risk Analysis."
AFTER THE CONVERSION, OUR NET INCOME-TO-EQUITY RATIO WILL BE LOW, COMPARED TO
OTHER COMPANIES AND OUR COMPENSATION EXPENSES WILL INCREASE. THIS COULD
NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK.
Our return on equity has historically been below that of our regional and
national peer group institutions. The proceeds we will receive from the sale of
our common stock will significantly increase our capital and it will take us
time to fully use it in our business operations through prudent longer-term
investments. Our compensation expenses will also increase because of the costs
associated with the employee stock ownership and stock-based incentive plans.
As expenses go up, our net income will go down. Therefore, we expect our return
on equity to remain below our historical level and below that of our regional
and national peers. This low return on equity could negatively impact our stock
price. We cannot give you any assurance as to when or if we will achieve
returns on equity that are comparable to industry peers. For further
information regarding pro forma income and expenses, see "Pro Forma Data."
A SIGNIFICANT PORTION OF OUR PRE-TAX INCOME IS DEPENDENT UPON THE STOCK
MARKET
Approximately one-third of our pre-tax income is derived from gains on the
sale of our equity security investments. Accordingly, a downturn in the
financial markets and a corresponding decrease in the values of our equity
security investments could cause our profits to decrease. For further
information regarding our investment activities, see "Business of the Bank --
Investment Activities."
IF OUR COMPUTER SYSTEMS DO NOT WORK PROPERLY WITH YEAR 2000 DATA, OUR BUSINESS
OPERATIONS WILL BE DISRUPTED
We could experience a disruption to our business operations and, as a
result, an adverse impact on our financial condition and results of operations
if our computer systems and the computer systems operated by our third party
vendors are not able to properly handle problems created by the Year 2000. In
addition, if our progress towards becoming Year 2000 compliant is deemed
inadequate, then we may be subjected to adverse regulatory action. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
9
<PAGE>
OUR LOAN PORTFOLIO POSSESSES INCREASED RISK DUE TO OUR SUBSTANTIAL NUMBER OF
CONSUMER, MULTI-FAMILY AND COMMERCIAL REAL ESTATE AND COMMERCIAL BUSINESS LOANS
Our portfolio of consumer, multi-family and commercial real estate, and
commercial business loans accounted for nearly one-half of our total loan
portfolio as of August 31, 1998. These types of loans are generally considered
to involve a higher degree of risk compared to first mortgage loans on single-
family owner occupied residential properties. Moreover, we plan to increase our
emphasis on commercial real estate and commercial business lending in the
future. As a consequence of our planned increased emphasis on and increased
investment in commercial real estate and commercial business loans, we may
determine it necessary to increase the level of our provision for loan losses
over that provided in past years. Additional or increased provisions for loan
losses would hurt our profits. For further information concerning the risks
associated with consumer, multi-family and commercial real estate and commercial
business loans, see "Business of the Bank -- Lending Activities" and "--
Delinquent Loans, Classified Assets and Real Estate Owned."
THE ESTABLISHMENT OF THE WORONOCO SAVINGS CHARITABLE FOUNDATION WILL HAVE A
NEGATIVE IMPACT ON EARNINGS
Woronoco Bancorp intends to contribute to the Woronoco Savings Charitable
Foundation shares of its common stock equal to 8% of the shares to be sold in
the conversion. This contribution will have an adverse impact on our operating
results for the year ending December 31, 1999, possibly resulting in an
operating loss for that year. For a further discussion regarding the effect of
the contribution to the foundation, see "Woronoco Savings Charitable Foundation"
and "The Conversion - Establishment of the Charitable Foundation."
THERE IS A RISK THAT THE CONTRIBUTION TO THE FOUNDATION WILL NOT BE TAX
DEDUCTIBLE AND THUS ITS NEGATIVE EFFECT ON OUR EARNINGS COULD BE SIGNIFICANTLY
GREATER THAN WE EXPECT
We believe that our contribution to the Woronoco Savings Charitable
Foundation will be deductible by us for federal income tax purposes.
Nevertheless, we do not have any assurance that the Internal Revenue Service
will agree with us. In the event that our contribution is not deductible for
federal income tax purposes, we would not receive any tax benefit from the
contribution. In addition, even if our contribution is tax deductible, we may
not have sufficient earnings to be able to use the deduction in full. For a
further discussion of the contribution to the charitable foundation, please see
"Woronoco Savings Charitable Foundation" and "The Conversion - Establishment of
the Charitable Foundation."
OUR AGREEMENT TO MAKE PAYMENTS AFTER A CHANGE IN CONTROL IN VARIOUS EMPLOYEE
CONTRACTS AND PLANS MAY DISCOURAGE TAKEOVER ATTEMPTS
The proposed stock benefit plans may contain provisions calling for the
acceleration of benefits or payments in the event of a change in control. We
also intend to enter into employment and change in control agreements with
certain employees and adopt an employee severance compensation plan. These
agreements and
10
<PAGE>
plan are expected to provide benefits and cash payments to employees if there is
a change in control and a subsequent termination of their employment. These
benefits that would be triggered upon a change in control would increase the
cost of acquiring us. This additional cost could discourage future attempts to
take us over which you might like to have happen. For a further discussion of
current and proposed benefits for our directors, officers and employees, see
"Restrictions on Acquisition of the Company and the Bank--Restrictions in the
Company's Certificate of Incorporation and Bylaws," "Management of the Bank--
Employment Agreements," "-- Change in Control Agreements," "-- Employee
Severance Compensation Plan" and "-- Other Benefit Plans."
ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING INSTRUMENTS AND VOTING CONTROL OF
MANAGEMENT MAY DISCOURAGE TAKEOVER ATTEMPTS
PROVISIONS IN WORONOCO BANCORP'S AND WORONOCO SAVINGS' GOVERNING
INSTRUMENTS. Provisions in our governing instruments may discourage potential
proxy contests and other potential takeover attempts, particularly those which
have not been negotiated with our board of directors. As a result, these
provisions generally may serve to perpetuate existing management. Examples of
these provisions include, a limitation on the voting of shares held by a single
beneficial owner in excess of 10% of our outstanding shares and the election of
directors for three-year terms so that only approximately one-third of our
directors are elected annually. For a more detailed discussion of these
provisions, see "Restrictions on Acquisitions of the Company and the Bank."
VOTING CONTROL OF OFFICERS AND DIRECTORS. The prospective possible total
ownership or voting influence over our shares which our employees and directors
might obtain over time through the shares they purchase in the conversion, their
interests in the employee stock ownership plan, and their possible acquisition
of shares through the proposed stock-based incentive plan, would give our
employees and directors a significant vote on matters important to you.
Further, this possible ownership level could discourage takeover attempts which
you might like to see happen. In addition, the total ownership or voting level
by employees and directors from these sources could reach in excess of 20% of
our outstanding common stock. That level would enable our employees and
directors as a group to defeat any stockholder matter that required an 80% vote.
For a detailed discussion of these provisions, see "Restrictions on Acquisition
of the Company and the Bank--Restrictions in the Company's Certificate of
Incorporation and Bylaws."
IF THE NUMBER OF SHARES OF COMMON STOCK TO BE SOLD IN THE CONVERSION IS
INCREASED, THE FUTURE NET INCOME ATTRIBUTABLE TO EACH SHARE OF COMMON STOCK
WOULD BE DECREASED
An increase in the number of shares sold in the conversion will mean that
each share will own a smaller part of whatever earnings and equity we have in
the future. For further information regarding pro forma information, see "Pro
Forma Data."
YOUR SUBSCRIPTION RIGHTS MAY BE TAXABLE
We have received an opinion of Keller & Co., Inc. that, under Keller's
valuation, the subscription rights granted to depositors to purchase our common
stock have no value. However, Keller's valuation is not binding on the Internal
Revenue Service. If the Internal Revenue Service determines that those
subscription rights have value, then receipt of those rights could result in a
taxable gain to you. Whether subscription rights have value is factual
determination. For further discussion regarding tax aspects, see "The
Conversion -- Tax Aspects."
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The following selected consolidated financial and other data of Woronoco
Savings is derived in part from our consolidated financial statements and notes
beginning on page F-1. The data presented for the eight months ended August 31,
1998 and 1997 were derived from unaudited financial statements and reflect, in
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such interim
periods. Interim results at and for the eight months ended August 31, 1998 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1998. In order to present ratios and other data for
the eight month periods ended August 31, 1998 and 1997, which can be compared to
the ratios and data for annual periods, the ratios and other data for the eight
month periods ended August 31, 1998 and 1997 have been presented as if they
related to an annual period.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
AUGUST
31,
----------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets.......................... $366,218 $341,909 $316,708 $275,405 $266,325 $236,174
Cash and cash equivalents............. 12,923 11,686 10,469 12,320 9,627 21,513
Loans, net............................ 265,564 261,723 234,135 200,189 186,781 172,133
Debt securities:
Available-for-sale................... -- -- 250 6,205 -- --
Held-to-maturity/ held-for-
investment.......................... -- -- -- -- 7,461 12,125
Mortgage-backed securities, net:
Available-for-sale................... 52,796 39,913 47,531 35,561 -- --
Held-to-maturity/held-for-investment -- -- -- -- 42,756 13,223
Equity securities:
Available-for-sale................... 18,686 15,727 13,845 12,271 11,425 --
Held-for-investment.................. -- -- -- -- -- 9,826
Deposits.............................. 273,567 262,679 248,982 231,689 218,856 207,081
FHLB advances......................... 54,792 41,726 35,441 14,472 22,000 5,000
Total surplus......................... 33,377 33,332 29,074 26,221 22,261 20,733
Other real estate owned, net.......... 335 381 423 641 955 1,126
Nonperforming assets and
troubled debt restructurings......... 1,197 1,540 675 3,154 3,476 4,348
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS ENDED
AUGUST 31, FOR THE YEAR ENDED DECEMBER 31,
---------------- ---------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- -------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest and dividend income...... $16,650 $15,567 $23,658 $21,734 $19,869 $16,980 $16,132
Interest expense........................ 8,829 8,087 12,500 11,022 9,823 7,035 6,537
------- ------- ------- ------- ------- ------- -------
Net interest income.................. 7,821 7,480 11,158 10,712 10,046 9,945 9,595
Provision for loan losses............... 160 120 180 180 210 300 508
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses................... 7,661 7,360 10,978 10,532 9,836 9,645 9,087
Noninterest income...................... 2,548 2,355 3,324 1,896 1,592 949 1,482
Noninterest expense..................... 6,677 6,628 9,743 8,372 7,693 7,139 5,996
------- ------- ------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting for income taxes............. 3,532 3,087 4,559 4,056 3,735 3,455 4,573
Income taxes............................ 1,223 986 1,541 1,582 1,400 1,263 1,809
------- ------- ------- ------- ------- ------- -------
Income before cumulative effect of
change in accounting for income
taxes................................... 2,309 2,101 3,018 2,474 2,335 2,192 2,764
Cumulative effect of change in -- -- -- -- -- -- 822
accounting for income taxes............. ------- ------- ------- ------- ------- ------- -------
Net income........................... $ 2,309 $ 2,101 $ 3,018 $ 2,474 $ 2,335 $ 2,192 $ 3,586
======= ======= ======= ======= ======= ======= =======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS ENDED
AUGUST 31, FOR THE YEAR ENDED DECEMBER 31,
---------------- --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- --------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Average yield on interest-earning assets........... 7.45% 7.64% 7.62% 7.80% 7.75% 7.11% 7.60%
Average rate paid on interest-bearing liabilities.. 4.28 4.28 4.35 4.26 4.11 3.16 3.27
Average interest rate spread....................... 3.17 3.36 3.27 3.54 3.64 3.95 4.33
Net interest margin................................ 3.50 3.67 3.59 3.84 3.92 4.16 4.52
Ratio of interest-earning assets to
interest-bearing liabilities..................... 108.38 107.73 107.96 107.70 107.35 107.37 106.12
Net interest income after provision for loan
losses to noninterest expense.................... 114.74 111.04 112.67 125.80 127.87 135.10 151.55
Noninterest expense as a percent of
average assets................................... 2.83 3.08 2.96 2.84 2.85 2.85 2.67
Return on average assets........................... 0.98 0.98 0.92 0.84 0.86 0.87 1.60
Return on average surplus.......................... 9.95 10.37 9.67 9.10 9.58 10.05 18.35
Ratio of average surplus to average assets......... 9.82 9.41 9.50 9.23 9.01 8.70 8.71
Efficiency ratio(1)................................ 71.85 72.42 73.04 70.61 69.56 65.69 56.05
</TABLE>
See note on following page
14
<PAGE>
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS ENDED
AUGUST 31, FOR THE YEAR ENDED DECEMBER 31,
------------------ -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------------ ------ -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
REGULATORY CAPITAL RATIOS:
Leverage capital............................... 9.11 9.33 9.08 8.94 9.28 8.53 8.94
Total risk-based capital....................... 13.49 13.99 15.14 15.67 15.95 15.90 17.13
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total loans... 0.32 0.51 0.44 0.11 1.24 1.34 1.85
Nonperforming assets and troubled debt
restructurings as a percent of total assets.. 0.33 0.49 0.45 0.21 1.15 1.31 1.84
Allowance for loan losses as a percent
of total loans............................... 0.77 0.77 0.74 0.81 0.91 0.88 0.96
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings............................... 239.10 150.93 168.42 758.33 73.14 65.73 51.74
Net loans charged-off to average interest-
earning loans................................ 0.03% 0.05% 0.06% 0.05% 0.01% 0.17% 0.20%
BANKING OFFICES AT END OF PERIOD.................. 11 10 10 9 9 8 6
</TABLE>
____________________________
(1) The efficiency ratio represents the ratio of noninterest expense divided by
the sum of the net interest income and noninterest income. Does not
include unrealized gains on investment securities. If the ratio included
unrealized gains on investment securities, then the efficiency ratio would
be 63.41%, 61.81%, 63.49%, 66.40%, 66.10%, 65.53% and 54.13% for the eight
months ended August 31, 1998 and 1997 and for the year ended December 31,
1997, 1996, 1995, 1994 and 1993, respectively.
15
<PAGE>
RECENT DEVELOPMENTS
The following table sets forth consolidated financial and other data of
Woronoco Savings at and for the periods indicated. Consolidated financial and
operating data and financial ratios and other data at and for the year ended
December 31, 1997 have been derived from the consolidated financial statements
and notes beginning on page F-1. The data presented for the three and nine
months ended September 30, 1998 and 1997 were derived from unaudited
consolidated financial statements and reflect, in the opinion of management, all
adjustments (consisting only of recurring adjustments) which are necessary to
present fairly the results for such interim periods. Interim results at and for
the three and nine months ended September 30, 1998, are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 1998. In order to present ratios and other data for the three and
nine month periods ended September 30, 1998 and September 30, 1997, which can be
compared to the ratios and data for the annual periods, the ratios and other
data for the three and nine month periods ended September 30, 1998 and 1997 have
been presented as if they relate to an annual period.
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL DATA:
Total assets........................ $368,717 $341,909
Cash and cash equivalents........... 12,694 11,686
Loans, net.......................... 268,563 261,723
Securities available-for-sale:
Mortgage-backed securities, net.... 52,262 39,913
Equity securities.................. 19,721 15,727
Deposits............................ 273,551 262,679
FHLB advances....................... 55,727 41,726
Total surplus....................... 34,288 33,332
Other real estate owned, net........ 335 381
Nonperforming assets and
troubled debt restructurings.... 1,513 1,540
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------- ------------ ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest and dividend income....................... $ 6,310 $ 5,929 $18,763 $17,551
Interest expense......................................... 3,416 3,251 9,991 9,211
------- ------- ------- -------
Net interest income..................................... 2,894 2,678 8,772 8,340
Provision for loan losses................................ 60 45 180 135
------- ------- ------- -------
Net interest income after provision 2,834 2,633 8,592 8,205
for loan losses......................................
Noninterest income....................................... 761 1,341 2,634 2,770
Noninterest expense...................................... 2,447 2,369 7,454 7,385
------- ------- ------- -------
Income before income taxes............................... 1,148 1,605 3,772 3,590
Income taxes............................................. 420 559 1,311 1,170
------- ------- ------- -------
Net income.............................................. $ 728 $ 1,046 $ 2,461 $ 2,420
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------- ------------ --------- -------------
<S> <C> <C> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Average yield on interest earning assets................. 7.40% 7.62% 7.45% 7.63%
Average rate paid on interest-bearing liabilities........ 4.32 4.52 4.30 4.31
Average interest rate spread............................. 3.08 3.10 3.15 3.32
Net interest margin...................................... 3.39 3.44 3.48 3.62
Ratio of interest-earning assets to
interest-bearing liabilities............................ 107.82 108.26 108.33 107.79
Net interest income after provision for loan
losses to noninterest expense....................... 115.82 111.14 115.27 111.10
Noninterest expense as a percent of
average assets.......................................... 2.71 2.87 2.79 3.03
Return on average assets................................. 0.81 1.27 0.92 0.99
Return on average surplus................................ 8.34 13.22 9.45 10.55
Ratio of average surplus to average assets............... 9.67 9.61 9.77 9.42
Efficiency Ratio (1)..................................... 68.14 78.24 71.91 73.03
</TABLE>
See note on following page
17
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
REGULATORY CAPITAL RATIOS:
Leverage capital ratio................................... 9.30 9.22 9.30 9.22
Total risk-based capital................................. 15.34 15.18 15.34 15.18
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total loans.............. .44 .50 .44 .50
Nonperforming assets and troubled debt
restructurings as a percent of total assets............. .41 .49 .41 .49
Allowance for loan losses as a percent
of total loans....................................... .78 .77 .78 .77
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings....................................... 177.4 152.1 177.4 152.1
Net loans charged-off to average interest-earning loans.. .02 .04 .02 .04
BANKING OFFICES AT END OF PERIOD.......................... 11 10 11 10
</TABLE>
______________________
(1) The efficiency ratio represents the ratio of noninterest expenses divided by
the sum of the net interest income and noninterest income. Does not include
unrealized gains on investment securities. If the ratio included unrealized
gains on investment securities, then the efficiency ratio would be 66.95%,
58.95%, 64.46% and 61.35% for the three months ended September 30, 1998 and
1997 and for the nine months ended September 30, 1998 and 1997,
respectively.
18
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
Total assets increased by $26.8 million, or 7.8%, to $368.7 million at
September 30, 1998, from $341.9 million at December 31, 1997. The growth in
assets is primarily attributable to a $12.4 million increase in mortgage-backed
securities available for sale, a $4.0 million increase in equity securities
available for sale, a $6.8 million increase in net loans and a $1.5 million
increase in banking premises and equipment. Asset growth was funded primarily
through FHLB borrowings and deposit inflows. Mortgage-backed securities
increased by $12.4 million, or 30.9%, to $52.3 million at September 30, 1998
from $39.9 million at December 31, 1997. The net increase in mortgage-backed
securities was due to the securitization of $19.1 million of fixed-rate one- to
four-family mortgage loans and an increase in the unrealized gain of $654,000,
less the normal amortization of the mortgage-backed securities portfolio
totalling $7.4 million. Equity securities at September 30, 1998 totalled $19.7
million, an increase of $4.0 million, or 25.4%, compared to $15.7 million at
December 31, 1997, attributable to net purchases of $7.0 million and a decrease
in the unrealized gain of $3.0 million. Net loans increased by $6.8 million, or
2.6%, to $268.5 million at September 30, 1998 from $261.7 million at December
31, 1997, primarily due to increased originations of one- to four-family
mortgage loans and home equity loans and lines of credit. These originations
were partially offset by the $19.1 million in fixed-rate loans that were
securitized and are now classified as mortgage-backed securities. The
relatively low interest rate environment during 1998 increased one-to four-
family refinance activity, primarily 15- and 30-year fixed-rate mortgage
products. Premises and equipment increased by $1.5 million, or 25.1%, due to
the construction of an addition to Woronoco Saving main office, which will
provide additional office space for Woronoco Saving administrative operations,
and the renovation of a branch office. The construction on the main office is
due to be completed in early 1999.
Total deposits at September 30, 1998 were $273.6 million, an increase of
$10.9 million, or 4.1%, compared to $262.7 million at December 31, 1997. The
increase was primarily due to an increase of $12.8 million, or 10.7%, in core
deposit accounts, to $132.2 million at September 30, 1998, from $119.4 million
at December 31, 1997. This increase in deposits consists of $2.5 million in
demand, $3.2 million in NOW, $3.7 million in money market, and $3.4 million in
savings accounts and is also due in part to an active promotion to gain new
checking account customers and the opening of a new banking office in 1997 which
had $6.2 million of deposits at September 30, 1998. Certificates of deposit
decreased $1.9 million, or 1.4%, to $141.3 million at September 30, 1998 from
$143.2 million at December 31, 1997. The decrease in certificates of deposit
was primarily attributable to the maturing of previously offered certificate
"specials" that Woronoco Savings did not actively seek to retain. To some
extent, the increase in core deposits and decrease in certificate accounts is
reflective of depositors' general unwillingness to commit funds to longer time
periods given the current low interest rate environment. Borrowed funds
increased $14.0 million, or 33.6%, to $55.7 million at September 30, 1998 from
$41.7 million at December 31, 1997 as management utilized borrowings to fund a
portion of Woronoco Saving asset growth.
Total surplus increased $956,000, or 2.9%, to $34.3 million at September
30, 1998, from $33.3 million at December 31, 1997, primarily the result of net
income of $2.5 million during the eight months ended September 30, 1998 which
was offset by a $1.5 million decrease in the after-tax net unrealized gain on
available-for-sale securities during the same period. The $1.5 million decrease
in the after-tax net unrealized gain on available-for-sale securities, along
with the increase in assets, caused a decrease in Woronoco Saving ratio of
equity capital to total assets to 9.30% at September 30, 1998, from 9.75% at
December 31, 1997.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997
GENERAL. Net income for the three months ended September 30, 1998 totalled
$728,000, a decrease of $318,000, or 30.4%, from $1.0 million for the three
months ended September 30, 1997. This decrease was due primarily to a decrease
in security gains of $927,000, or 93.5% to $64,000 for the three months ended
September 30, 1998 from $991,000 for the comparable period in 1997. There was
also an increase in non-interest expense of $78,000, or 3.3%. These were
partially offset by a $216,000 increase in net interest income despite a
decreasing interest rate spread of 2 basis points, an increase in noninterest
income due to the gain on the securitization of $19.1 million of one- to four-
family mortgage loans, and a decrease in income tax expense of $138,000, or
24.7%, to $421,000 for the three months ended September 30, 1998 from $559,000
for the comparable period in 1997.
INTEREST INCOME. Interest income increased $381,000 to $6.3 million for
the three months ended September 30, 1998 compared to $5.9 million for the three
months ended September 30, 1997. This increase reflects a $30.0 million
increase in total average interest-earning assets, partially offset by a 22
basis point decrease in the average yield on such assets to 7.40% for the three
months ended September 30, 1998 from 7.62% for the
19
<PAGE>
three months ended September 30, 1997. Interest income on loans increased by
$352,000 to $5.3 million for the three months ended September 30, 1998 from $5.0
million for the same period in 1997, due to a $25.3 million increase in the
average balance of loans offset by a 22 basis point decrease in the average
yield to 7.76%. The increase in the average balance of loans was primarily due
to an increase in Woronoco Saving one- to four-family mortgage loan and home
equity loans and lines of credit portfolios. The decrease in the average yield
on interest-earning assets was due primarily to a decrease in market interest
rates. Interest and dividend income on the securities portfolio increased
$21,000, or 2.3%, to $917,000, for the three months ended September 30, 1998.
INTEREST EXPENSE. Total interest expense for the three months ended
September 30, 1998 was $3.4 million, compared to $3.3 million for the three
months ended September 30, 1997, an increase of $165,000, or 5.1%. The increase
in interest expense was due to an increase in the average interest-bearing
liabilities of $29.0 million which was partially offset by a 20 basis point
decrease in the average cost of deposits and borrowings to 4.32% for the three
months ended September 30, 1998, from 4.52% for the comparable period in 1997.
Interest on deposits increased by $20,000, or 0.8%, to $2.6 million for the
three months ended September 30, 1998. This increase reflects a $15.4 million
increase in the average balance of interest-bearing deposits for the three month
period ended September 30, 1998, compared to the same three month period in
1997, primarily due to an increase in the average balance of higher yielding
certificates of deposit, which increased to $140.3 million.
PROVISION FOR LOAN LOSSES. Woronoco Saving provision for loan losses for
the three months ended September 30, 1998 was $60,000 compared to $45,000 for
the three months ended September 30, 1997. The $15,000, or 33.3%, increase in
the provision was due primarily to the growth in Woronoco Saving loan portfolio.
At September 30, 1998, Woronoco Saving allowance for loan losses as a percentage
of total loans, net was 0.78%, compared to 0.77% at September 30, 1997. At
September 30, 1998 and 1997, the ratio of the allowance for loan losses as a
percentage of total non-performing loans and troubled debt restructurings was
177.4% and 152.1%, respectively.
NONINTEREST INCOME. Noninterest income for the three months ended
September 30, 1998 decreased $579,000, or 43.2%, to $761,000 from $1.3 million
for the three months ended September 30, 1997. The primary reason for the
decrease were net security gains of $64,000 for the three months ended September
30, 1998 compared to net security gains of $991,000 for the comparable period in
1997. This decrease was partially offset by net gains of $290,000 on the
securitization of 30-year fixed-rate mortgage loans and $408,000 of fee income
during the three months ended September 30, 1998 compared to no net gains on the
sale of loans and $350,000 of fee income in the comparable period for 1997.
NONINTEREST EXPENSE. Total noninterest expense increased $78,000, or 3.3%,
for the three months ended September 30, 1998 compared to the three months ended
September 30, 1997. Compensation and employee benefit expense increased
$55,000, or 4.4%, to $1.3 million for the three months ended September 30, 1998
from $1.2 million for the three months ended September 30, 1997, primarily due
to the opening of a full-service banking office during 1998. Other significant
changes in Woronoco Saving noninterest expenses include a $44,000 decrease in
marketing expense and a $58,000 increase in professional services. Woronoco
Savings expects that compensation and benefits expense may increase after the
conversion, primarily as a result of the adoption of various employee benefit
plans and compensation adjustments contemplated in connection with the
conversion. In addition, Woronoco Savings expects noninterest expenses to
increase in future periods as a result of its renovation of its headquarters and
its main banking office and the opening of a new banking office in early 1999.
INCOME TAXES. Total income tax expense was $421,000 for the three months
ended September 30, 1998, compared to $559,000 for the same period in 1997, a
decrease of $138,000, or 24.7%. The effective tax rates were 36.7% and 34.8%
for the respective periods.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
GENERAL. Net income for the nine months ended September 30, 1998 increased
by $41,000, or 1.7%, to $2.5 million at September 30, 1998, from $2.4 million
for the nine months ended September 30, 1997. The increase was due to an
increase in net interest income which, despite a decrease in the average
interest rate spread to 3.15% from 3.32%, increased by $432,000 due to an
increase in the average balance of net interest-earning assets. There was also
an increase in non-interest income due to the gain on the securitization of
$19.1 million of one- to four-family mortgage loans. These increases were
partially offset by a $567,000 decrease in gains on sales of securities,
20
<PAGE>
a $69,000 increase in non-interest expense, and a 1.2% increase in income taxes
to $1.3 million from $1.2 million.
INTEREST INCOME. Interest income amounted to $18.8 million for the nine
months ended September 30, 1998, representing an increase of $1.2 million, or
6.9%, from the same period in 1997. The increase was the result of the combined
effect of a $29.1 million increase in average interest-earning assets and an 18
basis point decrease in the yield on interest-earning assets. The decrease in
the average interest rate on interest-earning assets was primarily due to the
lower interest rate environment during the nine month period ended September 30,
1998 which created lower yielding assets on all new loan originated or
refinanced. Interest income on mortgage-backed securities decreased $267,000 for
the nine months ended September 30, 1998, as compared to the same period in
1997. This decrease was primarily due to a decrease in the average balance of
mortgage-backed securities of $5.8 million, which resulted from the normal
amortization of the mortgage-backed securities portfolio. Dividend income on
equity securities increased $86,000, or 12.6%, due to a $5.5 million increase in
the average balance to $19.0 million for the nine months ended September 30,
1998, from $13.5 million for the nine months ended September 30, 1997, which was
partially offset by a 104 basis point decrease in the average yield on the
equity securities portfolio for the same time periods.
The increase in interest income on loans can be attributed to growth in the
average balance of loans outstanding. Average consumer loans increased $10.5
million, or 15.4%, to $78.4 million for the nine months ended September 30,
1998, as compared to $67.9 million for the same period in 1997. The increase in
consumer loans was primarily attributable to an increase in home equity loans
and lines of credit, which increased $5.3 million, or 8.7%, to $65.4 million for
the nine months ended September 30, 1998, from $60.2 million for the nine months
ended September 30, 1997. Woronoco Saving one- to four-family loan portfolio
decreased by $851,000, or 0.6%, to $140.1 million for the nine months ended
September 30, 1998. Further contributing to the increase in interest income for
the period was a decrease in non-accrual loans, to $396,000, for the nine months
ended September 30, 1998, as compared to $1.0 million for the same period in
1997. Although interest income on loans increased during the period, the
average yield decreased by 15 basis points, to 7.81% for the nine months ended
September 30, 1998, as compared to 7.96% for the same period in 1997.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1998 was $10.0 million compared to $9.2 million for the nine months ended
September 30, 1997, an increase of $780,000, or 8.5%. This increase reflects
both a $12.4 million increase in the average balance of interest-bearing in the
1998 period compared to the 1997 period, offset by a 3 basis pint decrease in
the average rate paid on such liabilities over the same period due to a lower
interest rate environment. The increase in average interest-bearing deposits
was primarily attributable to an increase in the average balance of certificates
of deposit to $140.1 million for the nine months ended September 30, 1998 from
$138.0 million for the nine months ended September 30, 1997. The higher average
balance and higher rate certificates promoted in our supermarket branch
locations during the second half of 1997 resulted in an increase of $112,000 in
interest expense on certificates of deposit. Interest expense decreased
$137,000 on savings accounts to $1.1 million for the eight months ended
September 30, 1998 from the same period a year earlier. This decrease was
attributable to a decrease in the average cost to 2.28% from 2.64% and an
increase in the average balance of these accounts to $66.5 million for the nine
months ended September 30, 1998, from $64.2 million during the comparable period
in 1997.
Interest expense on borrowed funds increased $474,000, or 27.6%, for the
nine months ended September 30, 1998 to $2.2 million from $1.7 million for the
same period in 1997 due to a $13.0 million increase in the average balance of
such funds to $52.5 million, which was partially offset by a 24 basis point
reduction in the average rate paid on borrowed funds to 5.57% for the nine
months ended September 30, 1998. The increase in borrowed funds in 1998
reflects management's decision to increase its utilization of borrowings to fund
asset growth in periods when such borrowings are cost effective as a source of
funds.
PROVISION FOR LOAN LOSSES. Woronoco Saving provision for loan losses
increased by $45,000, or 33.3%, to $180,000 for the nine months ended September
30, 1998 from $135,000 for the nine months ended September 30, 1997. The
increase in the provision was due primarily to the growth of Woronoco Saving
loan portfolio. The increased provision also reflects management's strategy to
continue to emphasize the origination of commercial real estate and commercial
business loans. Such loans generally bear a greater degree of risk compared to
one- to four-family mortgage loans. At September 30, 1998, Woronoco Saving
allowance for loan loses as a percentage of total non-performing loans and
troubled debt restructurings was 177.4%, compared to 152.1% at September 30,
1997, due to the increase in the provision and a decrease in non-accruing loans
to $396,000 at September 30, 1998 from $1.0 million at September 30, 1997. At
September 30, 1998, Woronoco Saving allowance for loan losses as a percentage of
total loans, net, was 0.78%.
21
<PAGE>
NONINTEREST INCOME. Noninterest income is composed of fee income for bank
services and profits from the sale of assets. Total noninterest income for the
nine months ended September 30, 1998 decreased $135,000, or 4.9%, to $2.6
million from $2.8 million for the nine months ended September 30, 1997. The
primary reason for the decrease were net security gains of $567,000, to $1.2
million for the nine months ended September 30, 1998 from $1.7 million for the
comparable period in 1997. This decrease was partially offset by net gains of
$290,000 on the securitization of 30 year fixed-rate mortgage loans and $1.2
million of fee income during the nine months ended September 30, 1998 compared
to no net gains on the sale of loans and $1.0 million of fee income in the
comparable period for 1997.
NONINTEREST EXPENSE. Noninterest expense increased by $69,000, or 1.0%, to
$7.5 million for the nine months ended September 30, 1998 from $7.4 million for
the nine months ended September 30, 1997. Compensation and employee benefit
expense increased $228,000 to $3.7 million for the nine months ended September
30, 1998 from $3.5 million for the same period in 1997 primarily due to the
opening of a full-service banking office during 1998. Other significant changes
in Woronoco Saving noninterest expenses include a $386,000, net decrease in
other noninterest expenses. During 1997, Woronoco Savings established a private
charitable foundation to provide grants to charitable organizations. The
foundation was funded by a donation from Woronoco Savings of equity securities
with a fair value of $549,000 at the date of transfer, the total amount of which
is included in other noninterest expenses. Woronoco Savings expects that
compensation and benefits expense may increase after the conversion, primarily
as a result of the adoption of various employee benefit plans and compensation
adjustments contemplated in the conversion. In addition, Woronoco Savings
expects noninterest expenses to increase in future periods as a result of its
renovation of its headquarters and its main banking office and the opening of a
new banking office in early 1999.
INCOME TAXES. Total income tax expense was $1.3 million for the nine
months ended September 30, 1998, compared to $1.2 million for the same period in
1997, an increase of $142,000, or 1.2%. The effective tax rates were 34.8% and
32.6% for the respective periods.
WORONOCO BANCORP, INC.
Woronoco Bancorp, Inc. (the "Company" or "Woronoco Bancorp") is a Delaware
corporation recently organized by Woronoco Savings Bank (the "Bank" or "Woronoco
Savings") for the purpose of acquiring all of the stock of the Bank to be issued
in its conversion to stock form. The Company expects to receive approval from
the Office of Thrift Supervision ("OTS") to become a savings and loan holding
company and, upon completion of the conversion, will be subject to regulation by
the OTS. See "The Conversion--General" and "Regulation and Supervision--Holding
Company Regulation." Upon the sale of its common stock, the Company will have no
significant assets other than all of the shares of the Bank's stock acquired in
the conversion and an amount equal to 50% of the net proceeds of the conversion
and will have no significant liabilities. The Company intends to use a portion
of the net proceeds it retains to form and capitalize a wholly owned subsidiary
(the "ESOP Loan Subsidiary") which will loan funds to the Woronoco Savings Bank
Employee Stock Ownership Plan (the "ESOP") to purchase 8% of the stock issued in
the conversion including shares issued to the Woronoco Savings Charitable
Foundation (the "Foundation"). Based on regulatory and market conditions, the
Company and the Bank may, however, alternatively choose to fund the ESOP's stock
purchases through a loan by a third party financial institution. The remaining
net proceeds will be used for general business activities, including the funding
of the stock-based incentive plan. Initially, net proceeds are expected to be
invested by the Company in short- to intermediate-term mortgage-backed
securities. See "Use of Proceeds." The management of the Company is set forth
under "Management of the Company." Initially, the Company will neither own nor
lease any property, but will instead use the premises, equipment and furniture
of the Bank. At the present time, the Company does not intend to employ any
persons other than individuals who are currently officers of the Bank but will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
Management believes that the holding company structure will provide
flexibility to diversify its business activities through existing or newly
formed subsidiaries (which subsidiaries could be financial institutions), or
through acquisitions of or mergers with other financial institutions and
financial services related companies.
22
<PAGE>
Although there are no current arrangements, understandings or agreements
regarding any such opportunities, the Company will be in a position, subject to
regulatory limitations and the Company's financial position, to take advantage
of acquisition and expansion opportunities that may arise. The initial
activities of the Company are anticipated to be funded by the proceeds to be
retained by the Company, income thereon and through dividends from the
Bank.
The Company's executive office is located at the administrative offices of
the Bank, 31 Court Street, Westfield, Massachusetts 01085. Its telephone number
is (413) 568-9141.
WORONOCO SAVINGS BANK
The Bank was organized in 1871 as a Massachusetts-chartered mutual savings
bank. The Bank's deposit accounts are insured to the maximum allowable amount
by the Bank Insurance Fund ("BIF") of the FDIC and the Depositors Insurance Fund
("DIF") of the Mutual Savings Central Fund, Inc., the Bank's excess insurer.
The Bank currently maintains 11 banking offices and one stand-alone automatic
teller machine ("ATM") located in the communities of Westfield, Southwick,
Feeding Hills, South Hadley, Springfield and West Springfield, Massachusetts.
At August 31, 1998, the Bank had total assets of $366.2 million, total deposits
of $273.6 million, surplus of $33.4 million and had a leverage capital ratio of
9.08% and a total risk-based capital ratio of 13.01%. The Bank is subject to
comprehensive examination, supervision and regulation by the Commissioner of the
Massachusetts Division of Banks (the "Commissioner") and the Federal Deposit
Insurance Corporation (the "FDIC"). See "Regulation and Supervision."
The Bank is a community-oriented savings institution whose principal
business consists of accepting retail deposits from the general public in its
primary deposit market area, consisting of those areas surrounding its banking
offices, and investing those deposits together with funds generated from
operations and borrowings primarily in first mortgage loans secured by
residential real estate and consumer loans, primarily home equity loans and
lines of credit, and to a lesser extent, multi-family and commercial real
estate loans, construction loans, commercial business loans and other types of
consumer loans, primarily automobile and personal loans. The Bank also invests
in mortgage-backed securities, equity securities and other investments permitted
by applicable laws and regulations. Although the Bank originates loans
throughout western Massachusetts and northern Connecticut, the Bank's primary
market area for lending consists of Hampden and Hampshire Counties,
Massachusetts. See "Business of the Bank."
At August 31, 1998, the Bank's total loan portfolio was $268.7 million, or
73.4% of total assets, of which $137.8 million were residential mortgage loans,
$22.8 million were multi-family real estate loans, $21.1 million were commercial
real estate loans, $4.2 million were construction and development loans, $78.3
million were consumer loans, consisting primarily of home equity loans and lines
of credit, and $4.6 million were commercial business loans. The Bank currently
originates one- to four-family mortgage loans, generally secured by properties
located in the Bank's primary market area, primarily for investment, selling or
securitizing some longer-term fixed-rate loans on a servicing retained basis and
retaining for its portfolio all adjustable-rate mortgage ("ARM") loans and
shorter-term fixed-rate mortgage loans. At August 31, 1998, the Bank was
servicing $45.5 million of loans for others which servicing rights were derived
from loans sold by the Bank. See "Business of the Bank."
The Bank's securities investment activities primarily consist of
investments in: (i) mortgage-backed securities, generally consisting of those
guaranteed or issued by governmental-sponsored agencies such as the Federal
National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage
Corporation ("Freddie Mac") and, to a lesser extent, the Government National
Mortgage Association ("Ginnie Mae"); and (ii) investment-grade equity
securities. At August 31, 1998, the Bank's securities portfolio totalled $71.5
million, or 19.5% of total assets, all of which was categorized as available-
for-sale. See "Business of the Bank--Investment Activities."
At August 31, 1998, the Bank's deposit accounts totalled $273.6 million, or
82.2% of total liabilities, of which $132.3 million, or 48.4%, were comprised of
saving accounts, retail checking/negotiable order of withdrawal
23
<PAGE>
("NOW") accounts, money market accounts and demand accounts (collectively, "core
deposits"). In addition to core deposits, the Bank had $141.2 million of
certificate accounts, or 51.6% of total deposits, of which $101.9 million were
certificates of deposit with maturities of less than one year. Of the $141.2
million of certificate accounts, $24.7 million were certificates of deposit with
balances of $100,000 or more ("jumbo deposits"). The Bank also utilizes advances
from the Federal Home Loan Bank ("FHLB") of Boston as a source of funds. At
August 31, 1998, such advances totalled $54.8 million, or 16.5% of total
liabilities. See "Business of the Bank--Sources of Funds."
The Bank's executive office is located at 31 Court Street, Westfield,
Massachusetts 01085. Its telephone number is (413) 568-9141.
WORONOCO SAVINGS CHARITABLE FOUNDATION
In furtherance of the Bank's commitment to its local community, the Bank's
Plan of Conversion (the "Plan") provides for the establishment of a charitable
foundation in connection with the conversion. The Plan provides that the Bank
and the Company will create the Woronoco Savings Charitable Foundation, and
fund such foundation with shares of common stock contributed by the Company,
as further described below. The Company and the Bank believe that the
funding of the Foundation with common stock of the Company is a means of
establishing a common bond between the Bank and its community and thereby
enables the communities in which the Bank maintains a banking office to share in
the potential growth and success of the Company over the long term. By further
enhancing the Bank's visibility and reputation in its local community, the Bank
believes that the Foundation will enhance the long-term value of the Bank's
community banking franchise. See "The Conversion--Establishment of the
Charitable Foundation--Structure of the Foundation."
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation, which initially will be comprised of
existing Directors or officers of the Company or the Bank, who will receive no
fees for serving on the Foundation's Board of Directors. The Directors of the
Foundation will be responsible for establishing the policies of the Foundation
with respect to grants or donations by the Foundation, consistent with the
purposes for which the Foundation was established. It is anticipated that the
Foundation will make grants and donations to nonprofit organizations and
community groups within the communities in which the Bank maintains a banking
office. The Directors of the Foundation will also be responsible for directing
the activities of the Foundation, including the management of the common stock
held by the Foundation. However, the Foundation is subject to regulatory
conditions, including a requirement that the common stock of the Company held
by the Foundation be voted in the same ratio as all other shares of the
Company's common stock on all proposals considered by stockholders of the
Company. See "The Conversion--Establishment of the Charitable Foundation."
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the conversion a number of shares of authorized
but unissued common stock equal to 8% of the common stock sold in the Offerings,
or 285,600, 336,000, 386,400, and 444,360 shares at the minimum, midpoint,
maximum and 15% above the maximum, respectively, of the estimated price range of
$35.7 million to $48.3 million (the "Estimated Price Range"). Such
contribution, once made, will not be recoverable by the Company or the Bank.
Assuming the sale of shares at the maximum of the Estimated Price Range and the
issuance of shares to the Foundation, the Company will have 5,216,400 shares
issued and outstanding, of which the Foundation will own 386,400 shares, or
7.4%. DUE TO THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK TO THE
FOUNDATION, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA
DATA." The establishment of the Foundation was taken into account in
determining the
24
<PAGE>
estimated pro forma market value of the Bank. In the event the conversion did
not include the Foundation, Keller & Company, Inc. ("Keller") has estimated that
the pro forma market value of the Bank would be $48.0 million at the midpoint
of the Estimated Price Range rather than $45.4 million. See "Pro Forma Data."
As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, which will be
offset in part by a corresponding tax benefit, during the quarter in which the
contribution is made, which is expected to be the first quarter of 1999. Such
expense will reduce earnings and have a material impact on the Company's
earnings for the fiscal year in which it is made. While management cannot
predict earnings for 1999, it expects that the establishment and funding of the
Foundation will have an adverse impact on the Company's earnings for the year in
which it is made. Assuming a contribution of $3.9 million in common stock in
1999, based on the maximum of the Estimated Price Range and assuming a tax rate
of 37%, the Company estimates a net tax effected expense of $2.4 million. If
the Foundation had been established at December 31, 1997, the Bank would have
reported a net gain of $584,000 for the year ended December 31, 1997, rather
than reporting net income of $3.0. For further discussion of the Foundation and
its impact on purchasers in the conversion see "Risk Factors--Establishment of
the Charitable Foundation," "Pro Forma Data" and "The Conversion--Establishment
of the Charitable Foundation."
25
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At August 31, 1998, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
FDIC capital standards as of August 31, 1998, on an historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table
below, the amount expected to be borrowed by the ESOP and the cost of the
conversion stock awards expected to be acquired by the stock-based incentive
plan are deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT AUGUST 31, 1998 BASED UPON THE SALE AT $10.00 PER SHARE
-----------------------------------------------------------------------------------
3,570,000 SHARES 4,200,000 SHARES 4,830,000 SHARES 5,554,500 SHARES
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF THE OF THE OF THE MAXIMUM OF THE
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED ESTIMATED
AUGUST 31, 1998 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (1)
-------------------- --------------------- -------------------- ------------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
--------- ---------- -------- ----------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital (3)........... $33,377 9.11% $45,971 12.14% $48,268 12.67% $50,565 13.19% $53,206 13.78%
======= ===== ======= ===== ======= ===== ======= ===== ------- =====
Leverage Capital:
Capital Level (4)........ $33,260 9.08% $45,853 12.10% $48,150 12.63% $50,447 13.16% $53,090 13.75%
Requirement (5).......... 14,649 4.00 15,152 4.00 15,244 4.00 15,336 4.00 15,442 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................... $18,611 5.08% $30,701 8.10% $32,906 8.63% $35,111 9.16% $37,648 9.75%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-Based Capital:
Capital Level (4)(6)..... $35,056 13.01% $47,649 17.10% $49,946 17.82% $52,243 18.52% $54,886 19.33%
Requirement.............. 21,551 8.00 22,292 8.00 22,427 8.00 22,562 8.00 22,717 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................... $13,505 5.01% $25,357 9.10% $27,519 9.82% $29,681 10.52% $32,169 11.33%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
__________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial or economic conditions following the commencement of the
subscription and direct community offerings.
(2) Leverage capital levels are shown as a percentage of average tangible
assets. Risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
(3) GAAP is defined as Generally Accepted Accounting Principles.
(4) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the shares of common stock. These levels also assume funding
by the Bank of the stock awards equal to 4% of the common stock issued,
including shares issued to the Foundation, and repayment of the loan by the
ESOP Loan Subsidiary to enable the ESOP to purchase 8% of the common stock
issued, including shares issued to the Foundation. See "Management of the
Bank--Other Benefit Plans" for a discussion of the stock-based incentive
plan and ESOP.
(5) The current leverage capital requirement for FDIC-insured banks is 3% of
total adjusted assets for FDIC-insured banks that receive the highest
supervisory rating for safety and soundness and that are not experiencing or
anticipating significant growth. The current leverage capital ratio
applicable to all other FDIC-insured banks is 4% to 5%. See "Regulation and
Supervision--Federal Regulations--Capital Requirements." The Company will
not be subject to regulatory capital requirements.
(6) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the actual risk weighting of the Bank's assets as of August 31,
1998.
26
<PAGE>
USE OF PROCEEDS
The Board of Trustees has carefully considered the alternatives available
to the Bank with respect to its corporate structure and has determined that a
mutual to stock conversion transaction is currently in the best interests of the
Bank, its depositors and the communities served by the Bank. By restructuring
the Bank into the stock form of organization the Bank will be able to expand the
Bank's franchise, compete more effectively with commercial banks and other
financial institutions for new business opportunities, increase its equity
capital base and access the capital markets when needed. The business purposes
of the conversion are to provide the Bank with equity capital which will enable
it to increase its reserves and net worth to support future lending and
operational growth and branching activities and to increase its ability to
render services to the communities it serves.
Although net proceeds from the sale of the common stock cannot be
determined until the sale is completed, it is anticipated that net proceeds from
the sale of the common stock will be between $34.4 million to $46.9 million (or
$54.1 million if the number of shares sold is increased by 15%). See "Pro Forma
Data" and "The Conversion--Stock Pricing" as to the assumptions used to arrive
at such amounts. The Company will be unable to utilize any of the net proceeds
of the Offerings until the consummation of the conversion.
The Company will purchase all of the outstanding stock of the Bank to be
issued in the Bank's conversion to stock form in exchange for 50% of the net
proceeds from the Company's sale of common stock. Based on net proceeds of
$34.4 million to $46.9 million, the Company expects to utilize between $17.2
million and $23.4 million of net proceeds to purchase the common stock of the
Bank. Such portion of net proceeds received by the Bank from the Company will
be added to the Bank's general funds which the Bank currently intends to utilize
for investment in loans, primarily for the origination of fixed-rate mortgage
loans secured by one- to four-family residential properties and, to a lesser
extent, investment-grade equity securities and the possible repayment of FHLB
borrowings. To the extent that the stock-based incentive plan which the Company
or the Bank intend to adopt subsequent to the conversion is not funded with
authorized but unissued common stock of the Company, the Company or Bank may use
net proceeds from the conversion to fund the purchase of stock to be awarded
under such program. See "Stock-Based Benefits to Management and Directors,
Employment Contracts and Change in Control Payments" and "Management of the
Bank--Other Benefit Plans--Stock-Based Incentive Plan." The Bank has not yet
determined the approximate amount of net proceeds to be used for any of the
purposes mentioned above.
The Company intends to use a portion of the net proceeds it retains (i.e.,
50% of the net proceeds, which based on net proceeds of $34.4 million to $46.9
million will be between $17.2 million and $23.4 million) to capitalize the ESOP
Loan Subsidiary which intends to loan funds to the ESOP to enable the ESOP to
purchase 8% of the common stock issued in the conversion, including shares
issued to the Foundation. Based upon the sale of 3,570,000, 4,200,000,
4,830,000 and 5,554,500 shares at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Price Range, and the issuance of shares to the
Foundation, the amount of proceeds used to capitalize the ESOP Loan Subsidiary
would be $3.1 million, $3.6 million, $4.2 million and $4.8 million,
respectively. The Company and Bank may alternatively choose to fund the ESOP's
stock purchases through a loan by a third party financial institution. See
"Management of the Bank--Other Benefit Plans--Employee Stock Ownership Plan."
The remaining net proceeds retained by the Company will initially be invested in
short- to intermediate-term mortgage-backed securities.
The net proceeds retained by the Company may also be used to support the
future expansion of operations through the acquisition of savings associations
and commercial banks or their assets, including those located within the Bank's
market area, or diversification into other banking related businesses. The
Company and the Bank have no current arrangements, understandings or agreements
regarding any such transactions. The Company, upon the conversion, will be a
unitary savings and loan holding company, which under existing laws would not be
restricted as to the types of business activities in which it may engage. See
"Regulation and Supervision--Holding Company Regulation" for a description of
regulations applicable to the Company.
The Board of Directors of the Company will have the authority to adopt
stock repurchase plans, subject to statutory and regulatory requirements.
Unless previously approved, the Company, pursuant to applicable regulations, may
not repurchase any common stock in the first year after conversion. If approval
is obtained to repurchase common stock during the first year after conversion,
then such
27
<PAGE>
repurchase may not be greater than 5% of the capital stock issued. Further, the
Company may not repurchase any of its common stock if the repurchases would
cause the Bank to become "undercapitalized" within the meaning of the FDIC
prompt corrective action regulation. The Company has no current intention of
implementing a stock repurchase program and any determination to do so in the
future will depend on the financial condition of the Company, market conditions
and satisfaction of any applicable laws or regulations. See "Regulation and
Supervision--Prompt Corrective Regulatory Action."
DIVIDEND POLICY
The Board of Directors of the Company will have the authority to declare
dividends on the common stock, subject to statutory and regulatory requirements.
Following the conversion, the Board of Directors intends to consider a policy of
paying cash dividends on the common stock. However, no decision has been made
as to the amount or timing of such dividends, if any. Declarations of dividends
by the Board of Directors, if any, will depend upon a number of factors,
including the amount of net proceeds retained by the Company, investment
opportunities available to the Company or the Bank, capital requirements,
regulatory limitations, the Company's and the Bank's financial condition and
results of operations, tax considerations and general economic conditions. No
assurances can be given, however, that any dividends will be paid or, if
commenced, will continue to be paid.
A Massachusetts savings bank may only pay dividends on its capital stock if
such payment would not impair the bank's capital stock and surplus account.
Additionally, the Bank will not be permitted to pay dividends to the Company on
its capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation Rights."
Unlike the Bank, the Company is not subject to the restrictions imposed by
the Massachusetts Banking Law on the payment of dividends to its stockholders,
although the source of such dividends will be, in part, dependent upon dividends
from the Bank in addition to the net proceeds retained by the Company and
earnings thereon. The Company is subject, however, to the requirements of
Delaware law, which generally limit dividends to an amount equal to the excess
of the net assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
MARKET FOR THE COMMON STOCK
The Company and the Bank have not previously issued capital stock and,
consequently, there is no established market for the common stock. The Company
expects to receive approval to have its common stock listed on the American
Stock Exchange (the "AMEX") under the symbol "____" upon completion of the
conversion. Such approval is subject to various conditions, including sale of
the stock and the satisfaction of applicable listing criteria. There can be no
assurance that the common stock will be able to meet the applicable listing
criteria in order to maintain its listing on the AMEX or that an active and
liquid trading market will develop or, if developed, will be maintained. A
public market having the desirable characteristics of depth, liquidity and
orderliness, however, depends upon the presence in the marketplace of both
willing buyers and sellers of common stock at any given time, which is not
within the control of the Company. No assurance can be given that an investor
will be able to resell the common stock at or above the purchase price of the
common stock after the conversion.
28
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
August 31, 1998, and the pro forma consolidated capitalization of the Company
after giving effect to the proposed sale of common stock and the issuance of
shares to the Foundation, based upon the sale of the number of shares indicated
in the table and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
-----------------------------------------------------------
5,554,500
3,570,000 4,200,000 4,830,000 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
----------- ------------- ------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2).............................. $273,567 $ 273,567 $ 273,567 $ 273,567 $ 273,567
FHLB advances............................ 54,792 54,792 54,792 54,792 54,792
-------- ---------- ---------- ---------- ----------
Total deposits and borrowed funds........ $328,359 $ 328,359 $ 328,359 $ 328,359 $ 328,359
======== ========== ========== ========== ==========
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized;
none to be issued................. $ -- $ -- $ -- $ -- $ --
Common stock, $.01 par value,
16,000,000 shares authorized;
shares to be issued as reflected.. -- 39 45 52 60
Additional paid-in capital(3)........... -- 34,400 40,621 46,842 53,997
Surplus(4).............................. 33,259 33,259 33,259 33,259 33,259
Less:
Expense of contribution to Foundation,
net of taxes(5)...................... -- (1,799) (2,117) (2,434) (2,800)
Plus:
Shares issued to Foundation............. -- 2,856 3,360 3,864 4,444
Accumulated other comprehensive income.. 118 118 118 118 118
Less:
Common stock acquired by the ESOP(6).... -- (3,084) (3,629) (4,173) (4,799)
Common stock acquired by the
stock-based incentive plan(7).......... -- (1,542) (1,814) (2,087) (2,400)
-------- ---------- ---------- ---------- ----------
Total stockholders' equity............... $ 33,377 $ 64,247 $ 69,843 $ 75,441 $ 81,879
======== ========== ========== ========== ==========
</TABLE>
____________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
subscription and direct community offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock. Such withdrawals would reduce pro forma deposits by the
amount of such withdrawals.
(3) Reflects the issuance of shares sold in the Offerings and the issuance of
additional shares of common stock to the Foundation at a value of $10.00
per share. No effect has been given to the issuance of additional shares
of common stock pursuant to the Company's stock-based incentive plan
intended to be adopted by the Company and presented for approval of
stockholders at a meeting of stockholders following the conversion. The
stock-based incentive plan would provide the grant of stock options to
purchase an amount of common stock equal to 10% of the shares of common
stock issued in the conversion, including shares issued to the
Foundation. See "Management of the Bank - Other Benefit Plans - Stock-
Based Incentive Plan."
(4) The surplus of the Bank will be substantially restricted after the
conversion. See "The Conversion - Liquidation Rights."
(5) Represents the tax effect of the contribution of common stock to the
Foundation based on a 37% tax rate. The realization of the deferred tax
benefit is limited annually to 10% of the Company's annual taxable
income, subject to the ability of the Company to carry forward any unused
portion of the deduction for five years following the year in which the
contribution is made.
(6) Assumes that 8% of the shares sold and issued to the Foundation, will be
purchased by the ESOP and the funds used to acquire the ESOP shares will
be borrowed from the ESOP Loan Subsidiary. The common stock acquired by
the ESOP is reflected as a reduction of stockholders' equity. See
"Management of the Bank - Other Benefit Plans - Employee Stock Ownership
Plan" and "- Other Benefit Plans - Stock-Based Incentive Plan."
(7) Assumes that, subsequent to the conversion, an amount equal to 4% of the
shares of common stock sold in the conversion, and issued to the
Foundation is purchased by the stock-based incentive plan through open
market purchases. The common stock purchased by the stock-based
incentive plan is reflected as a reduction of stockholder's equity. See
"Risk Factors - Stock-Based Benefits to Management and Directors,
Employment Contracts and Change in Control Payments," Footnote 3 to the
tables under "Pro Forma Data" and "Management of the Bank - Other Benefit
Plans - Stock-Based Incentive Plans."
29
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the sale is completed. However, net proceeds are currently
estimated to be between $34.4 million and $46.8 million based upon the following
assumptions: (i) $510,000 will be sold to executive officers, trustees,
directors and employees of the Bank and Company, the ESOP will purchase 8% of
the common stock issued, including shares issued to the Foundation, and the
remaining shares will be sold in the subscription and direct community
offerings; (ii) Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") will
receive a fee equal to 1.25% of the aggregate purchase price of the shares sold
in the subscription offering and direct community offering, except that no fee
will be paid with respect to shares purchased by the employee plans, including
the ESOP, officers, employees, trustees, directors of the Bank and Company and
their associates; (iii) the Company will issue to the Foundation an amount of
common stock equal to 8% of the common stock sold in the conversion from
authorized but unissued shares; and (iv) conversion expenses, excluding the
marketing fees paid to Sandler O'Neill, will be approximately $860,000. The
Bank's conversion to stock form, its acquisition by the Company and the
Company's sale of its common stock will be referred to as the "Conversion."
Actual Conversion expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the eight months ended
August 31, 1998 and for the year ended December 31, 1997 have been calculated as
if the common stock had been sold at the beginning of the respective periods and
the net proceeds had been invested at 4.50% and 5.35%, respectively, (the one
year U.S. Treasury bill rate as of August 31, 1998 and December 31, 1997,
respectively). The tables do not reflect the effect of withdrawals from deposit
accounts for the purchase of common stock. The pro forma after-tax yields for
the Company and the Bank are assumed to be 2.84% and 3.37% for the eight months
ended August 31, 1998 and the year ended December 31, 1997, respectively (based
on an assumed tax rate of 37%). Historical and pro forma per share amounts have
been calculated by dividing historical and pro forma amounts by the indicated
number of shares of common stock, as adjusted to give effect to the purchase of
shares by the ESOP and the effect of the issuance of shares to the Foundation.
No effect has been given in the pro forma stockholders' equity calculations for
the assumed earnings on the net proceeds. As discussed under "Use of Proceeds,"
the Company will retain 50% of the net Conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma consolidated stockholders' equity is not intended to
represent the fair market value of the common stock and may be greater than
amounts that would be available for distribution to stockholders in the event of
liquidation.
The following tables summarize historical data of the Bank and the
consolidated pro forma data of the Company on a consolidated basis at or for the
eight months ended August 31, 1998 and the year ended December 31, 1997, based
on the assumptions set forth above and in the table and should not be used as a
basis for projections of market value of the common stock following the
Conversion. The tables below give effect to stock which may be reserved for
grant under the stock-based incentive plan, which is expected to be adopted by
the Company following the Conversion. See Footnote 3 to the tables and
"Management of the Bank-- Other Benefit Plans." No effect has been given in the
tables to the possible issuance of additional shares of common stock upon the
exercise of stock options to be granted under the stock-based incentive plan,
nor does book value give any effect to the liquidation account to be established
for the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders or, in the event of liquidation of the Bank, to the tax effect of the
bad debt reserve and other factors. See Footnote 5 to the tables below, "The
Conversion-- Liquidation Rights" and "Management of the Bank-- Other Benefit
Plans." THE FOLLOWING TABLES ASSUME THAT THE FOUNDATION IS APPROVED AS PART OF
THE CONVERSION AND THEREFORE GIVE EFFECT TO THE ISSUANCE OF AUTHORIZED BUT
UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY
WITH THE COMPLETION OF THE CONVERSION. THE VALUATION RANGE TAKES INTO ACCOUNT
THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.
30
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998
---------------------------------------------------------------------------
3,570,000 4,200,000 4,830,000 5,554,500
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF OF OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (7)
------------------ ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................... $ 35,700 $ 42,000 $ 48,300 $ 55,545
Plus: Shares issued to the Foundation
(equal to 8% of stock issued in
Conversion)........................... 2,856 3,360 3,864 4,444
---------- ---------- ---------- ----------
Pro forma market capitalization.............. $ 38,556 $ 45,360 $ 52,164 $ 59,989
========== ========== ========== ==========
Gross proceeds............................... $ 35,700 $ 42,000 $ 48,300 $ 55,545
Less: Offering expenses and
commissions........................... (1,261) (1,334) (1,406) (1,488)
---------- ---------- ---------- ----------
Estimated net proceeds....................... 34,439 40,666 46,894 54,057
Less: Common stock purchased
by ESOP............................... (3,084) (3,629) (4,173) (4,799)
Common stock purchased by
stock-based incentive plan............ (1,542) (1,814) (2,087) (2,400)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted......... $ 29,813 $ 35,223 $ 40,634 $ 46,858
========== ========== ========== ==========
Net income (1):
Historical.................................. $ 2,309 $ 2,309 $ 2,309 $ 2,309
Pro forma income on net proceeds,
as adjusted............................... 563 666 768 886
Less: Pro forma ESOP adjustment (2)......... (212) (249) (286) (329)
Pro forma stock-based incentive plan
adjustment (3)........................ (130) (152) (175) (202)
---------- ---------- ---------- ----------
Pro forma net income.................. $ 2,530 $ 2,574 $ 2,616 $ 2,664
========== ========== ========== ==========
Per share net income (1):
Historical.................................. $ 0.65 $ 0.55 $ 0.48 $ 0.42
Pro forma income on net proceeds,
as adjusted......................... 0.16 0.16 0.16 0.16
Less: Pro forma ESOP adjustment (2)......... (0.06) (0.06) (0.06) (0.06)
Pro forma stock-based incentive plan
adjustment (3)..................... (0.04) (0.04) (0.04) (0.04)
---------- ---------- ---------- ----------
Pro forma net income per share........ $ 0.71 $ 0.61 $ 0.54 $ 0.48
========== ========== ========== ==========
Stockholders' equity:
Historical.................................. $ 33,377 $ 33,377 $ 33,377 $ 33,377
Estimated net proceeds...................... 34,439 40,666 46,894 54,057
Plus: Tax benefit of Foundation............. 1,057 1,243 1,430 1,644
Less: Common stock acquired
by ESOP (2).......................... (3,084) (3,629) (4,173) (4,799)
Less: Common stock acquired
by stock-based incentive plan (3).... (1,542) (1,814) (2,087) (2,400)
---------- ---------- ---------- ----------
Pro forma stockholders' equity (3)(4)(5).. $ 64,247 $ 69,843 $ 75,441 $ 81,879
========== ========== ========== ==========
Stockholders' equity per share (3)(6):
Historical.................................. $ 8.66 $ 7.36 $ 6.40 $ 5.56
Estimated net proceeds...................... 8.93 8.97 8.99 9.01
Plus: Tax benefit of Foundation............. 0.27 0.27 0.27 0.27
Less: Common stock acquired
by ESOP (2)........................... (0.80) (0.80) (0.80) (0.80)
Common stock acquired by
stock-based incentive plan (3)........ (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ----------
Pro forma stockholders' equity
per share (3)(4)(5)...................... $ 16.66 $ 15.40 $ 14.46 $ 13.64
========== ========== ========== ==========
Offering price as a percentage of pro forma
stockholders' equity per share............. 60.02% 64.94% 69.16% 73.31%
Offering price to pro forma net
earnings per share (8)...................... 9.39x 10.93x 12.35x 13.89x
</TABLE>
(See footnotes on next page)
31
<PAGE>
- -------------------------------------------------
(1) Does not give effect to the non-recurring expense that will be recognized in
1999 as a result of the establishment of the Foundation. In that event, the
Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $1.8 million, $2.1
million, $2.4 million and $2.8 million at the minimum, midpoint, maximum and
maximum as adjusted, of the Estimated Price Range, respectively. Assuming
that the contribution to the Foundation was expensed during the eight month
period ended August 31, 1998, pro forma net earnings (loss) would be
$731,000, 457,000, 182,000 and (136,000) and pro forma net (loss) earnings
per share would be $0.20, $0.11, $0.03 and ($0.03) at each of the minimum,
midpoint, maximum and 15% above the maximum of the Estimate Price Range,
respectively.
(2) It is assumed that 8% of the shares of common stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
ESOP Loan Subsidiary, a wholly owned subsidiary of the Company and the pro
forma ESOP amortized expenses are presented net of taxes using an effective
combined federal and state income tax rate of 37%. See "Use of Proceeds."
The ESOP Loan Subsidiary will be formed and capitalized by the Company in
connection with the consummation of the Conversion. The amount to be
borrowed is reflected as a reduction of stockholders' equity. The Bank
intends to make annual contributions to the ESOP in an amount at least equal
to the principal and interest requirement of the debt. The Bank's total
annual payment of the ESOP debt is based upon 12 equal annual installments
of principal, with an assumed interest rate at 8.0%. The pro forma net
earnings assumes: (i) that the Bank's contribution to the ESOP is
equivalent to the debt service requirement for the eight months ended August
31, 1998, and was made at the end of the period; (ii) that 17,137, 20,161,
23,185, and 26,663 shares at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, were committed to be released during
the eight months ended August 31, 1998 at an average fair value of $10.00
per share in accordance with SOP 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the net
earnings per share calculations. See "Management of the Bank--Other Benefit
Plans--Employee Stock Ownership Plan."
(3) Gives effect to the stock awards available for grant under the stock-based
incentive plan expected to be adopted by the Company following the
Conversion and presented for approval at a meeting of stockholders. For
purposes of this table, the pro forma stock-based incentive plan amortized
expenses are presented net of taxes using an effective combined federal and
state income tax rate of 37%. If the stock-based incentive plan is approved
by stockholders, the stock-based incentive plan intends to acquire an amount
of common stock equal to 4% of the shares of common stock issued in
connection with the Conversion, including shares issued to the Foundation,
or 154,224, 181,440, 208,656 and 239,954 shares of common stock at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range, respectively, either through open market purchases, if permissible,
or from authorized but unissued shares of common stock or treasury stock of
the Company, if any. In calculating the pro forma effect of the stock-based
incentive plan, it is assumed that the shares were acquired by the stock-
based incentive plan at the beginning of the period presented in open market
purchases at the Purchase Price and that 20% of the amount contributed was
an amortized expense during such period. The issuance of authorized but
unissued shares of the Company's common stock to the stock-based incentive
plan instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.8% and pro forma net earnings per
share would be $0.69, $0.60, $0.53 and $0.47 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively and pro forma
stockholders' equity per share would be $16.41, $15.19, $14.29 and $13.51 at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that the stockholder approval of
the stock-based incentive plan will be obtained, or that the actual purchase
price of the shares will be equal to the purchase price of $10.00 per share
(the "Purchase Price"). See "Management of the Bank--Other Benefit Plans--
Stock-Based Incentive Plan."
(4) No effect has been given to the issuance of additional shares of common
stock upon the exercise of options to be granted under the stock-based
incentive plan. An amount equal to 10% of the common stock issued in
connection with the Conversion, including shares issued to the Foundation,
or 385,560, 453,600, 521,640 and 599,886 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock-based incentive plan. The issuance of
common stock pursuant to the exercise of options under the stock-based
incentive plan will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the end of the period at
an exercise price of $10.00 per share, the pro forma net earnings per share
would be $0.64, $0.55, $0.49 and $0.43 respectively, and the pro forma
stockholders' equity per share would be $15.15, $14.00, $13.15 and $12.41,
respectively. See "Risk Factors--Stock-Based Benefits to Management and
Directors Employment Contracts and Change in Control Payments" and
"Management of the Bank--Other Benefit Plans--Stock-Based Incentive
Plan."
(5) The surplus of the Bank will continue to be substantially restricted after
the Conversion. See "Dividend Policy," "The Conversion--Liquidation
Rights."
(6) Stockholders' equity per share data is based upon 3,855,600, 4,536,000,
5,216,400 and 5,998,900 shares outstanding representing shares sold in the
conversion and shares contributed to the Foundation.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
subscription and direct community offerings.
(8) Based on pro forma net earnings for the eight months ended August 31, 1998
that have been annualized.
32
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------
3,570,000 4,200,000 4,830,000 5,554,500
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF OF OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (7)
------------------ ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................... $ 35,700 $ 42,000 $ 48,300 $ 55,545
Plus: Shares issued to the Foundation
(equal to 8% of stock issued in
Conversion)........................... 2,856 3,360 3,864 4,444
---------- ---------- ---------- ----------
Pro forma market capitalization.............. $ 38,556 $ 45,360 $ 52,164 $ 59,989
========== ========== ========== ==========
Gross proceeds............................... $ 35,700 $ 42,000 $ 48,300 $ 55,545
Less: Offering expenses and commissions..... (1,261) (1,334) (1,406) (1,488)
---------- ---------- ---------- ----------
Estimated net proceeds....................... 34,439 40,666 46,894 54,057
Less: Common stock purchased by ESOP........ (3,084) (3,629) (4,173) (4,799)
Common stock purchased by
stock-based incentive plan............ (1,542) (1,814) (2,087) (2,400)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted......... $ 29,813 $ 35,223 $ 40,634 $ 46,858
========== ========== ========== ==========
Net income (1):
Historical.................................. $ 3,018 $ 3,018 $ 3,018 $ 3,018
Pro forma income on net proceeds,
as adjusted................................ 1,005 1,087 1,370 1,579
Less: Pro forma ESOP adjustment (2)......... (317) (373) (429) (494)
Pro forma stock-based incentive plan
adjustment (3)........................ (194) (229) (263) (302)
---------- ---------- ---------- ----------
Pro forma net income...................... $ 3,512 $ 3,603 $ 3,696 $ 3,801
========== ========== ========== ==========
Per share net income (1):
Historical.................................. $ 0.84 $ 0.72 $ 0.62 $ 0.54
Pro forma income on net proceeds,
as adjusted................................ 0.28 0.28 0.28 0.28
Less: Pro forma ESOP adjustment (2)......... (0.09) (0.09) (0.09) (0.09)
Pro forma stock-based incentive plan
adjustment (3)........................ (0.05) (0.05) (0.05) (0.05)
---------- ---------- ---------- ----------
Pro forma net income per share......... $ 0.98 $ 0.86 $ 0.76 $ 0.68
========== ========== ========== ==========
Stockholders' equity:
Historical.................................. $ 33,332 $ 33,332 $ 33,332 $ 33,332
Estimated net proceeds...................... 34,439 40,666 46,894 54,057
Plus: Tax benefit of Foundation............ 1,057 1,243 1,430 1,644
Less: Common stock acquired by (3,084) (3,629) (4,173) (4,799)
ESOP (2).............................
Less: Common stock acquired
by stock-based incentive plan (3).... (1,542) (1,814) (2,087) (2,400)
---------- ---------- ---------- ----------
Pro forma stockholders' equity (3)(4)(5)... $ 64,202 $ 69,798 $ 75,396 $ 81,834
========== ========== ========== ==========
Stockholders' equity per share (3)(6):
Historical.................................. $ 8.65 $ 7.35 $ 6.39 $ 5.56
Estimated net proceeds...................... 8.93 8.97 8.99 9.01
Plus: Tax benefit of Foundation............ 0.27 0.27 0.27 0.27
Less: Common stock acquired by
ESOP (2)............................. (0.80) (0.80) (0.80) (0.80)
Common stock acquired by
stock-based incentive plan (3)....... (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ----------
Pro forma stockholders' equity $ 16.65 $ 15.39 $ 14.45 $ 13.64
per share (3)(4)(5)....................... ========== ========== ========== ==========
Offering price as a percentage of pro forma 60.06% 64.98% 69.20% 73.31%
stockholders' equity per share..............
Offering price to pro forma net
earnings per share......................... 10.20x 11.63x 13.16x 14.71x
</TABLE>
(See footnotes on next page)
33
<PAGE>
- -----------------------------------------
(1) Does not give effect to the non-recurring expense that will be recognized
in 1999 as a result of the establishment of the Foundation. In that
event, the Company will recognize an after-tax expense for the amount of
the contribution to the Foundation which is expected to be $1.8 million,
$2.1 million, $2.4 million and $2.8 million at the minimum, midpoint,
maximum and maximum as adjusted, of the Estimated Price Range,
respectively. Assuming that the contribution to the Foundation was
expensed during the year ended December 31, 1997, pro forma net earnings
would be $1,713,000, $1,486,000, $1,262,000 and $1,001,000 and pro forma
net earnings per share would be $0.48, $0.35, $0.26 and $0.18 at each of
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively.
(2) It is assumed that 8% of the shares of common stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from
the ESOP Loan Subsidiary, a wholly owned subsidiary of the Company and
the pro forma ESOP amortized expenses are presented net of taxes using an
effective combined federal and state income tax rate of 37%. See "Use of
Proceeds." The ESOP Loan Subsidiary will be formed and capitalized by
the Company in connection with the consummation of the Conversion. The
amount to be borrowed is reflected as a reduction of stockholders'
equity. The Bank intends to make annual contributions to the ESOP in an
amount at least equal to the principal and interest requirement of the
debt. The Bank's total annual payment of the ESOP debt is based upon 12
equal annual installments of principal, with an assumed interest rate at
8.0%. The pro forma net earnings assumes: (i) that the Bank's
contribution to the ESOP is equivalent to the debt service requirement
for the year ended December 31, 1997, and was made at the end of the
period; (ii) that 25,704, 30,240, 34,776, and 39,993 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, were committed to be released during the year ended
December 31, 1997 at an average fair value of $10.00 per share in
accordance with SOP 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net earnings per
share calculations. See "Management of the Bank--Other Benefit Plans--
Employee Stock Ownership Plan."
(3) Gives effect to the stock awards available for grant under the stock-
based incentive plan expected to be adopted by the Company following the
Conversion and presented for approval at a meeting of stockholders. For
purposes of this table, the pro forma stock-based incentive plan
amortized expenses are presented net of taxes using an effective combined
federal and state income tax rate of 37%. If the stock-based incentive
plan is approved by stockholders, the stock-based incentive plan intends
to acquire an amount of common stock equal to 4% of the shares of common
stock issued in connection with the Conversion, including shares issued
to the Foundation, or 154,224, 181,440, 208,656 and 239,954 shares of
common stock at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Price Range, respectively, either through open market
purchases, if permissible, or from authorized but unissued shares of
common stock or treasury stock of the Company, if any. In calculating
the pro forma effect of the stock-based incentive plan, it is assumed
that the shares were acquired by the stock-based incentive plan at the
beginning of the period presented in open market purchases at the
Purchase Price and that 20% of the amount contributed was an amortized
expense during such period. The issuance of authorized but unissued
shares of the Company's common stock to the stock-based incentive plan
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 4.0% and pro forma net earnings
per share would be $0.96, $0.84, $0.75 and $0.67 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively
and pro forma stockholders' equity per share would be $16.40, $15.18,
$14.28 and $13.50 at the minimum, midpoint, maximum and 15% above the
maximum of the range, respectively. There can be no assurance that the
stockholder approval of the stock-based incentive plan will be obtained,
or that the actual purchase price of the shares will be equal to the
Purchase Price. See "Management of the Bank--Other Benefit Plans--Stock-
Based Incentive Plan."
(4) No effect has been given to the issuance of additional shares of common
stock upon the exercise of options to be granted under the stock-based
incentive plan. An amount equal to 10% of the common stock issued in
connection with the Conversion, including shares issued to the
Foundation, or 385,560, 453,600, 521,640 and 599,886 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the stock-based incentive plan.
The issuance of common stock pursuant to the exercise of options under
the stock-based incentive plan will result in the dilution of existing
stockholders' interests. Assuming all options were exercised at the end
of the period at an exercise price of $10.00 per share, the pro forma net
earnings per share would be $0.89, $0.77, $0.69 and $0.62 respectively,
and the pro forma stockholders' equity per share would be $15.14, $13.99,
$13.14 and $12.40, respectively. See "Risk Factors--Stock-Based Benefits
to Management and Directors, Employment Contracts and Change in Control
Payments" and "Management of the Bank--Other Benefit Plans--Stock-Based
Incentive Plan."
(5) The surplus of the Bank will continue to be substantially restricted
after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights."
(6) Stockholders' equity per share data is based upon 3,855,600, 4,536,000,
5,216,400 and 5,998,900 shares outstanding representing shares sold in
the conversion and shares contributed to the Foundation.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
subscription and direct community offerings.
34
<PAGE>
COMPARISON OF VALUATION AND
PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Conversion, Keller has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $48.0 million, at the
midpoint, which is approximately $2.6 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included,
and would result in approximately a $6.0 million, or 14.3%, increase in the
amount of common stock offered for sale in the Conversion. The pro forma price
to book ratio would be substantially the same under both the current appraisal
and the estimate of the value of the Company without the Foundation. Further,
assuming the midpoint of the Estimated Price Range, pro forma stockholders'
equity per share and pro forma earnings per share would also be substantially
the same with the Foundation as without the Foundation. In this regard, pro
forma stockholders' equity and pro forma net income per share would be $15.46
and $0.58 respectively, at the midpoint of the estimate assuming no Foundation,
and $15.40 and $0.61, respectively, with the Foundation. In addition, the pro
forma price to book ratio and the pro forma price to earnings ratios are 64.67%
and 11.45x, respectively, at the midpoint of the estimate assuming no
Foundation, and 64.94% and 10.93x, respectively, with the Foundation. There is
no assurance that in the event the Foundation was not formed that the appraisal
prepared at that time would have concluded that the pro forma market value of
the Company would be the same as that estimated herein. Any appraisal prepared
at that time would be based on the facts and circumstances existing at that
time, including, among other things, market and economic conditions.
For comparative purposes only, set forth below are pricing ratios and
financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range, assuming the Conversion was completed at
August 31, 1998, using the assumptions set forth in the "Pro Forma Data."
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
------------------------- ------------------------ ------------------------- ------------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ------------ ---------- ----------- ---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount..... $ 35,700 $ 40,800 $ 42,000 $ 48,000 $ 48,300 $ 55,200 $ 55,545 $ 63,480
Pro forma market
capitalization............... $ 38,556 $ 40,800 $ 45,360 $ 48,000 $ 52,164 $ 55,200 $ 59,989 $ 63,480
Total assets.................. $397,155 $400,868 $402,753 $407,121 $408,351 $413,374 $414,789 $420,565
Total liabilities............. $332,903 $332,903 $332,903 $332,903 $332,903 $332,903 $332,903 $332,903
Pro forma stockholders'
equity....................... $ 64,247 $ 67,965 $ 69,843 $ 74,218 $ 75,441 $ 80,471 $ 81,879 $ 87,662
Pro forma consolidated net
earnings..................... $ 2,530 $ 2,539 $ 2,574 $ 2,584 $ 2,616 $ 2,628 $ 2,664 $ 2,680
Pro forma stockholders'
equity per share............. $ 16.66 $ 16.66 $ 15.40 $ 15.46 $ 14.46 $ 14.58 $ 13.64 $ 13.81
Pro forma consolidated net
earnings per share........... $ 0.71 $ 0.67 $ 0.61 $ 0.58 $ 0.54 $ 0.52 $ 0.48 $ 0.46
Pro Forma Pricing Ratios:
Offering price as a
percentage of pro forma
stockholders'
equity per share............ 60.02% 60.03% 64.94% 64.67% 69.16% 68.60% 73.31% 72.41%
Offering price to pro forma
net earnings per share...... 9.39x 9.90x 10.93x 11.45x 12.35x 12.94x 13.89x 14.60x
Offering price to assets..... 9.71% 10.18% 11.26% 11.79% 12.77% 13.35% 14.46% 15.09%
Pro Forma Financial Ratios:
Return on assets
(annualized)................ 0.93% 0.95% 0.93% 0.95% 0.93% 0.95% 0.93% 0.96%
Return on stockholders'
equity (annualized)......... 5.77% 5.60% 5.38% 5.22% 5.04% 4.90% 4.72% 4.59%
Stockholders' equity
to total assets............. 16.18% 16.95% 17.34% 18.23% 18.48% 19.47% 19.74% 20.84%
</TABLE>
35
<PAGE>
WORONOCO SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for each of the
years in the three year period ended December 31, 1997 have been audited by Wolf
& Company, P.C., independent certified public accountants, whose report thereon
appears elsewhere in this Prospectus. With respect to information for the eight
months ended August 31, 1998 and 1997, which is unaudited, in the opinion of
management, all adjustments necessary for a fair presentation of such interim
periods have been included and are of a normal recurring nature. Results for
the eight months ended August 31, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. These
statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE
EIGHT MONTHS ENDED
AUGUST 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- -----------------------------------
1998 1997 1997 1996 1995
--------------------- -----------------------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans.......................... $14,140 $12,936 $19,682 $17,732 $15,856
Interest and dividends on investment securities:
Non taxable interest............................... 1,664 1,985 2,894 2,883 2,826
Dividends.......................................... 704 609 929 928 862
Interest on federal funds sold...................... 52 4 36 115 217
Other interest income............................... 90 33 117 76 108
------- ------- ------- ------- -------
Total interest and dividend income.................. 16,650 15,567 23,658 21,734 19,869
------- ------- ------- ------- -------
Interest expense:
Interest on deposits (Notes 6 and 9)................ 6,876 6,579 10,159 9,413 8,701
Interest on advances (Note 9)....................... 1,953 1,508 2,341 1,609 1,122
------- ------- ------- ------- -------
Total interest expense............................ 8,829 8,087 12,500 11,022 9,823
------- ------- ------- ------- -------
Net interest income.................................. 7,821 7,480 11,158 10,712 10,046
Provision for loan losses (Note 3)................... 160 120 180 180 210
------- ------- ------- ------- -------
Net interest income after provision for loan losses.. 7,661 7,360 10,978 10,532 9,836
------- ------- ------- ------- -------
Other income:
Customer service fees............................... 1,040 914 1,412 1,129 973
Gain on sales and disposition of securities,
net (Note 2)...................................... 1,218 1,441 1,895 751 578
Gain on sales of property........................... -- -- 17 -- --
Gain on sales of loans, net......................... 290 -- -- 16 41
------- ------- ------- ------- -------
Total other income................................ 2,548 2,355 3,324 1,896 1,592
------- ------- ------- ------- -------
Other expenses:
Salaries and net employee benefits (Note 11)........ 3,355 3,177 4,724 4,303 4,003
Occupancy and equipment (Notes 5 and 9)............. 936 844 1,302 1,130 1,045
Other real estate owned (Note 4).................... 42 66 110 211 189
Marketing........................................... 444 409 610 540 383
Professional services............................... 318 239 360 395 343
Data processing..................................... 430 383 595 524 431
Deposit insurance................................... 24 23 31 2 259
Contributions....................................... 107 600 613 81 150
Other general and administrative.................... 1,021 887 1,398 1,186 890
------- ------- ------- ------- -------
Total other expenses.............................. 6,677 6,628 9,743 8,372 7,693
------- ------- ------- ------- -------
Income before income taxes........................... 3,532 3,087 4,559 4,056 3,735
Provision for income taxes (Note 8).................. 1,223 986 1,541 1,582 1,400
------- ------- ------- ------- -------
Net income........................................ $ 2,309 $ 2,101 $ 3,018 $ 2,474 $ 2,335
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial and Other Data of the Bank" and the Bank's Consolidated
Financial Statements and notes thereto, each appearing elsewhere in the
Prospectus. In addition to historical information, the following "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward-looking statements as a result of certain factors, including
those discussed in "Risk Factors" contained elsewhere in this Prospectus.
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
the Bank's interest-earning assets, such as loans and investments, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Bank also generates non-interest income such as service charges
and other fees. The Bank's noninterest expenses primarily consist of employee
compensation and benefits, occupancy and equipment expense, marketing expenses,
data processing, professional services and other general and administrative
expenses. The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory agencies. The
Bank exceeded all of its regulatory capital requirements at August 31, 1998.
See "Regulatory Capital Compliance" for a discussion of the historical and pro
forma capital of the Bank and capital requirements. See also "Regulation and
Supervision--Federal Regulation--Capital Requirements."
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of the
Company. These forward-looking statements are generally identified by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of the Company and the
subsidiaries include, but are not limited to, changes in interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area and accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. The Company does not undertake -- and specifically disclaims any
obligation -- to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
MANAGEMENT STRATEGY
The Bank operates as a community-oriented savings bank, offering
traditional deposit and loan products to its customers. In recent years, the
Bank's strategy has been to maintain profitability while managing its capital
position and limiting its credit and interest rate risk exposure. To accomplish
these objectives, the Bank has sought to:
. Emphasize providing superior service and competitive rates in order to
increase deposits, including commercial accounts
. Control credit risk by emphasizing the origination of single-family,
owner-occupied residential mortgage loans and consumer loans,
consisting primarily of home equity loans and lines of credit
. Invest funds in excess of loan demand primarily in mortgage-backed and
investment grade equity securities
37
<PAGE>
. Control interest rate risk by utilizing off-balance sheet hedging
transactions such as interest rate swaps, caps and floors
. Originate high quality, multi-family and commercial real estate and
commercial business loans which increase the yields earned on its
overall loan portfolio, without incurring unnecessary risk
. Expand its lending and deposit base through the establishment of full-
service banking offices located inside supermarket/grocery stores
Beginning in 1994, the Bank began opening full-service banking offices in
supermarket/grocery stores operated by the regionally based Big Y Foods, Inc.
Since 1994, the Bank has established three such banking offices and is planning
to open a fourth banking office at a Big Y supermarket located in Amherst,
Massachusetts. The Bank expects that such banking office will become
operational during the first quarter of 1999. The Bank will continue to seek
attractive opportunities to expand its branching activities through supermarket
facilities as such opportunities arise.
The Bank intends to continue its current operating strategy in an effort to
enhance its long-term profitability while maintaining a reasonable level of
interest rate risk. The Bank also intends to enhance its current operating
strategy by expanding the products and services that it offers, as necessary, in
order to improve its market share in its primary market area. In this regard,
the Bank has begun to offer new consumer and commercial deposit products and
various other customer improvement services and intends to expand its trust
services and invest in technological enhancements, such as PC banking, in order
to better serve its customers in the future. In addition, and consistent with
its plan to increase its loan portfolio, the Bank intends to hire additional
loan originators, a commercial loan officer and an additional credit analyst to
assist the loan department.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Trustees' approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Bank monitors its interest
rate risk as such risk relates to its operating strategies. The Bank maintains
an Asset/Liability Management Committee (the "ALCO"), responsible for reviewing
its asset/liability policies and interest rate risk position, which meets on a
quarterly basis and reports trends and interest rate risk position to the Board
of Trustees on a quarterly basis.
The extent of the movement of interest rates is an uncertainty that could
have a negative impact on the earnings of the Bank. Besides the risk that
rising interest rates could cause the cost of liabilities to rise faster than
the yield on assets, the Bank's interest rate spread and margin could also be
negatively affected in a declining interest rate environment if prepayments were
to increase and the Bank were to reinvest such proceeds at a lower rate. The
Bank's spread and margin would also be negatively impacted if deposit interest
rates did not decline commensurate with asset yields in such a declining
interest rate environment. Similarly, spreads and margins would contract in a
so-called flat- or inverse-yield curve environment, in which traditional spreads
between short- and long-term interest rates were to be compressed or become
negative. See "Risk Factors--Increasing Interest Rates May Hurt Our
Profits."
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination of shorter-term adjustable-
rate loans, such as home equity loans and lines of credit as well as emphasizing
the origination of multi-family and commercial real estate loans; (2)
emphasizing the origination of retail checking accounts and offering deposit
products with a variety of interest rates; (3) preparing and monitoring static
gap and asset/liability funding matrix reports; and (4) utilizing off-balance
sheet hedging transactions, such as interest rate swaps, caps and floors.
The Bank periodically is a party to financial instruments with off-balance
sheet risk in the normal course of
38
<PAGE>
business to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
interest rate swap, cap and floor agreements. Interest rate swap agreements
generally involve the exchange of fixed and floating-rate interest payment
obligations without the exchange of the underlying principal, or notional,
amounts. These transactions are accounted for using the accrual method. Net
interest income resulting from the differential between exchanging floating and
fixed-rate payments is recorded on a current basis. Interest rate cap and floor
agreements generally involve the payment of a premium in return for cash
receipts if interest rates rise above or fall below a specified interest rate
level. Payments are based on a notional principal amount. Swaps are generally
negotiated for periods of one to five years. Caps and floors generally are not
readily available for time periods longer than five years. The Bank's stated
objective regarding the utilization of interest rate swaps, caps and floors is
to reduce risk associated with adverse rate volatility while enabling the Bank
to benefit from favorable interest rate movements. The Bank's policies provide
that a rate swap is in essence a "cross hedge" and may only be undertaken if the
potential correlation of the swap is reasonable. The Bank's policies also
provide that the costs of caps and floors must be analyzed as they pertain to
the spread, asset yield or liability cost being protected. Such costs must be
viewed in light of the Bank's overall profitability. The Bank's policies further
provide that swap arrangements and the purchase of caps and floors shall only be
negotiated with firms which meet the Bank's investment criteria. All counter-
parties to swap, cap and floor arrangements must be pre-approved by the Bank's
Board of Trustees. At August 31, 1998, the notional principal amounts of the
Bank's outstanding interest rate cap and floor agreements were $10 million each.
Under the terms of the cap agreements, the Bank paid premiums totalling $80,000
which is included in other assets and being amortized over three years which are
the terms of the agreements. Amortization for the eight months ended August 31,
1998 totalled $8,000 and is recorded as an interest expense on advances. The
agreements provide that, if the London Interbank Offered Rate ("LIBOR")
increases above 6%, the Bank receives cash payments on a quarterly basis. There
were no cash payments received at August 31, 1998. Under the terms of the floor
agreement, the Bank paid a premium of $134,000 during 1996 which is included in
other assets and is being amortized over five years which is the term of the
agreement. Amortization for the eight months ended August 31, 1998 totalled
$18,000 and is recorded as an interest expense on advances. The agreement
provides that if the LIBOR falls below 5.75%, the Bank receives cash payments on
a quarterly basis. Cash payments received during the eight months ended August
31, 1998 totalled $2,000 and is recorded as a credit to interest on advances. At
August 31, 1998, the Bank was not a party to any swap arrangements.
GAP ANALYSIS. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At August 31, 1998, the Bank's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was negative 3.00%. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position would be in a worse position to invest in higher yielding
assets which, consequently, may result in the cost of its interest-bearing
liabilities increasing at a rate faster than its yield on interest-earning
assets than if it had a positive gap. Conversely, during a period of falling
interest rates, an institution with a negative gap would tend to have its
interest-bearing liabilities repricing downward at a faster rate than its
interest-earning assets as compared to an institution with a positive gap which,
consequently, may tend to positively affect the growth of its net interest
income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at August 31, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "Gap Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
August 31, 1998, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a one-year period and
subsequent selected time intervals. For loans on residential properties,
adjustable-rate loans, and fixed-rate loans, actual repricing and
39
<PAGE>
maturity dates were used. Mortgage-backed securities were assumed to prepay at
rates between 16.14% and 19.45% annually. The stratification of savings deposits
(including NOW, savings and money market accounts) is based on management's
philosophy of repricing core deposits in response to changes in the general
interest rate environment. Prepayment rates can have a significant impact on the
Bank's estimated gap. While the Bank believes such assumptions to be reasonable,
there can be no assurance that assumed prepayment rates will approximate actual
future loan prepayment activity. See "Business of the Bank--Lending Activities,"
"--Investment Activities" and "--Sources of Funds."
40
<PAGE>
<TABLE>
<CAPTION>
AT AUGUST 31, 1998
--------------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN
1 YEAR 1 YEAR TO 2 YEARS TO 3 YEARS TO
OR LESS 2 YEARS 3 YEARS 4 YEARS
------------------- --------------------- -------------------- ---------------------
(DOLLARS IN THOUSANDS)
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
----------- ------- ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage-backed securities. $ 17,068 6.63% $ 6,766 6.82% $ 5,653 6.84% $ 4,138 6.84%
Equity securities.......... 101 5.00 -- -- --
FHLB stock................. 2,984 6.30 -- -- --
Loans, net................. 147,245 7.87 37,794 7.20 18,708 7.37 21,209 7.67
Other...................... 1,932 4.69 -- -- --
Interest rate floor........ -- -- 10,000 5.75 --
-------- ------- ------- -------
Total interest-earning
assets.................... $169,330 $44,560 $34,361 $25,347
======== ======= ======= =======
INTEREST-BEARING LIABILITIES:
Savings accounts........... $ 6,624 1.98 $ -- $ -- $ --
Money market accounts...... 24,904 3.54 -- -- --
NOW accounts............... -- -- -- --
Certificates of deposit.... 105,216 5.30 31,343 6.37 4,635 5.37 17 2.50
FHLB advances.............. 43,579 5.42 706 8.51 204 8.51 152 8.51
Interest rate caps......... -- -- 10,000 6.00 --
-------- ------- ------- -------
Total interest-bearing
liabilities........... $180,323 $32,049 $14,839 $ 169
======== ======= ======= =======
Interest sensitivity gap(2) $(10,993) $12,511 $19,522 $25,178
======== ======= ======= =======
Cumulative interest $(10,993) $ 1,518 $21,040 $46,218
sensitivity gap............ ======== ======= ======= =======
Cumulative interest
sensitivity gap as a
percentage of total assets.. (3.00)% 0.41% 5.75% 12.62%
Cumulative interest
sensitivity gap as a
percentage of total interest-
earning assets.............. (3.13)% 3.41% 61.23% 182.34%
Cumulative net interest-
earning assets as a
percentage of cumulative
interest-bearing liabilities 93.90% 100.71% 109.26% 120.33%
</TABLE>
<TABLE>
<CAPTION>
AT AUGUST 31, 1998
----------------------------------------------------------------
MORE THAN
4 YEAR TO MORE THAN TOTAL FAIR
5 YEARS 5 YEARS AMOUNT VALUE(3)
------------------ --------------------- ----------- --------
(DOLLARS IN THOUSANDS)
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
----------- ------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage-backed securities. $ 4,137 6.84% $ 14,057 6.84% $ 51,819 $ 52,796
Equity securities.......... -- 19,374 1.57 19,475 18,686
FHLB stock................. -- -- 2,984 2,984
Loans, net................. 21,208 7.67 19,400 7.40 265,564 267,157
Other...................... -- -- 1,932 1,932
Interest rate floor........ -- -- 10,000 273
------- -------- -------- --------
Total interest-earning
assets.................... $25,345 $ 52,831 $351,774 $343,828
======= ======== ======== ========
INTEREST-BEARING LIABILITIES:
Savings accounts........... $ -- $ 59,850 1.98 $ 66,474 $ 68,474
Money market accounts...... -- -- 24,904 24,904
NOW accounts............... -- 29,305 1.00 29,305 29,305
Certificates of deposit.... 16 2.50 -- 141,227 141,990
FHLB advances.............. 151 8.51 10,000 4.99 54,792 59,956
Interest rate caps......... -- -- 10,000 17
------- -------- -------- --------
Total interest-bearing
liabilities........... $ 167 $ 99,155 $326,702 $324,646
======= ======== ======== ========
Interest sensitivity gap(2) $25,178 $(46,324) $ 25,072
======= ======== ========
Cumulative interest $71,396 $ 25,072 $ 50,144
sensitivity gap............ ======= ======== ========
Cumulative interest
sensitivity gap as a
percentage of total assets.. 19.50% 6.85%
Cumulative interest
sensitivity gap as a
percentage of total interest-
earning assets.............. 281.70% 47.46%
Cumulative net interest-
earning assets as a
percentage of cumulative
interest-bearing liabilities 131.36% 107.67%
</TABLE>
____________________
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments and contractual maturities.
(2) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
(3) Fair value of securities, including mortgage-backed securities, is based
on quoted market prices, where available. If quoted market prices are
not available, fair value is based on quoted market prices of comparable
instruments. Fair value of loans is, depending on the type of loan,
based on carrying values or estimates based on discounted cash flow
analyses. Fair value of deposit liabilities are either based on carrying
amounts or estimates based on a discounted cash flow calculation. Fair
values for FHLB advances are estimated using a discounted cash flow
analysis that applies interest rates concurrently being offered on
advances of aggregated expected monthly maturities on FHLB advances.
41
<PAGE>
Shortcomings are inherent in the method of analysis presented in the Gap
Table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, some assets, such as adjustable-rate loans, have features
which restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
depends on the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
42
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth information relating
to the Bank at August 31, 1998 and for the eight months ended August 31, 1998
and 1997, and for the years ended December 31, 1997, 1996 and 1995. The average
yields and costs are derived by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown and reflect annualized yields and costs.
Average balances are derived from average daily balances. The yields and costs
include fees which are considered adjustments to yields. Loan interest and
yield data does not include any accrued interest from nonaccruing loans.
<TABLE>
<CAPTION>
FOR THE EIGHT MONTHS ENDED AUGUST 31,
AT AUGUST 31, ------------------------------------------------------------------
1998 1998 1997
-------------------- --------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- -------- ------- -------- ---------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets:(1)
Investments:
Loans, net(2)................ $265,564 7.85% $271,480 $14,140 7.81% $242,998 $12,936 7.99%
Mortgage-backed
securities.................. 52,796 6.77 37,579 1,664 6.64 45,325 1,985 6.57
Equity securities............ 18,686 4.10 19,046 574 4.52 13,473 503 5.60
FHLB stock................... 2,984 6.30 2,826 130 6.90 ` 2,261 106 7.03
Other........................ 1,932 4.69 4,109 142 5.18 1,410 37 3.94
-------- -------- ------- -------- -------
Total interest-earning
assets................... 341,962 7.41 335,040 16,650 7.45 305,467 15,567 7.64
------ ------- ------ ------- ------
Noninterest earning assets.... 24,256 19,407 17,639
-------- -------- --------
Total assets.............. $366,218 $354,447 $323,106
======== ======== ========
LIABILITIES AND SURPLUS:
Interest-bearing liabilities:
Deposits:
Money market accounts......... $ 24,904 3.54 $ 23,457 533 3.41 $ 18,008 272 2.27
Savings accounts(3)........... 67,310 2.28 66,375 1,003 2.27 64,208 1,110 2.59
NOW accounts.................. 29,305 1.02 27,241 189 1.04 24,542 165 1.01
Certificates of deposit....... 141,227 5.56 139,881 5,151 5.52 137,626 5,032 5.48
-------- -------- ------- -------- -------
Total interest-
bearing deposits........... 262,746 4.02 256,954 6,876 4.01 244,384 6,579 4.04
FHLB advances................... 54,792 5.42 52,201 1,953 5.61 39,176 1,508 5.77
-------- -------- ------- -------- -------
Total interest-bearing
liabilities............... 317,538 4.26 309,155 8,829 4.28 283,560 8,087 4.28
------ ------- ------ ------- ------
Demand deposits................. 11,657 9,763 7,399
Other noninterest-bearing
liabilities.................. 3,646 725 1,753
-------- -------- --------
Total liabilities............ 332,841 319,643 292,712
Total surplus................... 33,377 34,804 30,394
-------- -------- --------
Total liabilities and
surplus................... $366,218 $354,447 $323,106
======== ======== ========
Net interest-earning assets..... $ 24,424 $ 25,885 $ 21,907
======== ======== ========
Net interest income/interest
rate spread(4)............... 3.15% $ 7,821 3.17% $ 7,480 3.36%
====== ======= ====== ======= ======
Net interest margin as a
percentage of interest-
earning assets(5)............ 3.50% 3.67%
====== ======
Ratio of interest earning
assets to interest-bearing
liabilities................... 107.69% 108.38% 107.73%
====== ====== ======
</TABLE>
_______________________
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan origination fees, unadvanced loan funds,
allowance for loan losses and includes nonaccruing loans. The Bank records
interest income on nonaccruing loans on a cash basis.
(3) Savings accounts include mortgagors' escrow deposits.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
43
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- -------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- -------- -------- -------- --------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets(1):
Investments:
Loans, net(2)................ $247,911 $19,682 7.94% $215,613 $17,732 8.22% $191,903 $15,856 8.26%
Debt securities.............. -- -- -- 2,373 140 5.90 6,622 398 6.01
Mortgage-backed securities... 44,094 2,894 6.56 43,123 2,743 6.36 39,322 2,428 6.17
Equity securities 13,707 785 5.73 12,392 801 6.46 12,146 735 6.05
FHLB stock.................... 2,308 144 6.24 2,009 127 6.32 1,568 127 8.10
Other......................... 2,568 153 5.96 3,111 191 6.19 4,757 325 6.83
-------- ------- -------- ------- -------- -------
Total interest-earning assets. 310,588 23,658 7.62 278,621 21,734 7.80 256,318 19,869 7.75
------- ------ ------- ------ ------- ------
Noninterest-earning assets...... 18,050 15,938 14,028
-------- -------- --------
Total assets.................. $328,638 $294,559 $270,346
======== ======== ========
LIABILITIES AND SURPLUS:
Interest-bearing liabilities:
Deposits:
Money market accounts....... $ 19,238 407 2.12 $ 16,825 441 2.62 $ 17,754 499 2.81
Savings accounts(3)......... 64,285 1,759 2.74 65,042 1,684 2.59 67,221 1,707 2.54
NOW accounts................ 24,941 253 1.01 22,831 243 1.06 20,920 272 1.30
Certificates of deposit..... 139,119 7,740 5.56 127,068 7,045 5.54 115,933 6,223 5.37
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits................... 247,583 10,159 4.10 231,766 9,413 4.06 221,828 8,701 3.92
FHLB advances.................. 40,099 2,341 5.84 26,941 1,609 5.97 16,948 1,122 6.62
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities................ 287,682 12,500 4.35 258,707 11,022 4.26 238,776 9,823 4.11
------- ------ ------- ------ ------- ------
Demand deposits................ 7,939 6,933 5,703
-------- -------- --------
Other noninterest-bearing
liabilities.................. 1,799 1,744 1,501
-------- -------- --------
Total liabilities............ 297,420 267,384 245,980
Surplus........................ 31,218 27,175 24,366
-------- -------- --------
Total liabilities and
surplus..................... $328,638 $294,559 $270,346
======== ======== ========
Net interest-earning assets.... $ 22,906 $ 19,914 $ 17,542
======== ======== ========
Net interest income/interest
rate spread(4)............... $11,158 3.27% $10,712 3.54% $10,046 3.64%
======= ====== ======= ====== ======= ======
Net interest margin as a
percentage of interest-earning
assets(5) 3.59% 3.84% 3.92%
====== ====== ======
Ratio of interest-earning
assets to interest-bearing
liabilities................. 107.96% 107.70% 107.35%
====== ====== ======
</TABLE>
- ---------------------------------------
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan origination fees, unadvanced loan funds,
allowance for loan losses and includes nonaccruing loans. The Bank records
interest income on nonaccruing loans on a cash basis.
(3) Savings accounts include mortgagors' escrow deposits.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
44
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO COMPARED TO
EIGHT MONTHS ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- ---------------------------------- ------------------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
--------------------------- ------------------- ------------------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
---------- ------- ------ -------- -------- -------- -------- -------- -------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net................ $1,476 $(272) $1,204 $2,537 $(587) $1,950 $1,950 $(74) $1,876
Debt securities........... -- -- -- (70) (70) (140) (251) (7) (258)
Mortgage-backed securities (343) 22 (321) 63 88 151 240 75 315
Equity securities......... 133 (62) 71 227 (243) (16) 15 51 66
FHLB stock................ 26 (2) 24 19 (2) 17 -- -- --
Other..................... 90 15 105 (32) (6) (38) (104) (30) (134)
------ ----- ------ ------ ----- ------ ------ ---- ------
Total interest-earning
assets.................. 1,382 (299) 1,083 2,744 (820) 1,924 1,850 15 1,865
------ ----- ------ ------ ----- ------ ------ ---- ------
INTEREST-BEARING LIABILITIES:
Deposits:
Money market accounts.... 98 163 261 97 (131) (34) (25) (33) (58)
Savings accounts(1)...... 40 (147) (107) (19) 94 75 (58) 35 (23)
NOW accounts............. 19 5 24 20 (10) 10 29 (58) (29)
Certificates of deposit.. 83 36 119 670 25 695 612 210 822
------ ----- ------ ------ ----- ------ ------ ---- ------
Total deposits.......... 240 57 297 768 (22) 746 558 154 712
FHLB advances............. 485 (40) 445 767 (35) 732 584 (97) 487
------ ----- ------ ------ ----- ------ ------ ---- ------
Total interest-bearing
liabilities........... 725 17 742 1,535 (57) 1,478 1,142 57 1,199
Increase (decrease) in net ------ ----- ------ ------ ----- ------ ------ ---- ------
interest income......... $ 657 $(316) $ 341 $1,209 $(763) $ 446 $ 708 $(42) $ 666
====== ===== ====== ====== ===== ====== ====== ==== ======
</TABLE>
_______________
(1) Includes interest on mortgagors' escrow deposits.
COMPARISON OF FINANCIAL CONDITION AT AUGUST 31, 1998 AND DECEMBER 31, 1997
Total assets increased by $24.3 million, or 7.1%, to $366.2 million at
August 31, 1998, from $341.9 million at December 31, 1997. The growth in assets
is primary attributable to a $12.9 million increase in mortgage-backed
securities available-for-sale, a $3.0 million increase in equity securities
available-for-sale, a $3.8 million increase in net loans and a $1.4 million
increase in banking premises and equipment. Asset growth was funded primarily
through FHLB borrowings and deposit inflows. Mortgage-backed securities
increased by $12.9 million, or 32.3%, to $52.8 million at August 31, 1998, from
$39.9 million at December 31, 1997. The net increase in mortgage-backed
securities was due to the securitization of $19.1 million of fixed rate one- to
four-family mortgage loans and an increase in the unrealized gain of $322,000,
less the normal amortization of the mortgage-backed securities portfolio
totalling $6.5 million. Equity securities at August 31, 1998 totalled $18.7
million, an increase of $3.0 million, or 18.8%, compared to $15.7 million at
December 31, 1997 attributable to net purchases of $6.9 million and a decrease
in the unrealized gain of $3.9 million. Net loans increased by $3.8 million, or
1.5%, to $265.6 million at August 31, 1998, from $261.7 million at December 31,
1997, primarily due to increased
45
<PAGE>
originations of one- to four-family mortgage loans and home equity loans and
lines of credit. These originations were partially offset by the $19.1 million
in fixed rate loans that were securitized and are now classified as mortgage-
backed securities. The relatively low interest rate environment during 1998
increased one- to four-family refinance activity, primarily 15- and 30-year
fixed-rate mortgage products. Premises and equipment increased by $1.4 million,
or 22.8%, due to the construction of an addition to the Bank's main office,
which will provide additional office space for the Bank's administrative
operations, and the renovation of a branch office. The construction on the main
office is due to be completed in early 1999.
Total deposits at August 31, 1998 were $273.6 million, an increase of $10.9
million, or 4.1%, compared to $262.7 million at December 31, 1997. The increase
was primarily due to an increase of $12.9 million, or 10.8%, in core deposit
accounts, to $132.3 million at August 31, 1998, from $119.4 million at December
31, 1997. This increase in deposits consists of $3.4 million in demand, $3.4
million in NOW, $2.7 million in money market, and $3.4 million in savings
accounts and is also due in part to an active promotion to gain new checking
account customers and the opening of a new banking office in 1997 which had $2.8
million of deposits at August 31, 1998. Certificates of deposit decreased $2.0
million, or 1.4%, to $141.2 million at August 31, 1998, from $143.2 million at
December 31, 1997. The decrease in certificates of deposit was primarily
attributable to the maturing of previously offered certificate "specials" that
the Bank did not actively seek to retain. To some extent, the increase in core
deposits and decrease in certificate accounts is reflective of depositors'
general unwillingness to commit funds to longer time periods given the current
low interest rate environment. Borrowed funds increased $13.1 million, or
31.3%, to $54.8 million at August 31, 1998 from $41.7 million at December 31,
1997 as management utilized borrowings to fund a portion of the Bank's asset
growth.
Total surplus increased $45,000, or 0.1%, to $33.4 million at August 31,
1998, from $33.3 million at December 31, 1997, primarily the result of net
income of $2.3 million during the eight months ended August 31, 1998 which was
offset by a $2.3 million decrease in the after-tax net unrealized gain on
available-for-sale securities during the same period. The $2.3 million decrease
in the after-tax net unrealized gain on available-for-sale securities, along
with the increase in assets, caused a decrease in the Bank's ratio of equity
capital to total assets to 9.11% at August 31, 1998, from 9.75% at December 31,
1997.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets at December 31, 1997 were $341.9 million as compared to total
assets of $316.7 million at December 31, 1996, an increase of $25.2 million, or
8.0%, primarily by a $27.6 million growth in the loan portfolio. Asset growth
was funded primarily through the inflow of deposits and borrowed funds.
Deposits increased $13.7 million, or 5.5%, to $262.7 million at December 31,
1997, from $249.0 million at December 31, 1996. The Bank's securities portfolio
decreased by $6.0 million, or 9.7%, to $55.6 million at December 31, 1997, from
$61.6 million at December 31, 1996. The decrease in the securities portfolio
was comprised of a $7.6 million decrease in mortgage-backed securities due
primarily to normal amortization offset by a $1.6 million increase in debt and
equity securities. The increase in debt and equity securities was attributable
to net purchases of both common and preferred stocks of $1.0 million, and an
increase in the unrealized gain of $1.4 million on such portfolio. This
increase was partially offset by a transfer of equity securities totalling
$549,000 to establish The Woronoco Foundation, Inc., a charitable foundation.
Total loans increased by $27.8 million, or 11.7%, to $264.6 million at
December 31, 1997, as compared to $236.8 million at December 31, 1996. In
particular, one- to four-family loans increased by $1.5 million, or 1.1%,
commercial real estate loans increased by $2.1 million, or 10.5%, multi-family
loans increased by $1.2 million, or 6.8%, construction and development loans
increased by $1.7 million, or 155%, and consumer loans, primarily home equity
loans and lines of credit, increased by $20.8 million, or 37.1%, to $76.8
million at December 31, 1997, from $56.0 million at December 31, 1996. The
increase in consumer loans was in part attributable to a telemarketing effort
through the services of a third party to increase the amount of home equity
loans and lines of credit which loans contributed $18.6 million toward the $20.8
million increase in consumer loans. Cash and cash equivalents was $11.7 million
at December 31, 1997, an increase of $1.2 million, or 11.6%, as compared to
$10.5 million at
46
<PAGE>
December 31, 1996. The increase in cash and cash equivalents was a result of the
timing of operating and investing cash flows.
The increase in deposit growth was attributable to the combined effect of
net deposit inflows of $3.5 million and interest paid on deposits of $10.2
million during the period. The Bank's core deposit accounts increased $8.8
million, or 8.0%, from $110.6 million at December 31, 1996, to $119.4 million at
December 31, 1997. This increase was primarily attributable to a $5.6 million
increase in money market accounts due to the Bank offering competitive money
market rates, effective cross-selling of the money market product and the
opening of a new banking office. Certificates of deposit increased by $4.9
million, or 3.5%, during the period to $143.2 million, representing 54.5% of
total deposits at December 31, 1997. The increase in certificates reflects the
effect of the promotion of higher rate certificate products that were offered at
our three supermarket branch locations during the latter half of 1997.
Total surplus was $33.3 million at December 31, 1997, or 9.7% of total
assets, an increase of $4.3 million, or 14.6%, as compared to $29.1 million at
December 31, 1996. The increase in surplus is attributable to net income of
$3.0 million during the period and a $1.2 million increase in the component of
net unrealized gain on the Bank's available-for-sale securities portfolio, net
of taxes, as required by Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115").
COMPARISON OF OPERATING RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND
AUGUST 31, 1997
GENERAL. Net income for the eight months ended August 31, 1998 increased
by $208,000, or 9.9%, to $2.3 million at August 31, 1998, from $2.1 million for
the eight months ended August 31, 1997. The increase was due to an increase in
net interest income which, despite a decrease in the average interest rate
spread to 3.17% from 3.36%, increased by $341,000 due to an increase in the
average balance of net interest-earning assets. There was also an increase in
noninterest income due to the gain on the securitization of $19.1 million of
one- to four-family mortgage loans. These increases were partially offset by a
$49,000 increase in noninterest expense, and a 24.0% increase in income taxes to
$1.2 million from $986,000.
INTEREST INCOME. Interest income amounted to $16.7 million for the eight
months ended August 31, 1998, representing an increase of $1.1 million, or 7.0%,
from the same period in 1997. The increase was the result of the combined
effect of a $29.6 million increase in average interest-earning assets and a 19
basis point decrease in the yield on interest-earning assets. The decrease in
the average interest rate on interest-earning assets was primarily due to the
lower interest rate environment during the eight month period ended August 31,
1998 which created lower yielding assets on all new loans originated or
refinanced. Interest income on mortgage-backed securities decreased $321,000
for the eight months ended August 31, 1998, as compared to the same period in
1997. This decrease was primarily due to a decrease in the average balance of
mortgage-backed securities of $7.7 million, which resulted from the normal
amortization of the mortgage-backed securities portfolio. Dividend income on
equity securities increased $71,000, or 14.1%, due to a $5.6 million increase in
the average balance to $19.0 million for the eight months ended August 31, 1998,
from $13.5 million for the eight month period ended August 31, 1997, which was
partially offset by a 108 basis point decrease in the average yield on the
equity securities portfolio for the same time periods.
The increase in interest income on loans can be attributed to growth in the
average balance of loans outstanding. Average consumer loans increased $11.2
million, or 16.7%, to $78.3 million for the eight months ended August 31, 1998,
as compared to $67.1 million for the same period in 1997. The increase in
consumer loans was primarily attributable to an increase in home equity loans
and lines of credit, which increased $5.7 million, or 9.8%, to $64.1 million for
the eight months ended August 31, 1998, from $58.4 million for the eight month
period ended August 31, 1997. The Bank's one- to four-family loan portfolio
decreased by $3.3 million, or 2.1%, to $137.8 million for the eight months ended
August 31, 1998. Further contributing to the
47
<PAGE>
increase in interest income for the period was a 72.4% decrease in non-accrual
loans, to $280,000, for the eight months ended August 31, 1998, as compared to
$1.0 million for the same period in 1997. Although interest income on loans
increased during the period, the average yield decreased by 18 basis points, to
7.81% for the eight months ended August 31, 1997, as compared to 7.99% for the
same period in 1997.
INTEREST EXPENSE. Interest expense for the eight months ended August 31,
1998 was $8.8 million, compared to $8.1 million for the eight months ended
August 31, 1997, an increase of $742,000, or 9.2%. This increase reflects both
a $12.6 million increase in the average balance of interest-bearing deposits in
the 1998 period compared to the 1997 period, offset by a three basis point
decrease in the average rate paid on such liabilities over the same period due
to a lower interest rate environment. The increase in average interest-bearing
deposits was primarily attributable to an increase in the average balance of
certificates of deposit to $139.9 million for the eight months ended August 31,
1998 from $137.6 million for the eight months ended August 31, 1997. The higher
average balance and higher rate certificates promoted in our supermarket branch
locations during the second half of 1997 resulted in an increase of $119,000 in
interest expense on certificates of deposit. Interest expense decreased
$107,000 on savings accounts to $1.0 million for the eight months ended August
31, 1998 from the same period a year earlier. This decrease was attributable to
a decrease in the average cost to 2.27% from 2.59% and an increase in the
average balance of these accounts to $66.4 million for the eight months ended
August 31, 1998, from $64.2 million during the comparable period in 1997.
Interest expense on borrowed funds increased $445,000, or 29.5%, in the
eight months ended August 31, 1998 to $2.0 million from $1.5 million for the
same period in 1997 due to a $13.0 million increase in the average balance of
such funds to $52.2 million, which was partially offset by a 16 basis point
reduction in the average rate paid on borrowed funds to 5.61% for the eight
months ended August 31, 1998. The increase in borrowed funds in 1998 reflects
management's decision to increase its utilization of borrowings to fund asset
growth in periods when such borrowings are cost effective as a source of funds.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased
by $40,000 , or 33.3%, to $160,000 for the eight months ended August 31, 1998
from $120,000 for the eight months ended August 31, 1997. The increase in the
provision was due primarily to the growth of the Bank's loan portfolio. The
increased provision also reflects management's strategy to continue to emphasize
the origination of commercial real estate and commercial business loans. Such
loans generally bear a greater degree of risk compared to one- to four-family
mortgage loans. At August 31, 1998, the Bank's allowance for loan losses as a
percentage of total non-performing loans and troubled debt restructurings was
239%, compared to 151% at August 31, 1997, due to the increase in the provision
and a decrease in non-accruing loans to $280,000 at August 31, 1998 from $1.0
million at August 31, 1997. At August 31, 1998, the Bank's allowance for loan
losses as a percentage of total loans, net, was 0.77%. Management of the Bank
assesses the adequacy of the allowance for loan losses based on known and
inherent risks in the loan portfolio and upon management's continuing analysis
of the factors underlying the quality of the loan portfolio. While management
believes that, based on information currently available, the Bank's allowance
for loan losses is sufficient to cover losses inherent in its loan portfolio at
this time, no assurances can be given that the Bank's level of allowance for
loan losses will be sufficient to cover future loan losses incurred by the Bank
or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses. Management may in the future increase its
level of allowance for loan losses as a percentage of total loans and non-
performing loans in the event it increases the level of commercial real estate,
multi-family, commercial, construction and development or consumer lending as a
percentage of its total loan portfolio. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
provide additions to the allowance based upon judgments different from
management. See "Risk Factors - Increased Lending Risks Associated with
Consumer, Multi-Family and Commercial Real Estate and Commercial Lending" and
"Business of the Bank - Delinquent Loans, Classified Assets and Real Estate
Owned Assets" and "- Allowance for Loan Losses."
NONINTEREST INCOME. Noninterest income is composed of fee income for bank
services and profits from the
48
<PAGE>
sale of assets. Total noninterest income for the eight months ended August 31,
1998 increased $193,000, or 8.2%, to $2.5 million from $2.4 million for the
eight months ended August 31, 1997. The primary reasons for the increase were
net gains of $290,000 on the securitization of 30 year fixed-rate mortgage loans
and $1.0 million of fee income during the eight months ended August 31, 1998
compared to no net gains on the sale of loans and $914,000 of fee income in the
comparable period for 1997. The increases in these items of noninterest income
were partially offset by a decrease in security gains to $1.2 million for the
eight months ended August 31, 1998 from $1.4 million for the comparable period
in 1997.
NONINTEREST EXPENSE. Noninterest expense increased by $49,000, or 0.7%, to
$6.7 million for the eight months ended August 31, 1998 from $6.6 million for
the eight months ended August 31, 1997. Compensation and employee benefit
expense increased $178,000 to $3.4 million for the eight months ended August 31,
1998 from $3.2 million for the same period in 1997 primarily due to the opening
of a full-service banking office during 1998. Other significant changes in the
Bank's noninterest expenses include a $359,000 net decrease in other noninterest
expenses. During 1997, the Bank established a private charitable foundation to
provide grants to charitable organizations. The foundation was funded by a
donation from the Bank of equity securities with a fair value of $549,000 at the
date of transfer, the total amount of which is included in other noninterest
expenses. The Bank expects that compensation and benefits expense may increase
after the Conversion, primarily as a result of the adoption of various employee
benefit plans and compensation adjustments contemplated in connection with the
Conversion. In this regard, the proposed ESOP, which intends to purchase 8% of
the common stock issued in connection with the Offering, including shares issued
to the Foundation, and the Stock Programs which, if implemented, would purchase
an amount of common stock equal to 14% of the common stock issued in connection
with the Offering, including shares issued to the Foundation, may result in
increased compensation and benefits expense as the amortization of the ESOP loan
and amortization of the Stock Program awards will be reflected as compensation
expense. See "Management of the Bank - Other Benefit Plans - Employee Stock
Ownership Plan." In addition, the Bank expects noninterest expenses to increase
in future periods as a result of its renovation of its headquarters and its main
banking office and the opening of a new banking office in early 1999.
INCOME TAXES. Total income tax expense was $1.2 million for the eight
months ended August 31, 1998, compared to $986,000 for the same period in 1997,
an increase of $237,000, or 24.0%. The effective tax rates were 34.6% and 31.9%
for the respective periods. The transfer of $549,000 of equity securities to a
charitable foundation in 1997 reduced the effective tax rate for that year only.
In addition, a securities corporation was formed in May 1997 to hold its
remaining equity securities. Because this subsidiary's income is taxed at a
lower rate than the Bank at the state level, both 1997 and 1998 state income
taxes were reduced.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL. Net income increased $544,000, or 22.0%, to $3.0 million for the
year ended December 31, 1997 from $2.5 million for the year ended December 31,
1996. This increase was due to the increase in net interest income, which
increased by $446,000, or 4.2%, an increase in noninterest income of $1.4
million, or 75.3%, which primarily resulted from gains on the sale of securities
and a decrease in income tax expense of $41,000. Despite a decreasing interest
rate spread for the Bank during 1997, net interest income increased due to a
higher average balance of net interest-earning assets. An increase in
noninterest expense of $1.4 million partially offset the above positive changes.
INTEREST INCOME. Interest income increased $2.0 million to $23.7 million
for the year ended December 31, 1997 compared to $21.7 million for the year
ended December 31, 1996. This increase reflects a $32.0 million increase in
total average interest-earning assets in 1997 compared to 1996 partially offset
by an 18 basis point decrease in the average yield on such assets over the same
period. Interest income on loans increased by $2.0 million to $19.7 million for
the year ended December 31, 1997 from $17.7 million for the same period in 1996,
due to a $32.3 million increase in the average balance of loans offset by a 28
basis point decrease in the average yield to 7.94%. The increase in the average
balance of loans was primarily due to an increase in the Bank's one- to four-
family mortgage loan and home equity loans and lines of credit portfolios. The
decrease in the average yield on
49
<PAGE>
interest-earning assets was due primarily to a decrease in market interest rates
and an increase in non-accruing loans and troubled debt restructurings, to $1.2
million from $252,000, at December 31, 1997 and 1996, respectively. Interest and
dividend income on the securities portfolio decreased $5,000, or 0.1%, to $3.7
million for the year ended December 31, 1997.
INTEREST EXPENSE. Total interest expense for the year ended December 31,
1997 was $12.5 million, compared to $11.0 million for the year ended December
31, 1996, an increase of $1.5 million, or 13.4%. The increase in interest
expense was due to an increase in the average costs of deposits and borrowings
to 4.35% for 1997, from 4.26% for 1996. Interest on deposits increased by
$746,000, or 7.9%, to $10.2 million for 1997 compared to $9.4 million for 1996.
This increase reflects a $15.8 million increase in the average balance of
interest-bearing deposits in 1997 compared to 1996 primarily due to an increase
in the average balance of higher yielding certificates of deposit, which
increased to $139.1 million for the year ended December 31, 1997 from $127.1
million for 1996. The increase in the average balance of certificates of
deposit was primarily due to certificates of deposit promotions at the Bank's
three banking offices at supermarkets and the opening of a new branch. These
two increases resulted in the interest expense on certificates of deposit
accounts increasing by $695,000, or 9.9%, to $7.7 million for the year ended
December 31, 1997. These increases were partially offset by a decrease in the
average rate paid on all other core deposits to 2.23% for 1997 from 2.26% for
1996.
The Bank incurred interest expense on borrowed funds for 1997 of $2.3
million as compared to $1.6 million for 1996 reflecting management's decision to
utilize borrowings to fund a portion of its asset growth. The average balance
in borrowed funds increased $13.2 million to $40.1 million at December 31, 1997
compared to $26.9 million at December 31, 1996. The increase in the average
balance in borrowed funds was partially offset by a decrease in the average rate
paid on such borrowings to 5.84% for 1997 compared to 5.97% for 1996.
PROVISION FOR LOAN LOSSES. For 1997, the Bank's provision for loan losses
was $180,000, the same amount as was provided in 1996. Management determined
that an increase in the provision was unnecessary in light of its review of the
adequacy of the balance in the allowance for loan losses, the quality of the
loan portfolio, and the national and regional economies. At December 31, 1997,
the allowance for loan losses totalled 168% of total nonperforming loans and
troubled debt restructurings, a decrease from 758% at December 31, 1996. Net
charge-offs for the year ended December 31, 1997 were $139,000 compared to
$107,000 from the year ended December 31, 1996.
NONINTEREST INCOME. Total noninterest income increased $1.4 million, or
75.3%, to $3.3 million for 1997, from $1.9 million for 1996. Net gains on sales
of securities increased $1.1 million, or 152%, to $1.9 million for 1997 compared
to $751,000 for 1996. Service charges and fees increased $283,000, of which
$191,000 was due to an increase in certain NOW accounts which were introduced in
the latter part of 1996 and aggressively promoted during 1997. Additionally,
insufficient funds charges increased $146,000 due to the larger number of
checking accounts serviced by the Bank.
NONINTEREST EXPENSE. Total noninterest expense increased by $1.4 million,
or 16.4%, to $9.7 million for 1997 from $8.4 million for 1996. Compensation and
employee benefits expense increased $421,000 to $4.7 million for 1997 from $4.3
million for 1996, primarily due to the added personnel costs associated with the
opening of a new banking office and the addition of several new positions.
Occupancy and equipment expense increased $172,000 primarily due to an increase
in depreciation, an increase in rent expense due to the new banking office and
an increase in real estate taxes due to the purchase of property adjacent to the
main office building which property was purchased in anticipation of future
growth and the need for greater storage capacity. Other noninterest expense
increased $744,000 to $2.0 million for 1997 from $1.3 million for 1996,
primarily due to the transfer of stock with a market value of $549,000 to fund
the charitable foundation, and an increase in expenses associated with checking
accounts of $152,000 due to increased volume.
50
<PAGE>
INCOME TAXES. Tax expense totalled $1.5 million for the year ended
December 31, 1997 compared to $1.6 million in 1996. The decrease was
attributable to the transfer of equity securities to establish the charitable
foundation which decreased taxes by $126,000 in 1997 and the formation of a
securities corporation in 1997 to hold equity securities, reducing the amount of
state tax paid on the equity income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL. Net income increased $139,000, or 6.0%, to $2.5 million for the
year ended December 31, 1996 from $2.3 million for the year ended December 31,
1995. The increase was primarily attributable to a $666,000 increase in net
interest income, a $304,000 increase in noninterest income, and a $30,000
decrease in the provision for loan losses offset by a $679,000 increase in
noninterest expenses and a $182,000 increase in income tax expense.
INTEREST INCOME. Total income from interest-earning assets increased by
$1.9 million, or 9.4%, to $21.7 million for 1996 compared to $19.9 million for
1995 due primarily to a $22.3 million increase in the average balance of
interest-earning assets combined with a 5 basis point increase in the average
yield on interest-earning assets. Interest and dividend income on the Bank's
securities portfolio increased $123,000 to $3.8 million in 1996 compared to $3.7
million in 1995 due to the purchase of mortgage-backed securities during 1996
and the relatively higher interest rate environment. The yield on mortgage-
backed securities increased to 6.36% in 1996 from 6.17% in 1995, while the yield
on the Bank's debt and equity securities increased to 6.37% from 6.04% for 1996
and 1995, respectively. Interest income on loans increased by $1.9 million for
the year ended December 31, 1996. Such increase was primarily attributable to a
$23.7 million increase in the average balance of loans to $215.6 million for the
year ended December 31, 1996 from $191.9 million for the year ended December 31,
1995 offset by a slight decrease in the average yield on loans, to 8.22% in
1996, from 8.26% in 1995. The increase was due to the effects of higher
interest rates on new loan originations.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1996
was $11.0 million, compared to $9.8 million for the year ended December 31,
1995, an increase of $1.2 million, or 12.2%. The increase is primarily due to a
$10.0 million increase in the average balance of deposits outstanding and an
increase in the average cost of deposits to 4.06% for 1996, from 3.92% for 1995.
Such increases were offset by a $110,000, or 4.4%, decrease in the interest
expense on core deposit accounts from $2.5 million for 1995 to $2.4 million for
1996 primarily due to the Bank's decision to reduce the rate paid on NOW and
money market accounts during 1996. The average rate paid on core deposit
accounts for 1996 was 2.26% compared to 2.34% for 1995. In addition, the
average balance of such accounts decreased from $105.9 million for 1995 to
$104.7 million for 1996. Despite the effect of the lower interest rate
environment and the decreased cost of core deposit accounts, interest expense
increased primarily due to higher rates paid on certificate of deposit accounts.
The average rate paid on certificates of deposit accounts increased from 5.37%
for the year ended December 31, 1995 to 5.54% for the year ended December 31,
1996 due primarily to the Bank's deposit pricing strategy whereby it offered
certificate of deposit promotions with attractive rates in an effort to extend
the maturity of its deposit accounts resulting in an increase in the average
balance of such accounts from $115.9 million for 1995 to $127.1 million for
1996. The increase in interest expense on certificates of deposit accounts of
$822,000 more than offset the decrease in interest expense on savings accounts.
PROVISION FOR LOAN LOSSES. During 1996, the provision for loan losses was
reduced by $30,000, or 14.3%, to $180,000 from the prior year's level of
$210,000. The lower provision was based on management's evaluation of existing
real estate market conditions, improvement in the ratio of delinquent loans to
total loans from 0.53% to 0.28%, and the improved level of non-accruing loans as
well as a stabilization of general economic conditions in the Bank's primary
market area. In particular, non-performing loans and troubled debt
restructurings decreased by $2.5 million to 0.11% of total loans from 1.24% of
total loans at December 31, 1996 and December 31, 1995, respectively. At
December 31, 1996, the Bank's allowance for loan losses to total nonperforming
loans and troubled debt restructurings and to total loans was 758% and 0.81%,
respectively, as compared to 73.14% and 0.91%, respectively, at December 31,
1995.
51
<PAGE>
NONINTEREST INCOME. Noninterest income increased by $304,000, or 19.1%, to
$1.9 million in 1996 from $1.6 million in 1995. The increase was primarily
attributable to the increase in net gains on securities of $173,000 to $751,000
in 1996 from $578,000 in 1995 and a $156,000 increase in service charges and
fees, approximately half of which is due to increased insufficient funds charges
due to a higher number of checking account customers.
NONINTEREST EXPENSE. Total noninterest expense increased $679,000 in 1996
to $8.4 million, as compared to $7.7 million in 1995. The increase primarily
relates to compensation and employee benefits which increased by $300,000, or
7.5%, to $4.3 million in 1996 from $4.0 million in 1995, primarily the result of
normal salary increases and an increase in the Bank's pension plan related
expenses.
INCOME TAXES. The provision for income taxes increased by $182,000, or
13.0%, to $1.6 million in 1996 from $1.4 million in 1995, primarily as a result
of the increase in the Bank's pre-tax income. The effective tax rate was 39.0%
for the year ended December 31, 1996 as compared to 37.5% for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and funding strategies are the responsibility of the ALCO. The
ALCO is responsible for establishing liquidity targets and implementing
strategies to meet desired goals. Liquidity is measured by the Bank's ability
to raise cash within 30 days at a reasonable cost and with a minimum of loss.
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and investment securities and borrowings from the FHLB-Boston.
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit outflows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
The primary investing activities of the Bank are the origination of
residential one-to four-family mortgage loans and consumer loans, primarily home
equity loans and lines of credit, and, to a lesser extent, multi-family and
commercial real estate loans, construction and development loans, commercial
business loans, other types of consumer loans and the investment in mortgage-
backed and equity securities. These activities are funded primarily by
principal and interest payments on loans, maturing of investment securities,
deposit growth and the utilization of FHLB advances. During the eight months
ended August 31, 1998 and the years ended December 31, 1997 and 1996, the Bank's
loan originations totalled $67.1 million, $79.1 million and $87.6 million,
respectively. For the eight months ended August 31, 1998 and the years ended
December 31, 1997 and 1996, the Bank's investments in mortgage-backed and equity
securities totalled $71.5 million, $55.6 million and $61.4 million,
respectively. The Bank experienced a net increase in total deposits of $10.9
million, $13.7 million and $17.3 million for the eight months ended August 31,
1998 and the years ended December 31, 1997 and 1996, respectively. Deposit
flows are affected by the overall level of interest rates, the interest rates
and products offered by the Bank and its local competitors and other factors.
The Bank closely monitors its liquidity position on a daily basis. In the event
the Bank should require funds beyond its ability to generate them internally,
additional sources of funds are available through FHLB advances. See "Business
of the Bank--Sources of Funds--Borrowed Funds." At August 31, 1998, the Bank
had $54.8 million of outstanding FHLB borrowings. Although the Bank's policies
allow for the use of brokered deposits, the Bank does not currently solicit
brokered deposits.
More recently, the Bank completed the securitization (converting whole
loans into mortgage-backed securities) of $19.1 million of 30 year fixed-rate
one- to four-family mortgage loans with Fannie Mae. The loans are serviced as
mortgage-backed securities for Fannie Mae. In addition to resulting in a
decrease in loans receivable and a related increase in mortgage-backed
securities, the securitization provides a liquidity related benefit to the Bank
in that it adds high quality collateral to the Bank's balance sheet which can be
pledged for borrowings in the secondary market and designates such loans as
"available-for-sale" so that the Bank could sell or collateralize such
securities.
Outstanding commitments for all loans totalled $8.4 million at August 31,
1998. Management of the Bank anticipates that it will have sufficient funds
available to meet its current loan commitments. Certificates of deposit
52
<PAGE>
which are scheduled to mature in one year or less from August 31, 1998 totalled
$101.9 million. The Bank relies primarily on competitive rates, customer
service, and long-standing relationships with customers to retain deposits.
From time to time, the Bank will also offer competitive special products to its
customers to increase retention and to attract new deposits. Based upon the
Bank's experience with deposit retention and current retention strategies,
management believes that, although it is not possible to predict future terms
and conditions upon renewal, a significant portion of such deposits will remain
with the Bank.
At August 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $33.3 million, or 9.08% of
adjusted assets, which is above the required level of $14.6 million, or 4.00%,
and risk-based capital of $35.1 million, or 13.01% of adjusted assets, which is
above the required level of $21.6 million, or 8.00%. See "Regulatory Capital
Compliance."
The capital injection resulting from the Conversion will significantly
increase liquidity and capital resources. Over time, the initial level of
liquidity will be reduced as net proceeds are utilized for general corporate
purposes, including the funding of lending and security investment activities .
The additional capital may also assist the Bank in offering new programs and
expand services to its customers. See "Use of Proceeds." The Bank's financial
condition and the results of operations will be enhanced by the capital
injection, resulting in increased net earning assets and net income. However,
due to the large increase in equity resulting from the capital injection, return
on equity will be adversely impacted immediately following the Conversion. See
"Risk Factors-- Potential Low Return on Equity Following the Conversion Which
May Negatively Influence Market Price and Liquidity."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing computer application software programs and operating
systems can accommodate this date value. Many existing application software
products are designed to accommodate only two digits. If not corrected, many
computer applications and systems could fail or create erroneous results by or
at the Year 2000. While the Bank maintains an internal computer system for
approximately 20% of its operating functions, the substantial majority of the
Bank's data processing is out-sourced to a third party vendor. The Bank's
Technology Committee has been identifying potential problems associated with the
Year 2000 issue and has implemented a Year 2000 Action Plan (the "Y2K Plan")
designated to ensure that all software and hardware used in connection with the
Bank's business will manage and manipulate data involved in the transition from
1999 to 2000 without functional or data abnormality and without inaccurate
results related to such data. While 93% of the Bank's internal computer system
is Year 2000 compliant, with full compliance expected by June 30, 1999, the Bank
has prepared a critical issues schedule for the remaining 7% which identifies
timelines and responsibilities for their completion. Specifically,
responsibility to ensure that the Bank's file server, E-mail, safe deposit
billing, voice mail and credit reporting systems are Year 2000 compliant has
been assigned to the appropriate departments at the Bank, such as the Management
Information Systems, Retail Banking and Lending Departments. The Bank's internal
schedule requires that these remaining systems become Year 2000 compliant by
March 31, 1999.
The Bank recognizes that its ability to be Year 2000 compliant is
dependent upon the cooperation of its vendors and, in particular, the outside
third party data processor. The Bank is requiring its computer systems and
software vendors to represent that the products provided are or will be Year
2000 compliant and has planned a program of testing for compliance. The Bank
utilizes these representations from its computer system and software vendors for
the purpose of determining the vendors' Year 2000 readiness. Upon receiving
such representations, the Bank then determines the need for replacement of or
remediations to each particular vendor's system. The Bank recognizes that its
ability to pursue vendors for possible misrepresentations is limited in
comparison to the disruption that may occur in the Bank's business and
operations if a particular vendor is not Year 2000 compliant. Accordingly,
rather than solely relying on representations from its vendors, the Bank also
independently tests all critical vendor applications. The Bank has received
representations from its primary third party data processing vendor confirming
completion of over 95% of that vendor's internally developed programs.
Remaining internal and external programs are presently being converted to be
Year 2000 compliant. The Bank began testing the data center's completed
programs in April of 1998 and is currently engaged in additional testing of
remaining programs. The Bank anticipates that all of its vendors also will have
resolved any Year 2000 problems in their software by
53
<PAGE>
March 31, 1999. All Year 2000 issues for the Bank, including testing, are
expected to be addressed and any problems remedied by June 30, 1999.
The Bank has also identified and contacted commercial borrowers that may be
vulnerable to the Year 2000 date change and has also provided brochures to its
customers to make them aware of the Year 2000 issue. The Bank has determined
that Year 2000 readiness issues have little or no impact on the Bank's one- to
four-family lending relationships. However, the Bank views Year 2000 compliance
as an integral part of the commercial loan credit analysis and underwriting
process. Therefore, and as warranted by the type and nature of a particular
loan request, the Bank reviews and assesses the impact of Year 2000 on an
applicant's business and any factors that may limit the applicant's ability to
repay the debt. Additionally, as assessment is made on the potential effect
that vendors, suppliers and customers, who fail to remediate Year 2000 risks,
might have on the applicant's business. Based upon the results of the review
and analysis, a determination is then made as to whether or not it is necessary
to require the applicant to develop a formal program to address Year 2000 issues
and to report the progress of such a program to the Bank. In situations that
warrant formal programs and monitoring, this requirement becomes a condition of
the terms for granting the loan. Additionally, the Bank has completed its
efforts to contact and survey all of its existing commercial borrowers with
lending relationships having aggregate exposure exceeding $500,000. The
majority of credits represented by these relationships are comprised of multi-
family and commercial real estate loans. All 32 borrowers in this category
responded to a comprehensive questionnaire either in writing or via telephone.
Based upon the responses and analysis of the type of business operations that
each borrower conducts, the Bank concluded that the effect of Year 2000 issues
on these credits do not pose a material risk to the Bank.
The Bank's operations may also be affected by the Year 2000 compliance of
its significant suppliers and other vendors, including those vendors that
provide non-information and technology systems. The Bank has begun the process
of requesting information related to the Year 2000 compliance of its significant
suppliers and other vendors. With respect to significant suppliers, the Bank is
currently awaiting the results of a Year 2000 compliance questionnaire mailed to
those suppliers. All responses are due back to the Bank by January 7, 1999. If
any critical supplier is not Year 2000 compliant, the Bank will replace that
supplier. In addition, the Bank is requiring a contingency plan for all
critical and practical applications as part of the Year 2000 section of its
Business Resumption Policy. Various department managers are assigned the
responsibility for writing contingency plans for business resumption in the
event of a Year 2000 related failure. This project is part of a general upgrade
to the Bank's existing Business Resumption Policy. Such upgrade is scheduled
for completion during the first quarter of 1999. A test plan to validate the
Bank's Business Resumption Policy and related Year 2000 contingency plans is
scheduled to take place in the second quarter of 1999. With respect to
significant other vendors, information has been gathered from such vendors to
assess their individual Year 2000 compliance. Those vendors that are not Year
2000 compliant and who are unlikely to achieve year 2000 compliance are being
replaced. In the event that any of the Bank's significant suppliers or other
vendors do not successfully achieve Year 2000 compliance in a timely manner, the
Bank's business or operations could be adversely affected. The Bank's most
likely worst case scenario relates to a possible systemic liquidity crisis
created by depositor concerns over possible Year 2000 failures. Accordingly, as
part of the Bank's Y2K Plan, a special Liquidity Plan has been developed that
will address the Bank's cash needs during any such emergency.
The Bank has budgeted approximately $235,000 from its 1998 and 1999
operating budgets in connection with the costs associated with achieving Year
2000 compliance and, as of October 31, 1998, had expended approximately $30,000.
Approximately 16% of the $235,000 Year 2000 budget is being used for
remediation. In order to assure the reliability of the Bank's Year 2000 risk
and cost estimates, the Bank follows the workprogram guidelines as provided by
the Federal Financial Institutions Examination Council. These are the same
guidelines used by federal examiners to determine the effectiveness of the Year
2000 efforts by the banks they examine. The
54
<PAGE>
Bank's Compliance Officer regularly monitors the Bank's Year 2000 progress and
the Bank's internal auditor has performed regular audits of the Y2K Plan. These
audits are designed to be specific to the current regulatory guidelines. In
addition, the Bank is subject to regular Y2K examinations conducted by the FDIC.
Material costs, if any, that may arise from the failure to achieve Year 2000
compliance by either the Bank's third party data processing vendor or its
significant suppliers and other vendors is not currently determinable. To the
extent that the Bank's systems are not fully Year 2000 compliant, there can be
no assurance that potential systems interruptions or the cost necessary to
update software would not have a materially adverse effect on the Bank's
business, financial condition, results of operations, cash flows or business
prospects. In the event that the Bank's progress towards becoming Year 2000
compliant is deemed inadequate, regulatory action may be undertaken.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which generally require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result,
interest rates have a greater impact on the Bank's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This statement simplifies
the standards for computing earnings per share previously found in Accounting
Principles Board ("APB") Opinion 14, "Earnings per Share," and makes them
comparable to international ESP standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. This statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure" ("SFAS No. 129") which establishes standards for
disclosing information about an entity's capital structure. This Statement
continues the previous disclosure requirements found in APB Opinions No. 10,
"Omnibus Opinion -1996," and No. 15, "Earnings Per Share," and FASB Statement
No. 47, "Disclosure of Long-Term Obligations" and eliminates the exemption of
nonpublic entities from certain disclosure requirements of Opinion 15.
Additionally, this Statement consolidates capital disclosure requirements for
ease of retrieval and greater visibility to nonpublic entities. This Statement
is effective for financial statements for periods ending after December 15, 1997
and is not expected to have a material impact on the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). This Statement establishes standards for
reporting and displaying comprehensive income and its components within the
financial statements. Comprehensive income is defined in FASB Concepts
Statement 6 as the "change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." The Statement is effective
for fiscal years beginning after December 15, 1997 and was adopted on January 1,
1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for the way
that public business enterprises report information about
55
<PAGE>
operating segments in annual financial statements. This Statement requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This Statement supersedes FASB
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise."
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement is effective for financial statements for periods
beginning after December 15, 1997 and is not expected to have a material impact
on the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"), which
standardizes the disclosure requirements for pensions and other postretirement
benefits. This Statement supersedes FASB Statements No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions." This Statement is effective for fiscal years beginning after December
15, 1997 and is not expected to have a material impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal years beginning
after June 15, 1999. This Statement standardizes the accounting for derivative
instruments, including derivative instruments embedded in other contracts, by
requiring that an entity recognize those items as assets or liabilities in the
balance sheet and measure them at fair value. In specific circumstances, an
entity may elect to designate a derivative as follows: a hedge of the exposure
to changes in the fair market value of a recognized asset or liability, or of an
unrecognized firm commitment that are attributable to a particular risk. A hedge
of the exposure to variability in the cash flows of a recognized asset or
liability, or of a forecasted transaction, that are attributable to a particular
risk. Or, a hedge of the foreign currency exposure of an unrecognized firm
commitment, an available-for-sale security, a forecasted transaction, or a net
investment in a foreign operation. This Statement generally provides for
matching the timing of a gain or loss recognition on the hedging instrument with
the recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or the earnings effect of the
hedged forecasted transaction. The Company will adopt the requirements of this
statement during the year ended December 31, 2000, and it is not expected to
have a material impact on the Company.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held-for-Sale by
a Mortgage Banking Enterprise." This Statement requires that, after the
securitization of mortgage loans held-for-sale, the resulting mortgage-backed
security be classified based upon management's intent to hold or sell these
securities under the provisions of SFAS No. 115. This Statement is effective for
the first fiscal quarter beginning after December 15, 1998. Early adoption of
this Statement is permitted and encouraged and it is not expected to have a
material impact on the Company.
BUSINESS OF THE COMPANY
The Company was organized in October 1998 by the Board of Directors of the
Bank for the purpose of becoming a holding company to own all of the outstanding
capital stock of the Bank. Upon consummation of the Conversion, it is
anticipated that the Bank will become a wholly-owned subsidiary of the Company.
Upon the consummation of the Conversion, the Company will be a savings and loan
holding company regulated by the OTS. See "Regulation and Supervision--Holding
Company Regulation."
The Company is currently not an operating company. Following the
Conversion, in addition to directing, planning and coordinating the business
activities of the Bank, the Company will initially invest net proceeds it
retains in short- to intermediate- term mortgage-backed securities. In
addition, the Company intends to form and capitalize the ESOP Loan Subsidiary
which subsidiary will loan funds to enable the ESOP to purchase 8% of the common
stock issued in connection with the Conversion, including shares issued to the
Foundation; however, a
56
<PAGE>
third-party lender may be utilized to lend funds to the ESOP. See "Use of
Proceeds." In the future, the Company may acquire or organize other operating
subsidiaries, including other financial institutions and financial services
companies. There are presently no other agreements, understandings or plans for
an expansion of the Company's operations. Initially, the Company will neither
own nor lease any property from any third party, but will instead use the
premises, equipment and furniture of the Bank. At the present time, the Company
does not intend to employ any persons other than individual officers of the
Bank, who will not be separately provided cash compensation by the Company. The
Company may utilize the support staff of the Bank from time to time, if needed.
Additional employees will be hired as appropriate to the extent the Company
expands its business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank is a community-oriented Massachusetts-chartered savings bank which
was organized in 1871. The Bank's principal business consists of the acceptance
of retail deposits from the general public in the areas surrounding its 11
banking offices and the investment of those deposits, together with funds
generated from operations and borrowings, primarily in mortgage loans secured by
real property which contain one to four residences ("one- to four-family
residences") and consumer loans, primarily home equity loans and lines of
credit, and to a lesser extent, multi-family and commercial real estate loans,
construction and development loans, commercial business loans and other types of
consumer loans, primarily automobile and personal loans. The Bank originates
loans primarily for investment and, to a significantly lesser extent, for sale
in the secondary market, generally retaining the servicing rights to all loans
sold. The Bank also invests in mortgage-backed securities, equity securities and
other investments permitted by applicable laws and regulations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management Strategy." The Bank's revenues are derived principally
from the generation of interest and fees on loans originated and, to a lesser
extent, interest and dividends on investment securities. The Bank's primary
sources of funds are deposits, principal and interest payments on loans and
investment securities and advances from the FHLB-Boston.
MARKET AREA
The Bank is headquartered in Westfield, Massachusetts. The Bank's primary
deposit gathering area is concentrated in the communities surrounding its main
office located in Westfield and its ten other banking offices located in the
communities of Southwick, Feeding Hills, South Hadley, Springfield, Westfield
and West Springfield, Massachusetts. The Bank's primary lending area is
significantly broader than its deposit gathering area and includes all of
Hampden and Hampshire Counties in western Massachusetts and parts of northern
Connecticut.
The city of Westfield is largely suburban and is located in the Pioneer
Valley near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike)
and 91. Interstate 90 is the major east-west highway that transverses
Massachusetts. Interstate 91 is the major north-south highway that runs directly
through the heart of New England. Westfield is located approximately 90 miles
west of Boston, Massachusetts, 70 miles southeast of Albany, New York and 30
miles north of Hartford, Connecticut. Westfield's estimated 1996 population was
approximately 38,194 and the estimated 1996 population for Hampden and Hampshire
Counties was 441,280 and 150,373, respectively. The economy in the Bank's
primary market area has benefitted from the presence of large employers such as
the University of Massachusetts, Baystate Medical Center, MassMutual Life
Insurance Company, Big Y Foods, Inc., Friendly Ice Cream Corporation, Old Colony
Envelope, Hamilton Standard, Pratt and Whitney and Strathmore Paper Company.
Other employment and economic activity is provided by financial institutions,
eight other colleges and universities of higher education, seven other hospitals
and a variety of wholesale and retail trade businesses.
New England had generally lagged behind the rest of the nation in coming
out of the recession of the late 1980s and early 1990s. During that time, the
market values of many one- to four-family residences declined throughout the
region. Loan demand diminished and competition for such loans increased.
However, over the past
57
<PAGE>
few years, the regional economy in the Bank's primary market area, based on
economic indicators such as unemployment rates, residential and commercial real
estate values and vacancy rates and household income trends, has stabilized and
strengthened to a level which, in some areas, approaches the market values
existing before the downturn in the late 1980s. As of August 1998, the
unemployment rate for the Bank's primary market area and Massachusetts showed a
significant decrease from prior years and was 3.3% and 2.8%, respectively, as
compared to the national level of 4.5%. From 1990 to 1997, median household
income in the Bank's primary market area also increased by 11.3% to $35,447
compared to a 13.9% increase to $42,084 in Massachusetts and a 29.6% increase to
$36,961 nationally. The median household income is projected to increase such
that by the year 2002, median household income will be $38,865, $45,253 and
$42,042 in the Bank's primary market area, Massachusetts and the United States,
respectively.
COMPETITION
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a local, state-wide or regional presence and, in some
cases, a national presence. Many of these financial institutions are
significantly larger and have greater financial resources than the Bank. The
Bank's competition for loans comes principally from commercial banks, other
savings banks, co-operative banks, mortgage brokers, mortgage banking companies
and insurance companies. Its most direct competition for deposits has
historically come from savings, co-operative and commercial banks. In addition,
the Bank faces significant competition for deposits from non-bank institutions
such as brokerage firms and insurance companies in such instruments as short-
term money market funds, corporate and government securities funds, mutual funds
and annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. The Bank
has also experienced significant competition from credit unions which have a
competitive advantage as they do not pay state or federal income taxes. Such
competitive advantage has placed increased pressure on the Bank with respect to
its loan and deposit pricing.
In recent years, the Bank's strategy has been to maintain profitability
while managing its capital position and limiting its credit and interest rate
risk exposure. Beginning in 1994, the Bank began opening full-service banking
offices in supermarket/grocery stores operated by the regionally based Big Y
Foods, Inc. Since 1994, the Bank has established three such banking offices and
is planning to open a fourth banking office at a Big Y supermarket located in
Amherst, Massachusetts. The Bank expects that such banking office will become
operational during the first quarter of 1999. The Bank will continue to seek
attractive opportunities to expand its branching activities through supermarket
facilities as such opportunities arise.
The Bank intends to continue its current operating strategy in an effort to
enhance its long-term profitability while maintaining a reasonable level of
interest rate risk. The Bank also intends to enhance its current operating
strategy by expanding the products and services that it offers, as necessary, in
order to improve its market share in its primary market area. In this regard,
the Bank has begun to offer new consumer and commercial deposit products and
various other customer improvement services and intends to expand its trust
services and invest in technological enhancements, such as PC banking, in order
to better serve its customers in the future. In addition, and consistent with
its plan to increase its loan portfolio, the Bank intends to hire additional
loan originators, a commercial loan officer and an additional credit analyst to
assist the loan department.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The types of loans that the Bank may originate
are subject to federal and state laws and regulations. Interest rates charged by
the Bank on loans are affected principally by the Bank's current asset/liability
strategy, the demand for such loans, the supply of money available for lending
purposes and the rates offered by its competitors. These factors are, in turn,
affected by general and economic conditions, monetary policies of the federal
government, including the Federal Reserve Board ("FRB"), legislative tax
policies and governmental budgetary matters.
58
<PAGE>
At August 31, 1998, the Bank's total loan portfolio was $268.7 million, of
which $137.8 million were one-to four-family residential mortgage loans, or
51.3% of total loans. At such date, the remainder of the loan portfolio
consisted of $22.8 million of multi-family loans, or 8.5% of total loans; $21.1
million of commercial real estate loans, or 7.9% of total loans; $4.2 million of
construction and development loans, or 1.5% of total loans; and $78.3 million of
consumer loans, or 29.1% of total loans consisting primarily of $64.1 million of
home equity loans and lines of credit, or 81.9% of consumer loans. Primarily all
loans in the Bank's portfolio, with the exception of home equity loans and lines
of credit, are located in the Bank's primary market area.
59
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the respective portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
AT AUGUST 31, 1998 1997 1996 1995
-------------------- -------------------- --------------------- ----------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family....... $137,840 51.30% $139,811 52.84% $138,289 58.39% $127,811 62.73%
Multi-family.............. 22,775 8.47 19,047 7.20 17,826 7.53 11,843 5.81
Commercial................ 21,088 7.85 21,757 8.22 19,697 8.32 3,032 1.49
Construction and
development.............. 4,150 1.54 2,868 1.08 1,124 0.47 18,580 9.12
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate
loans................. 185,853 69.16 183,483 69.34 176,936 74.71 161,266 79.15
-------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Home equity loans and
lines of credit.......... 64,144 23.87 62,227 23.52 43,662 18.43 29,305 14.39
Automobile................ 10,019 3.73 10,287 3.89 7,969 3.36 5,507 2.70
Other..................... 4,116 1.53 4,291 1.62 4,397 1.86 4,286 2.10
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans...... 78,279 29.13 76,805 29.03 56,028 23.65 39,098 19.19
-------- ------ -------- ------ -------- ------ -------- ------
Commercial loans............ 4,588 1.71 4,319 1.63 3,879 1.64 3,382 1.66
-------- ------ -------- ------ -------- ------ -------- ------
Total loans............... 268,720 100.00% 264,607 100.00% 236,843 100.00% 203,746 100.00%
====== ====== ====== ======
Less:
Unadvanced loan funds(1).. (1,987) (1,866) (1,395) (2,089)
Net deferred loan
origination costs (fees). 892 934 598 370
Allowance for loan
losses (2,061) (1,952) (1,911) (1,838)
-------- -------- -------- --------
Loans, net........... $265,564 $261,723 $234,135 $200,189
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------
1994 1993
------------------------- ------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family........ $140,614 74.11% $134,378 76.67%
Multi-family............... 8,823 4.65 2,780 1.59
Commercial................. 16,500 8.70 15,214 8.68
Construction and
development............... 1,037 0.55 1,511 0.86
-------- ------ -------- ------
Total real estate
loans.................. 166,974 88.01 153,883 87.80
-------- ------ -------- ------
Consumer loans:
Home equity loans and
lines of credit........... 13,404 7.06 12,799 7.30
Automobile................ 2,701 1.42 2,118 1.21
Other..................... 3,868 2.04 4,381 2.50
-------- ------ -------- ------
Total consumer loans....... 19,973 10.52 19,298 11.01
-------- ------ -------- ------
Commercial loans............. 2,795 1.47 2,090 1.19
-------- ------ -------- ------
Total loans................ 189,742 100.00% 175,271 100.00%
====== ======
Less:
Unadvanced loan funds(1)... (1,212) (1,456)
Net deferred loan
origination costs (fees).. (92) (15)
Allowance for loan
losses (1,657) (1,667)
-------- --------
Loans, net............ $186,781 $ 172,133
======== ========
</TABLE>
____________________________
(1) Includes committed but unadvanced loan amounts.
60
<PAGE>
ORIGINATION, SALE AND SERVICING OF LOANS. The Bank's mortgage lending
activities are conducted primarily by its salaried loan representatives
operating at its ten full service banking offices. All loans originated by the
Bank are underwritten by the Bank pursuant to the Bank's policies and
procedures. The Bank originates both adjustable-rate and fixed-rate mortgage
loans. The Bank's ability to originate fixed- or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates. Consistent with its
current business strategy, the Bank plans to hire at least two commissioned loan
officers in the future with the primary responsibility of originating one- to
four-family mortgage loans for the Bank.
The Bank is primarily a portfolio lender, originating substantially all of
its loans for investment. Recently, however, the Bank completed the
securitization of $19.1 million of 30-year fixed-rate one- to four-family
mortgage loans with Fannie Mae. Such loans are serviced as mortgage-backed
securities for Fannie Mae. The Bank intends to continue securitizing a portion
of its loans, mostly 30-year fixed-rate one- to four-family mortgage loans, in
the future. See "- Investment Activities." Any loans originated for sale by
the Bank conform to the underwriting standards specified by Fannie Mae and
Freddie Mac. The Bank generally retains the servicing rights on any mortgage
loans which it sells or securitizes.
At August 31,1998, the Bank was servicing $45.5 million of loans for
others, consisting of conforming fixed-rate mortgage loans sold by the Bank.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults,
making insurance and tax payments on behalf of the borrowers and generally
administering the loans. Substantially all of the loans currently being
serviced for others are loans which have been sold or securitized by the Bank.
The gross servicing fee income from loans sold is generally 25 basis points of
the total balance of the loan being serviced.
During the eight months ended August 31, 1998 and the years ended December
31, 1997 and December 31, 1996, the Bank originated $31.5 million, $9.9 million
and $15.6 million of fixed-rate one- to four-family loans, respectively, of
which $24.1 million, $5.1 million and $9.8 million, respectively, were retained
by the Bank. During these same periods, the Bank also originated $4.1 million,
$8.6 million and $12.4 million of adjustable-rate one- to four-family loans,
respectively, all of which were retained by the Bank. The Bank recognizes, at
the time of sale, the cash gain or loss on the sale of loans based on the
difference between the net cash proceeds received and the carrying value of the
loans sold. The Bank has, from time-to-time, participated in loans, primarily
multi-family and commercial real estate loans and commercial business loans and,
at August 31, 1998, had $3.8 million in loan participation interests.
61
<PAGE>
The following table sets forth the Bank's loan originations, sales and
principal repayments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE EIGHT MONTHS
ENDED AUGUST 31, FOR THE YEAR ENDED DECEMBER 31,
---------------------- ---------------------------------
1998 1997 1997 1996 1995
--------- --------- -------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans, net, beginning of period................... $261,723 $234,135 $234,135 $200,189 $186,781
-------- -------- -------- -------- --------
Loans originated:
Real estate..................................... 41,534 13,007 25,233 39,467 26,781
Consumer:
Home equity loans and lines of credit......... 16,799 31,469 40,976 35,352 37,351
Automobile.................................... 3,427 4,690 6,829 5,651 4,837
Other......................................... 2,196 1,945 2,980 3,325 3,487
Total consumer.............................. 22,422 38,104 50,785 44,328 45,675
-------- -------- -------- -------- --------
Commercial...................................... 3,097 1,777 3,131 3,853 2,495
-------- -------- -------- -------- --------
Total loans originated...................... 67,053 52,888 79,149 87,648 74,951
-------- -------- -------- -------- --------
Principal repayments, unadvanced funds and
other, net (44,071) (34,710) (51,141) (52,256) (48,300)
Sale/securitization of mortgage loans, principal
balance......................................... (19,068) -- -- (815) (12,942)
Net loan charge-offs.............................. (51) (84) (139) (107) (29)
Transfers to REO.................................. (22) ( 61) (281) (524) (272)
-------- -------- -------- -------- --------
Total deductions................................ (63,212) (34,855) (51,561) (53,702) (61,543)
-------- -------- -------- -------- --------
Net loan activity................................. 3,841 18,033 27,588 33,946 13,408
-------- -------- -------- -------- --------
Loans, net, end of period....................... $265,564 $252,168 $261,723 $234,135 $200,189
======== ======== ======== ======== ========
</TABLE>
62
<PAGE>
LOAN MATURITY. The following table shows the remaining contractual
maturity of the Bank's loan portfolio at August 31, 1998. The table does not
include prepayments or scheduled principal amortization. Prepayments and
scheduled principal amortization on mortgage loans totalled $53.8 million for
the eight months ended August 31, 1998, and $52.7 million, $51.0 million, and
$38.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
AT AUGUST 31, 1998
--------------------------------------------------------------------------------------------------------
HOME EQUITY
ONE-TO CONSTRUCTION LOANS AND
FOUR- MULTI- COMMERCIAL AND LINES OF OTHER
FAMILY FAMILY REAL ESTATE DEVELOPMENT CREDIT AUTOMOBILE CONSUMER COMMERCIAL
------------ ----------- ------------ -------------- ----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less.......... $ 1,172 $ 84 $ 1,286 $ 879 $ 57 $ 651 $ 744 $ 669
After one year:
More than one
year to three years... 615 -- 212 51 31 5,743 1,894 1,086
More than three years
to five years......... 2,235 -- 455 3,220 2,791 3,624 220 792
More than five years
to 10 years............ 30,017 3,554 1,655 -- 4,249 -- 500 1,734
More than 10 years
to 15 years............ 35,218 3,625 6,414 -- 2,378 -- 77 45
More than 15 years....... 68,583 15,512 11,066 -- 54,638 1 681 262
-------- ------- ------- ------ ------- ------- ------ ------
Total amount due....... $137,840 $22,775 $21,088 $4,150 $64,144 $10,019 $4,116 $4,588
======== ======= ======= ====== ======= ======= ====== ======
Less:
Unadvanced loan funds......................................................................................................
Net deferred loan origination costs........................................................................................
Allowance for loan losses..................................................................................................
Loans, net.....................................................................................................................
<CAPTION>
AT AUGUST 31, 1998
-------------------
TOTAL
LOANS
RECEIVABLE
--------------
<S> <C>
Amounts due:
One year or less........................ $ 5,542
After one year:
More than one
year to three years................. 9,632
More than three years
to five years....................... 13,337
More than five years
to 10 years.......................... 41,709
More than 10 years
to 15 years.......................... 47,757
More than 15 years..................... 150,743
--------
Total amount due..................... 268,720
Less:
Unadvanced loan funds................ (1,987)
Net deferred loan origination costs.. 892
Allowance for loan losses............ (2,061)
--------
Loans, net............................... $265,564
========
</TABLE>
63
<PAGE>
The following table sets forth at August 31, 1998, the dollar amount of
gross loans receivable contractually due after August 31, 1999, and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER AUGUST 31, 1999
------------------------------------
FIXED ADJUSTABLE TOTAL
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family...................... $ 81,885 $ 54,783 $136,668
Multi-family and commercial real estate.. 2,499 39,994 42,493
Construction and development............. -- 3,271 3,271
-------- -------- --------
Total real estate loans............ 84,384 98,048 182,432
-------- -------- --------
Consumer loans:
Home equity loans and lines of credit.. 6,696 57,391 64,087
Automobile loans....................... 9,368 -- 9,368
Other 3,136 236 3,372
Commercial loans........................... 1,811 2,108 3,919
-------- -------- --------
Total loans.......................... $105,395 $157,783 $263,178
======== ======== ========
</TABLE>
ONE- TO FOUR-FAMILY LENDING. The Bank currently offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years secured
by one- to four-family residences substantially all of which are located in the
Bank's primary market area. One- to four-family mortgage loan originations are
generally obtained from the Bank's in-house loan representatives from existing
or past customers, through advertising, and through referrals from local
builders, real estate brokers and attorneys. At August 31, 1998, the Bank's
one- to four-family mortgage loans totalled $137.8 million, or 51.3% of total
loans. Of the one- to four-family mortgage loans outstanding at that date,
59.8% were fixed-rate mortgage loans and 40.2% were ARM loans.
The Bank currently offers fixed-rate mortgage loans with terms of up to 30
years. Approximately 50.2% of the Bank's fixed-rate one- to four-family loan
portfolio consist of loans with maturities of 15 years or less. The Bank also
currently offers a number of ARM loans with terms of up to 30 years and interest
rates which adjust every one or three years from the outset of the loan or which
adjust annually after a five year initial fixed period. The interest rates for
the Bank's ARM loans are indexed to either the one, three or five year Constant
Maturity Treasury ("CMT") Index. The Bank originates ARM loans with initially
discounted rates. The Bank's ARM loans generally provide for periodic (not more
than 2%) and overall (not more than 6%) caps on the increase or decrease in the
interest rate at any adjustment date and over the life of the loan. The Bank
retains for its portfolio substantially all loans originated, selling or
securitizing, from time to time, 30-year fixed-rate mortgage loans. Loans that
are sold are generally sold to Freddie Mac and Fannie Mae. The Bank generally
retains the servicing on all loans sold.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower also rise, thereby
increasing the potential for default. The Bank attempts to minimize such risk
by assuming a 200 basis point increase in the loan's interest rate when
evaluating a borrower's creditworthiness based on the assumed higher payment.
Periodic and lifetime caps on interest rate increases also help to reduce the
risks associated with adjustable-rate loans but also limit the interest rate
sensitivity of such loans.
All one- to four-family mortgage loans are underwritten according to the
Bank's policies and secondary market underwriting guidelines. Generally, the
Bank originates one- to four-family residential mortgage loans in amounts up to
80% of the lower of the appraised value or the selling price of the property
securing the loan and up to 95% of the lesser of the appraised value or selling
price if private mortgage insurance ("PMI") is obtained. Mortgage loans
originated by the Bank generally include due-on-sale clauses which provide the
Bank with the contractual right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the
64
<PAGE>
property without the Bank's consent. Due-on-sale clauses are an important means
of adjusting the yields on the Bank's fixed-rate mortgage loan portfolio and the
Bank has generally exercised its rights under these clauses. The Bank requires
fire, casualty, title and flood insurance, if applicable, on all properties
securing real estate loans made by the Bank.
In an effort to provide financing for first-time home buyers, the Bank
offers its own first-time home buyer loan program. This program offers one- and
two-family residential mortgage loans to qualified low-to-moderate income
individuals. These loans are offered with initial five year fixed-rates of
interest which adjust annually thereafter with terms of up to 30 years. The
program includes initially discounted rates and periodic (not more than 1%) and
overall (not more than 4%) caps on the increase or decrease in the interest rate
at any adjustment date and over the life of the loan. Pursuant to this program,
borrowers receive reduced loan origination fees and closing costs. Such loans
must be secured by an owner-occupied residence. These loans are originated
using similar underwriting guidelines as are the Bank's other one- to four-
family mortgage loans. Such loans are originated in amounts of up to 95% of the
lower of the property's appraised value or the sale price. Private mortgage
insurance is required for loans with loan-to-value ("LTV") ratios of over 80%.
HOME EQUITY LOANS AND LINES OF CREDIT. The Bank offers home equity
revolving lines of credit, substantially all of which are secured by second
mortgages on owner-occupied one- to four-family residences located in the Bank's
primary market area and, to a lesser extent, by properties in northern
Connecticut and in Franklin County, Massachusetts. The lines of credit
maintained outside of the Bank's primary market were generated through the
services of a third party telemarketing firm, subject to approval by the Bank.
Such third party currently does very little solicitation on behalf of the Bank.
At August 31, 1998, home equity loans and lines of credit totalled $64.1
million, or 24.0% of the Bank's total loans and 81.9% of consumer loans. Home
equity lines of credit have adjustable-rates of interest which adjust on a
monthly basis. The adjustable-rate of interest charged on such loans is indexed
to the prime rate as reported in The Wall Street Journal. Home equity lines of
credit generally have an 18% lifetime limit on interest rates. Generally, the
maximum LTV ratio on home equity lines of credit is 75% of the assessed value of
the property less the outstanding balance of the first mortgage up to a maximum
of $100,000. The underwriting standards employed by the Bank for home equity
lines of credit include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment and, additionally, from any
verifiable secondary income.
The home equity line of credit may be drawn down by the borrower for a
period of ten years from the date of the loan agreement (the "draw period").
During the draw period, the borrower has the option of paying, on a monthly
basis, either principal and interest or only the interest. Following the draw
period, the borrower has fifteen years in which to payback the line of credit
(the "repayment period"). A borrower is precluded from accessing the home
equity line of credit during the repayment period unless terms are renegotiated
with the Bank. At any time during the draw period, all, or a portion of the
outstanding balance of a home equity line of credit, may be converted into a
fixed-rate, home equity loan with terms of five, ten or 15 years. See "Risk
Factors -- Increased Lending Risk Associated with Consumer, Multi-Family and
Commercial Real Estate and Commercial Business Lending."
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small office buildings, industrial facilities or retail facilities primarily
located in the Bank's primary market area. The Bank's multi-family and
commercial real estate underwriting policies provide that such real estate loans
may be made in amounts of up to 80% of the appraised value of the property, 75%
if the property is being refinanced, subject to the Bank's current loans-to-one-
borrower limit, which at August 31, 1998 was $4.0 million. The Bank's multi-
family and commercial real estate loans may be made with terms of up to 25 years
and are offered with interest rates that adjust periodically and are generally
indexed to the prime rate as reported in The Wall Street Journal. In reaching
its decision on whether to make a multi-family or commercial real estate loan,
the Bank considers the net operating income of the property, the borrower's
expertise, credit history and profitability
65
<PAGE>
and the value of the underlying property. In addition, with respect to
commercial real estate rental properties, the Bank will also consider the term
of the lease and the quality of the tenants. The Bank has generally required
that the properties securing these real estate loans have debt service coverage
ratios (the ratio of earnings before debt service to debt service) of at least
1.15x. Environmental impact surveys are generally required for commercial real
estate loans. Generally, all multi-family and commercial real estate loans made
to corporations, partnerships and other business entities require personal
guarantees by the principals. The Bank's multi-family real estate loan
portfolio at August 31, 1998 was $22.8 million, or 8.5% of total loans, and the
Bank's commercial real estate loan portfolio at such date was $21.1 million, or
7.9% of total loans. The largest multi-family or commercial real estate loan in
the Bank's portfolio at August 31, 1998 was a $3.1 million multi-family real
estate loan secured by a 126-unit apartment building located in West
Springfield, Massachusetts.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to adverse conditions in the real estate market or the
economy. The Bank seeks to minimize these risks through its underwriting
standards. See "Risk Factors--Increased Lending Risks Associated with Consumer,
Multi-Family and Commercial Real Estate and Commercial Business Lending."
CONSTRUCTION AND DEVELOPMENT LENDING. The Bank originates construction and
development loans primarily to finance the construction of one- to four-family,
owner-occupied residential real estate and commercial real estate properties
located in the Bank's primary market area. Commercial real estate construction
loans typically convert into permanent financing. Construction and development
loans are generally offered to customers and experienced builders with whom the
Bank has an established relationship. Construction and development loans are
typically offered with terms of up to 12 months; however, terms may be extended
up to four years under certain circumstances. The maximum loan-to-value limit
applicable to such loans is 80% for contract sales and 75% for speculative
properties. Construction loan proceeds are disbursed periodically in increments
as construction progresses and as inspections by the Bank's lending officers or,
on larger projects, independent architects or engineering firms, warrant. At
August 31, 1998, the Bank's largest construction and development loan was a
performing revolving line of credit for $1.4 million secured by a condominium
development project in Easthampton, Massachusetts. At August 31, 1998,
construction and development loans totalled $4.2 million, or 1.5%, of the Bank's
total loans.
The Bank originates land loans to local contractors and developers for the
purpose of making improvements thereon, or for the purpose of holding or
developing the land for sale. Such loans are secured by a lien on the property,
are limited to 60% of the lower of the acquisition price or the appraised value
of the land and have a term of up to three years with a floating interest rate
based on the prime rate as reported in The Wall Street Journal. The Bank's land
loans are generally secured by property in its primary market area. The Bank
requires title insurance and, if applicable, a hazardous waste survey reporting
that the land is free of hazardous or toxic waste.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction compared to the estimated cost (including interest) of
construction and other assumptions, including the estimated time to sell
residential properties. If the estimate of value proves to be inaccurate, the
Bank may be confronted with a project, when completed, having a value which is
insufficient to assure full repayment.
AUTOMOBILE AND OTHER CONSUMER LENDING. The Bank offers automobile loans
with term of up to 60 months and loan-to-value ratios of 80% for new cars. For
used cars, the maximum loan-to-value ratio is 75% of the lesser of the retail
value shown in the NADA Used Car Guide or the purchase price, and the terms for
used automobile loans range between 48 months (for automobiles up to four years
old) to 36 months (for older vehicles).
66
<PAGE>
The interest rates offered are the same for new and used automobile loans. At
August 31, 1998, automobile loans totalled $10.0 million, or 3.7% of the Bank's
total loans and 12.8% of consumer loans. Other Consumer loans at August 31,
1998 amounted to $4.1 million, or 1.5% of the Bank's total loans and 5.3% of
consumer loans. These loans include education, second mortgages, collateral,
motorcycle, boat, mobile home and unsecured personal loans. Motorcycle, boat
and mobile home loans are generally made in amounts of up to 80% of the fair
market value of the property securing the loan. Collateral loans are generally
secured by a passbook account, a certificate of deposit, securities or life
insurance. Unsecured personal loans generally have a maximum borrowing
limitation of $5,000 and a maximum term of three years.
Loans secured by rapidly depreciable assets such as automobiles,
motorcycles, boats or that are unsecured entail greater risks than one- to four-
family mortgage loans. In such cases, repossessed collateral for a defaulted
loan may not provide an adequate source of repayment of the outstanding loan
balance, since there is a greater likelihood of damage, loss or depreciation of
the underlying collateral. Further, collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. See "Risk Factors --
Increased Lending Risk Associated with Consumer, Multi-Family and Commercial
Real Estate and Commercial Business Lending."
COMMERCIAL LENDING. At August 31, 1998, the Bank had $4.6 million in
commercial loans which amounted to 1.7% of total loans. In addition, at such
date, the Bank had $1.0 million of unadvanced commercial lines of credit. The
Bank makes commercial business loans primarily in its market area to a variety
of professionals, sole proprietorships and small businesses. The Bank offers a
variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit, letters of credit, and Small
Business Administration guaranteed loans. The maximum amount of a commercial
business loan is limited by the Bank's loans-to-one-borrower limit which at
August 31, 1998, was $4.0 million. Term loans are generally offered with
initial fixed rates of interest for the first five years and with terms of up to
7 years. Business lines of credit have adjustable rates of interest and are
payable on demand, subject to annual review and renewal. Business loans with
variable rates of interest adjust on a monthly basis and are indexed to the
prime rate as published in The Wall Street Journal.
In making commercial business loans, the Bank considers the financial
statements of the borrower, the Bank's lending history with the borrower, the
debt service capabilities of the borrower, the projected cash flows of the
business and the value of the collateral. Commercial business loans are
generally secured by a variety of collateral, primarily equipment, assets and
accounts receivable, and are supported by personal guarantees. Depending on the
collateral used to secure the loans, commercial loans are made in amounts of up
to 80% of the adjusted value of the collateral securing the loan. The Bank
generally does not make unsecured commercial loans. In addition, the Bank
participates in loans, often community-based, with area lenders with whom the
Bank has a relationship. When determining whether to participate in such loans,
the Bank will underwrite its participation interest according to its own
underwriting standards. At August 31, 1998, $48,000, or 1.1% of the commercial
loan portfolio, were participation loans of this nature. In an effort to
increase its emphasis on commercial loans, the Bank intends to hire an
experienced commercial loan officer with the primary responsibility of
increasing commercial business and real estate loan volume.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans are of higher risk and typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment
of commercial loans may be substantially dependent on the success of the
business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value. See "Risk
Factors -- Increased Lending Risk Associated with Consumer, Multi-Family and
Commercial Real Estate and Commercial Business Lending." At August 31, 1998,
the Bank's largest commercial loan was a $200,000 revolving line of credit to a
retail business located in South Hadley, Massachusetts.
67
<PAGE>
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Investment
establishes, subject to ratification by the Board of Trustees, the lending
policies and loan approval limits of the Bank. In connection with one- to four-
family mortgage loans, the Board of Investment has authorized the following
persons to approve the loans up to the amounts indicated: one assistant vice
president and the vice president of commercial lending may approve loans up to
$150,000; the other assistant vice president and all loan origination and
underwriting officers may approve loans up to $227,150; and the Chief Executive
Officer and the Senior Vice President, Lending may approve loans up to $250,000.
With respect to consumer loans, the Board of Investment has authorized the
following persons to approve loans up to the amounts indicated: assistant branch
managers and all but one branch supervisor may approve secured and unsecured
loans of up to $15,000 and $5,000, respectively; the remaining branch
supervisor, branch managers, loan originators and underwriting officers and the
vice president, operations may approve secured and unsecured loans of up to
$25,000 and $10,000, respectively; and the Chief Executive Officer and the
Senior Vice President, Lending may approve loans up to $75,000 and $50,000,
respectively.
The Board of Investment has authorized the following individuals to approve
home equity loans and lines of credit up to the amounts indicated: one loan
origination officer may approve such loans up to $25,000; lending vice
presidents, assistant vice presidents and loan origination and underwriting
officers may approve loans up to $100,000; and the Chief Executive Officer and
the Senior Vice President, Lending may approve loans up to $125,000.
All loans in excess of these amounts must be approved by either the Senior
Vice President, Lending, the Officers' Loan Committee and/or the Board of
Investment. The Officers' Loan Committee, which currently consists of three
lending officers, is selected by the Board of Investment and ratified by the
Board of Trustees. Specifically, all loans, commitments or other extensions of
credit, which either alone or in the aggregate total up to $350,000 may be
approved by the Senior Vice President, Lending. Those loan commitments or other
extensions of credit, either alone or in the aggregate, which are greater than
$350,000 but are less than $750,000 must be approved by the Officers' Loan
Committee and those loans commitments or other extensions of credit, either
alone or in the aggregate, which exceed $750,000 must be approved by the Board
of Investment. Additionally, those loans less than $750,000 must be ratified by
the Board of Investment. All loans, commitments and other extensions of credit
which increase the total aggregate unsecured liability of a borrower to $75,000
or more must be approved by the Officers' Loan Committee.
With respect to commercial loans, the Board of Investment has authorized
the following persons to approve loans up to the amounts indicated: the
Assistant Vice President, Loan Servicing and Collection may approve commercial
real estate loans, commercial secured and unsecured loans in amounts of up to
$125,000, $50,000 and $10,000, respectively; the vice president/commercial
lending officer may approve commercial real estate loans, commercial secured and
unsecured loans in amounts of up to $250,000, $200,000 and $100,000,
respectively; and the Chief Executive Officer and the Senior Vice President,
Lending may approve commercial real estate loans, commercial secured and
unsecured loans in amounts of up to $350,000, $250,000 and $125,000,
respectively.
All loans in excess of the these amounts must be approved by either the
Officer's Loan Committee and/or the Board of Investment. The Officers' Loan
Committee, which currently consists of three lending officers, is selected by
the Board of Investment and ratified by the Board of Trustees. Specifically,
all loans, commitments or other extensions of credit, either alone or in the
aggregate which exceed $350,000 or $750,000 must be approved by the Officers'
Loan Committee and the Board of Investment, respectively. Additionally, all
loans, commitments and other extensions of credit which increase the total
aggregate unsecured liability of a borrower to $125,000 or more must be approved
by the Officers' Loan Committee.
68
<PAGE>
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
DELINQUENT LOANS. Reports listing all delinquent accounts are generated
and reviewed by management and the Board of Investment on a monthly basis and
the Board of Trustees performs a bi-monthly review of all loans or lending
relationships delinquent 90 days or more. The procedures taken by the Bank with
respect to delinquencies vary depending on the nature of the loan, period and
cause of delinquency and whether the borrower is habitually delinquent. When a
borrower fails to make a required payment on a loan, the Bank takes a number of
steps to have the borrower cure the delinquency and restore the loan to current
status. The Bank generally sends the borrower a written notice of non-payment
after the loan is 15 days past due. The Bank's guidelines provide that
telephone and written correspondence will be attempted to ascertain the reasons
for delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Bank will offer to work out a
repayment schedule with the borrower to avoid foreclosure. In the event payment
is not then received or the loan not otherwise satisfied, additional letters and
telephone calls generally are made. If the loan is still not brought current or
satisfied and it becomes necessary for the Bank to take legal action, which
typically occurs after a loan is 90 days or more delinquent, the Bank will
demand the loan and then commence foreclosure proceedings against any real
property that secured the loan or accept a deed in lieu of foreclosure. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the property securing the loan
generally is sold at foreclosure and, if purchased by the Bank, becomes real
estate owned.
CLASSIFIED ASSETS. Federal regulations and the Bank's internal policies
require that the Bank utilize an internal asset classification system as a means
of reporting problem and potential problem assets. The Bank currently
classifies problem and potential problem assets as "Substandard," "Doubtful" or
"Loss" assets. An asset is considered Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. Assets classified as Doubtful have all of the
weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets, without
the establishment of a specific loss reserve, is not warranted. Assets which do
not currently expose the Bank to a sufficient degree of risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for possible
loan losses in an amount deemed prudent by management unless the loss of
principal appears to be remote. When the Bank classifies one or more assets,
or portions thereof, as Loss, it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified or
to charge off the loan in full.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the FDIC and
Commissioner, which can order the establishment of additional general or
specific loss allowances. The FDIC, in conjunction with the other federal
banking agencies, recently adopted an interagency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management has
established acceptable allowance evaluation processes that meet the objectives
set forth in the policy statement. While the Bank believes that it has
established an adequate allowance for possible loan losses, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to materially increase at that time its allowance for possible
loan losses, thereby negatively affecting the Bank's financial condition and
earnings at that time. Although management
69
<PAGE>
believes that adequate specific and general loan loss allowances have been
established, future provisions are dependent upon future events such as loan
growth and portfolio diversification and, as such, further additions to the
level of specific and general loan loss allowances may become necessary.
Management of the Bank and the Board of Investment review and classify the
assets of the Bank on a monthly basis and the Board of Trustees reviews the
results of the reports on a bi-monthly basis. The Bank classifies its assets in
accordance with the management guidelines described above. At August 31, 1998,
the Bank had $3.0 million, or 0.82%, of assets designated as Substandard,
consisting of 18 one- to four-family loans, three commercial real estate loans,
six multi-family loans, one construction and development loan, 14 consumer loans
and three commercial business loans. At such date, the Bank had no loans
classified as Doubtful or Loss. Also, at August 31, 1998, the Bank had
$882,000, or 0.24% of assets designated as Special Mention, consisting of seven
one- to four-family loans, three commercial real estate loans, two home equity
lines of credit and four commercial business loans. At August 31, 1998, all of
these classified assets represented 1.5% of total loans.
At August 31, 1998, the Bank had two loans, each with balances of $500,000
or more, which had been adversely classified or identified as a problem credit.
The first, which is classified as substandard, was restructured in 1994 and is
secured by a blanket first mortgage on ten multi-family properties located in
Westfield, Massachusetts. Currently, the borrower provides the Bank with
monthly financial statements and the Bank actively monitors the properties'
vacancy rates. The borrower is current with respect to payments. The second
loan, which was originally restructured in 1992 and, more recently in December
1997, is classified as impaired. This loan is secured by an office/retail
building located in Wilbraham, Massachusetts. The borrower is current with
respect to payments. As of August 31, 1998, the aggregate outstanding carrying
balance of these loans was $1.4 million.
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AT AUGUST 31, 1998 AT DECEMBER 31, 1997
---------------------------------------------- -----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------------- ----------------------- ----------------------- ----------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- ---------- --------- ------------ --------- ----------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... 1 $ 116 3 $ 220 2 $ 80 1 $ 95
Commercial real estate.. -- -- -- -- 2 192 1 790
Home equity loans
and lines of credit... -- -- 1 60 1 30 -- --
Other consumer.......... 2 5 -- -- 6 38 -- --
----- ----- ----- ----- ----- ----- ----- -----
Total loans............. 3 $ 121 4 $ 280 11 $ 340 2 $ 885
===== ===== ===== ===== ===== ===== ===== =====
Delinquent loans to
total loans(1)........ 0.05% 0.10% 0.13% 0.34%
===== ===== ===== =====
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
---------------------------------------------- -----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------------- ----------------------- ----------------------- ----------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- ---------- --------- ------------ --------- ----------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... 2 $ 51 1 $ 7 6 $ 340 4 $ 384
Commercial real estate.. 1 43 2 124 1 43 1 61
Home equity loans
and lines of credit... -- -- 1 30 2 39 -- --
Other consumer.......... 1 4 4 27 4 22 1 93
---- ----- ----- ----- ----- ----- ----- -----
Commercial.............. -- -- -- -- -- -- 1 28
---- ----- ----- ----- ----- ----- ----- -----
Total loans............. 4 $ 98 8 $ 252 13 $ 444 7 $ 566
==== ===== ===== ===== ===== ===== ===== =====
Delinquent loans to
total loans(1)........ 0.04% 0.11% 0.22% 0.28%
===== ===== ===== =====
</TABLE>
______________________
(1) Total loans includes loans, less unadvanced loan funds, plus deferred loan
costs (fees), net.
NONPERFORMING ASSETS AND IMPAIRED LOANS. The following table sets forth
information regarding nonaccrual loans and real estate owned ("REO"). At August
31, 1998, nonaccrual loans totalled $280,000, consisting of four loans. It is
the general policy of the Bank to cease accruing interest on loans 90 days or
more past due and to fully reserve for all previously accrued interest. If
interest payments on all nonaccrual loans for the eight months ended August 31,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995 had been made
in accordance with original loan agreements, interest income of $10,000,
$38,000, $48,000, $13,000 and $62,000 respectively, would have been recognized.
On January 1, 1995, the Bank adopted Statement of Financial Accounting Standards
No. 114 "Accounting by Creditors for Impairment of a Loan," as amended by SFAS
No. 118. At August 31, 1998, the Bank had a $1.2 million recorded investment in
impaired loans which had specific allowances of $290,000. At August 31, 1997,
there were $1.3 million of impaired loans with specific loan loss allowances of
$238,000. At August 31, 1998, REO totalled $323,000, consisting of two
residential building lots, a 25 lot residential subdivision and a one- to four-
family property. When the Bank acquires property through foreclosure or deed in
lieu of foreclosure, it is initially recorded at the lower of the recorded
investment in the corresponding loan or the fair value of the related assets at
the date of foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, the Bank provides for a specific allowance and charges
operations for the diminution in value.
71
<PAGE>
<TABLE>
<CAPTION>
AT AUGUST 31, AT DECEMBER 31,
------------------ -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- --------- -------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
Real estate:
One- to four-family............... $ 220 $ 212 $ 95 $ 71 $ 412 $ 404 $1,638
Multi-family...................... -- -- -- -- -- 180 60
Commercial........................ -- 789 790 124 61 880 56
Home equity loans and lines of
credit............................ 60 -- -- 30 93 113 170
Other consumer...................... -- 15 -- 27 -- 5 25
------ ------ ------ ----- ------ ------ ------
Total............................. 280 1,016 885 252 566 1,582 1,949
Real estate owned (REO), net(1)...... 323 385 189 348 534 955 1,126
Real estate in possession............ 12 -- 192 75 107 -- --
------ ------ ------ ----- ------ ------ ------
Total nonperforming assets.......... 615 1,401 1,266 675 1,207 2,537 3,075
Troubled debt restructurings......... 582 274 274 -- 1,947 939 1,273
------ ------ ------ ----- ------ ------ ------
Troubled debt restructurings and
total nonperforming assets......... $1,197 $1,675 $1,540 $ 675 $3,154 $3,476 $4,348
====== ====== ====== ===== ====== ====== ======
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans(2)(3).... 0.32% 0.51% 0.44% 0.11% 1.24% 1.34% 1.85%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets(3)...... 0.33% 0.49% 0.45% 0.21% 1.15% 1.31% 1.84%
</TABLE>
________________________
(1) Real estate owned balances are shown net of related loss allowances.
(2) Total loans includes loans, less unadvanced loan funds, plus deferred
loan costs (fees), net.
(3) Nonperforming assets consist of nonperforming loans and REO.
Nonperforming loans consist of nonaccruing loans and all loans 90 days or
more past due and other loans which have been identified by the Bank as
presenting uncertainty with respect to the collectibility of interest or
principal.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through provisions for loan
losses based on management's on-going evaluation of the risks inherent in its
loan portfolio in consideration of the trends in its loan portfolio, the
national and regional economies and the real estate market in the Bank's primary
lending area. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses in its loan portfolio
which are deemed probable and estimable based on information currently known to
management. The Bank's loan loss allowance determinations also incorporate
factors and analyses which consider the potential principal loss associated with
the loan, costs of acquiring the property securing the loan through foreclosure
or deed in lieu thereof, the periods of time involved with the acquisition and
sale of such property, and costs and expenses associated with maintaining and
holding the property until sale.
Management calculates a loan loss allowance sufficiency analysis on a bi-
monthly basis based upon the loan portfolio composition, asset classifications,
loan-to-value ratios, potential impairments in the loan portfolio and other
factors. The analysis is compared to actual losses, peer group comparisons and
economic conditions. As of August 31, 1998, the Bank's allowance for loan
losses was $2.1 million or 0.77% of total loans, and 239.1% of nonperforming
loans and troubled debt restructurings as compared to $2.0 million or 0.74% of
total loans, and 168% of nonperforming loans and troubled debt restructurings as
of December 31, 1997. The Bank had total nonperforming loans and troubled debt
restructurings of $862,000 and $1.2 million at August 31, 1998 and December 31,
1997, respectively, and nonperforming loans and troubled debt restructurings to
total loans of 0.32% and 0.44%, respectively. Management believes that, based
on information available at August 31, 1998, the Bank's allowance for loan
losses was sufficient to cover losses inherent in its loan portfolio at that
time. Based upon
72
<PAGE>
the Bank's plan to increase its emphasis on non-one- to four-family mortgage
lending, the Bank may further increase its allowance for loan losses over future
periods as conditions dictate. See "Risk Factors--Increased Lending Risk
Associated With Consumer, Multi-Family and Commercial Real Estate and Commercial
Business Lending." However, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Bank or that further future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. In addition, the
FDIC and the Commissioner, as an integral part of their examination processes,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for estimated loan losses based
upon judgments different from those of management.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE
EIGHT MONTHS
ENDED AUGUST 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- -------- -------- --------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of period.. $ 1,952 $ 1,911 $ 1,911 $ 1,838 $1,657 $1,667 $1,500
Charged-off loans:
Real estate.................................... -- 31 52 34 30 271 283
Consumer....................................... 70 63 109 72 45 73 79
Commercial..................................... -- 10 10 30 -- -- --
------- ------- ------- ------- ------ ------ ------
Total charged-off loans....................... 70 104 171 136 75 344 362
------- ------- ------- ------- ------ ------ ------
Recoveries on loans previously charged-off:
Real estate.................................... -- 8 11 10 24 11 --
Consumer....................................... 19 12 21 19 22 23 19
Commercial..................................... -- -- -- -- -- -- 2
------- ------- ------- ------- ------ ------ ------
Total recoveries.............................. 19 20 32 29 46 34 21
------- ------- ------- ------- ------ ------ ------
Net loans charged-off........................... 51 84 139 107 29 310 341
Provision for loan losses....................... 160 120 180 180 210 300 508
------- ------- ------- ------- ------ ------ ------
Allowance for loan losses, end of period........ $ 2,061 $ 1,947 $ 1,952 $ 1,911 $1,838 $1,657 $1,667
======= ======= ======= ======= ====== ====== ======
Net loans charged-off to average
interest-earning loans(1)..................... 0.03% 0.05% 0.06% 0.05% 0.01% 0.17% 0.20%
Allowance for loan losses to total loans(2)..... 0.77% 0.77% 0.74% 0.81% 0.91% 0.88% 0.96%
Allowance for loan losses to nonperforming
loans and troubled debt restructuring(3)...... 239.10% 150.93% 168.42% 758.33% 73.14% 65.73% 51.74%
Net loans charged-off to allowance
for loan losses............................... 2.47% 4.31% 7.12% 5.60% 1.58% 18.71% 20.46%
Recoveries to charge-offs....................... 27.14% 19.23% 18.71% 21.32% 61.33% 9.88% 5.80%
</TABLE>
________________________
(1) Ratio is annualized for the eight month periods.
(2) Total loans includes loans, less unadvanced loan funds, plus deferred loan
costs (fees), net.
(3) Nonperforming loans and troubled debt restructuring 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.
73
<PAGE>
The following table sets forth the Bank's percent of allowance for loan losses
to total allowances and the percent of loans to total loans in each of the
categories listed at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. These
allocations are not necessarily indicative of future losses and do not restrict
the use of the allowance to absorb losses in any other loan category.
<TABLE>
<CAPTION>
AT AUGUST 31, AT DECEMBER 31,
------------------------------------------------------------------ ---------------------------------
1998 1997 1997
-------------------------------- -------------------------------- ---------------------------------
% OF % OF % OF
ALLOWANCE PERCENT OF ALLOWANCE PERCENT OF ALLOWANCE PERCENT OF
IN EACH LOANS IN IN EACH LOANS IN IN EACH LOANS IN
CATEGORY EACH CATEGORY EACH CATEGORY EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
-------- ---------- ----------- ------- ---------- ------------ ------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans.......... $1,506 73.07% 69.16% $1,524 78.28% 70.38% $1,506 77.15% 69.34%
Consumer loans............. 457 22.17 29.13 325 16.69 28.40 348 17.83 29.03
Commercial loans........... 98 4.76 1.71 98 5.03 1.22 98 5.02 1.63
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses............ $2,061 100.00% 100.00% $1,947 100.00% 100.00% $1,952 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
AT DECEMBER 31,
------------------------------------
1996
------------------------------------
% OF
ALLOWANCE PERCENT OF
IN EACH LOANS IN
CATEGORY EACH
TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS
------ --------- ------------
<S> <C> <C> <C>
Real estate loans.......... $1,547 80.95% 74.71%
Consumer loans............. 256 13.40 23.65
Commercial loans........... 108 5.65 1.64
------ ------ ------
Total allowance for
loan losses............ $1,911 100.00% 100.00%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------- --------------------------------- -----------------------------------
% OF % OF % OF
ALLOWANCE PERCENT OF ALLOWANCE PERCENT OF ALLOWANCE PERCENT OF
IN EACH LOANS IN IN EACH LOANS IN IN EACH LOANS IN
CATEGORY EACH CATEGORY EACH CATEGORY EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
-------- ---------- ----------- ------- ---------- ------------ ------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans.......... $1,555 84.60% 79.15% $1,441 86.96% 88.01% $1,402 84.10% 87.80%
Consumer loans............. 145 7.89 19.19 78 4.71 10.52 127 7.62 11.01
Commercial loans........... 138 7.51 1.66 138 8.33 1.47 138 8.28 1.19
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan
losses................... $1,838 100.00% 100.00% $1,657 100.00% 100.00% $1,667 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
74
<PAGE>
INVESTMENT ACTIVITIES
The Board of Trustees establishes the investment policy and procedures of
the Bank and has delegated investment authority and responsibility to the Bank's
Board of Investment. It is the general policy of the Bank that all investment
transactions be conducted in a safe and sound manner. The Bank's investment
policy further provides that investment decisions be based upon a thorough
analysis of each proposed investment to determine its quality, inherent risks,
fit within the Bank's overall asset/liability management objectives, the effect
on the Bank's risk-based capital and prospects for yield and/or appreciation.
While general investment strategies are developed and authorized by the Board of
Investment, the execution of specific investment actions and the day-to-day
oversight of the Bank's investment portfolio rests with the President and Senior
Vice President/Treasurer. These officers are authorized to execute investment
transactions of up to $5 million per transaction without the prior approval of
the Board of Investment if such transactions are within the scope of the Bank's
established investment policy. On a monthly basis, the Board of Investment
reviews and evaluates all investment activities for safety and soundness,
adherence to the Bank's investment policy and assurance that authority levels
are maintained.
As required by SFAS No. 115, the Bank has established an investment
portfolio of securities that are categorized as held-to-maturity, available-for-
sale or held-for-trading. The Bank generally invests in securities as a method
of utilizing funds not utilized for loan origination activity and as a method of
maintaining liquidity at levels deemed appropriate by management. The Bank does
not currently maintain a portfolio of securities categorized as held-for-
trading. At August 31, 1998, the Bank's securities portfolio totalled $71.5
million, or 19.5% of assets, all of which was categorized as available-for-sale.
MORTGAGE-BACKED SECURITIES. In the past, the Bank has purchased mortgage-
backed securities in order to (i) achieve positive interest rate spreads with
minimal administrative expense and (ii) lower its credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae, and Ginnie Mae. The Bank
purchases mortgage-backed securities insured or guaranteed by Fannie Mae,
Freddie Mac and Ginnie Mae. More recently, the Bank completed the
securitization of $19.1 million of fixed-rate one- to four-family mortgage loans
with Fannie Mae. The loans are serviced as mortgage-backed securities for
Fannie Mae. In addition to resulting in a decrease in loans receivable and a
related increase in mortgage-backed securities, the securitization provides
several benefits to the Bank, including (i) improvement in the credit risk
profile of the Bank's balance sheet by converting whole loans into mortgage-
backed securities guaranteed by Fannie Mae, (ii) reduction of the required level
of risk-based capital, and (iii) addition of high quality collateral designated
as "available-for-sale" which can be pledged for borrowings or sold in the
secondary market to fund future loan growth.
Mortgage-backed securities are created by the pooling of mortgages and
issuance of a security with an interest rate which is less than the interest
rate on the underlying mortgage. Mortgage-backed securities typically represent
a participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage-backed securities backed
by one- to four-family mortgages. The issuers of such securities (generally
U.S. government agencies and government sponsored enterprises, including Fannie
Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in
the form of securities to investors such as the Bank and guarantee the payment
of principal and interest to investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. However, mortgage-backed securities
are usually more liquid than individual mortgage loans and may be used to
collateralize specific liabilities and obligations of the Bank.
75
<PAGE>
Although the Bank no longer invests in Real Estate Mortgage Investment
Conduits ("REMICs"), the Bank did maintain $8.7 million of such investments in
its securities portfolio at August 31, 1998. Generally, REMICs hold commercial
and/or residential real estate mortgages in trust and issue securities
representing an undivided interest in such mortgages. A REMIC, which can be a
corporation, trust, association or partnership, assembles mortgages into pools
and issues pass-through certificates, multiclass bonds (similar to a
collateralized mortgage obligation) or other securities to investors in the
secondary mortgage market. Mortgage-backed securities issued through a REMIC
are generally debt financings of the issuer.
At August 31, 1998, mortgage-backed securities totalled $52.8 million, or
14.4%, of assets and 15.4% of interest earning assets, all of which were
classified as available-for-sale. At August 31, 1998, 17.0% of the mortgage-
backed securities were backed by adjustable-rate loans and 83.0% were backed by
fixed-rate loans. The mortgage-backed securities portfolio had a stated rate of
6.8% at August 31, 1998. The estimated fair value of the Bank's mortgage-backed
securities at August 31, 1998, was $52.8 million, which is $976,000 more than
the amortized cost of $51.8 million. Investments in mortgage-backed securities
involve a risk that actual prepayments may differ from estimate prepayments over
the life of the security, which may require adjustments to the amortization of
any premium or accretion of any discount relating to such instruments thereby
changing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. In addition, the market value of such
securities may be adversely affected by changes in interest rates.
EQUITY SECURITIES. The Bank currently maintains a diversified equity
security portfolio. At August 31, 1998, the Bank's equity securities portfolio
totalled $18.7 million, or 5.1% of assets, all of which were classified as
available-for-sale. Such portfolio consisted of $14.2 million of diversified
common stock and $3.4 million of preferred stock issued by corporate issuers and
$1.1 million of mutual funds. The Bank's current policies generally provide
that the maximum equity investment in any one corporation shall not exceed
$300,000 and the maximum aggregate investment in equity securities shall not
exceed 10% of the Bank's total assets.
Investments in equity securities involve risk as they are not insured or
guaranteed investments and are subject to stock market fluctuations. Such
investments are carried at their market value and can directly affect the net
surplus of the Bank. The Bank also utilizes, from time to time, "covered" call
options with respect to common stocks as a means to further supplement its
revenues associated with equity investments. Such investment activity is
specifically authorized by both federal and Massachusetts law.
76
<PAGE>
The following table sets forth at the dates indicated information regarding
the amortized cost and market values of the Bank's investment securities.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
AT AUGUST 31, 1998 1997 1996 1995
------------------- -------------------- -------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
----------- ------ --------- ------ ---------- ------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT SECURITIES:
U.S. Government and federal
agency obligations.......... $ -- $ -- $ -- $ -- $ -- $ -- $ 5,034 $ 5,050
Other debt securities......... -- -- -- -- 250 250 1,157 1,155
------- ------- ------- ------- ------- ------- ------- -------
Total debt securities........ -- -- -- -- 250 250 6,191 6,205
------- ------- ------- ------- ------- ------- ------- -------
EQUITY SECURITIES AVAILABLE-
FOR-SALE:
Preferred stock............... 3,246 3,330 3,177 3,345 4,527 4,723 4,510 4,786
Common stock(1)............... 14,858 14,226 9,425 12,382 7,576 9,122 6,631 7,485
Mutual funds.................. 1,371 1,130 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total equity securities...... 19,475 18,686 12,602 15,727 12,103 13,845 11,141 12,271
------- ------- ------- ------- ------- ------- ------- -------
MORTGAGE-BACKED SECURITIES
AVAILABLE-FOR SALE:
Freddie Mac................... 6,341 6,449 7,923 8,059 11,218 11,268 2,523 2,515
Fannie Mae.................... 34,300 34,710 18,353 18,476 22,275 22,116 21,206 21,182
Ginnie Mae.................... 2,513 2,648 2,814 2,941 2,937 2,999 -- --
REMICs........................ 8,666 8,989 10,169 10,437 10,874 11,148 11,662 11,864
------- ------- ------- ------- ------- ------- ------- -------
Total mortgage-backed
securities................. 51,820 52,796 39,259 39,913 47,304 47,531 35,391 35,561
------- ------- ------- ------- ------- ------- ------- -------
Total securities(2).......... $71,295 $71,482 $51,861 $55,640 $59,657 $61,626 $52,723 $54,037
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
_______________________
(1) On January 1, 1994, the Bank adopted SFAS 115 and, accordingly, there
were no investment securities categorized as held-to-maturity during the
years ended December 31, 1996 and 1995.
(2) Does not include $3.0 million of FHLB-Boston stock held by the Bank.
77
<PAGE>
The following table sets forth the Bank's securities activities for the
periods indicated. This table does not include FHLB-Boston stock held by the
Bank.
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS
ENDED
AUGUST 31, FOR THE YEAR ENDED DECEMBER 31,
------------------ -------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES (AVAILABLE-FOR-SALE):
Mortgage-backed securities, beginning of period.......... $39,913 $47,531 $47,531 $35,561 $42,756
------- ------- ------- ------- -------
Purchases and securitization............................. 19,068 -- -- 18,039 --
Calls: mortgage-backed securities........................ -- (5) (496) (120) (32)
Repayments and prepayments............................... (6,516) (4,756) (7,561) (6,017) (7,346)
Net accretion............................................ 9 7 12 13 12
Increase in unrealized gain.............................. 322 217 427 55 171
------- ------- ------- ------- -------
Net increase (decrease) in mortgage-backed securities.. 12,883 (4,537) (7,618) 11,970 (7,195)
------- ------- ------- ------- -------
Mortgage-backed securities, end of period................ $52,796 $42,994 $39,913 $47,531 $35,561
======= ======= ======= ======= =======
DEBT AND EQUITY SECURITIES:
Debt and equity securities, beginning of period.......... $15,727 $14,095 $14,095 $18,476 $18,887
------- ------- ------- ------- -------
Purchases: equity securities (available-for-sale)........ 12,658 5,900 10,285 8,569 6,149
Sales: equity securities (available-for-sale) (5,153) (4,647) (7,521) (10,727) (7,368)
Calls:
Debt securities (held-to-maturity)..................... -- -- -- -- (100)
Debt securities (available-for-sale)................... -- -- -- (241) --
Equity securities (available-for-sale)................. (530) (1,259) (1,716) -- (4)
Principal payments: Corporate bonds..................... -- -- -- (166) (602)
Transfer to Charitable Foundation: equity securities
(available-for-sale)................................... (102) (549) (549) -- --
Maturities:
Debt securities (held-to-maturity)..................... -- -- -- -- (505)
Debt securities (available-for-sale)................... -- (250) (250) (2,386) --
Net amortization......................................... -- -- -- (28) (68)
Increase (decrease) in unrealized gain................... (3,914) 379 1,383 598 2,087
------- ------- ------- ------- -------
Net increase (decrease) in debt and equity securities.. 2,959 (426) 1,632 (4,381) (411)
------- ------- ------- ------- -------
Debt and equity securities, end of period................ $18,686 $13,669 $15,727 $ 4,095 $18,476
======= ======= ======= ======= =======
</TABLE>
78
<PAGE>
The table below sets forth information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's securities
portfolio as of August 31, 1998. There were no securities with contractual
maturities of one year or less.
<TABLE>
<CAPTION>
AT AUGUST 31, 1998
-------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
------------------ ------------------ ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
securities:
Mortgage-backed
securities:
Freddie Mac.............. $12 10.00% $ 3 7.75% $ 6,434 7.43% $ 6,449 7.44%
Fannie Mae............... -- -- 14,858 6.31 19,853 6.97 34,710 6.69
Ginnie Mae............... -- -- -- -- 2,648 7.50 2,648 7.50
REMICs................... -- -- 258 5.25 8,731 6.42 8,989 6.38
--- ------- ------- -------
Total mortgage-backed
securities............. 12 10.00% 15,119 6.30% 37,666 6.96% 52,796 6.77%
Equity securities......... -- -- -- -- -- -- 18,686 4.10%
--- ------- ------- -------
Total securities(1)..... $12 $15,119 $37,666 $71,482
=== ======= ======= =======
</TABLE>
___________________________________
(1) Does not include $3.0 million of FHLB-Boston stock held by the Bank.
79
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, repayments and prepayments of loans, cash flows
generated from operations and FHLB advances are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes.
DEPOSITS. The Bank offers a variety of consumer and commercial deposit
accounts with a range of interest rates and terms. The Bank's deposit accounts
consist of savings, retail checking/NOW accounts, commercial checking accounts,
money market accounts, club accounts and certificate of deposit accounts. The
Bank offers certificate of deposit accounts with balances in excess of $100,000
at preferential rates (jumbo certificates) and also offers Individual Retirement
Accounts ("IRAs") and other qualified plan accounts.
At August 31, 1998, the Bank's deposits totalled $273.6 million, or 82.2%,
of total liabilities. For the eight months ended August 31, 1998, the average
balance of core deposits (savings, NOW, money market and demand accounts)
totalled $126.8 million, or 47.6% of total average deposits. At August 31,
1998, the Bank had a total of $141.2 million in certificates of deposit, of
which $101.9 million had maturities of less than one year. For the year ended
December 31, 1997, the average balance of core deposits represented
approximately 45.6% of total deposits and certificate accounts represented
54.4%, as compared to core deposits representing 46.8% of total deposits and
certificate accounts representing 53.2% of deposits for the year ended December
31, 1996. Although the Bank has a significant portion of its deposits in core
deposits, management monitors activity on the Bank's core deposits and, based on
historical experience and the Bank's current pricing strategy, believes it will
continue to retain a large portion of such accounts. The Bank is not limited
with respect to the rates it may offer on deposit products.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its banking offices are located. The Bank relies primarily on customer
service, advertising and long-standing relationships with customers to attract
and retain these deposits; however, market interest rates and rates offered by
competing financial institutions affect the Bank's ability to attract and retain
deposits. The Bank uses traditional means of advertising its deposit products,
including radio and print media and generally does not solicit deposits from
outside its market area. While certificate accounts in excess of $100,000 are
accepted by the Bank, and may be subject to preferential rates, the Bank does
not actively solicit such deposits as such deposits are more difficult to retain
than core deposits. Although the Bank's policies allow for the use of brokered
deposits, the Bank does not currently solicit brokered deposits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." All Massachusetts savings banks
are required to be members of the Mutual Savings Central Fund and are subject to
its assessments. The Mutual Savings Central Fund maintains the DIF, a private
deposit insurer, which insures all deposits in member banks in excess of FDIC
deposit insurance limits. See "Regulation and Supervision--Massachusetts
Banking Laws and Supervision."
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE
EIGHT MONTHS ENDED
AUGUST 31, FOR THE YEAR ENDED DECEMBER 31,
------------------ --------------------------------
1998 1997 1997 1996 1995
-------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Increase before interest credited.. $ 4,018 $3,359 $ 3,512 $ 7,848 $ 4,157
Interest credited(1)............... 6,870 6,603 10,185 9,445 8,676
------- ------ ------- ------- -------
Net increase....................... $10,888 $9,962 $13,697 $17,293 $12,833
======= ====== ======= ======= =======
</TABLE>
___________________________
(1) Does not include escrow interest credited of $8,000, $7,000, $7,000,
$5,000 and $9,000 for the periods ended August 31, 1998 and 1997 and
December 31, 1997, 1996 and 1995, respectively.
80
<PAGE>
At August 31, 1998, the Bank had $24.7 million in certificate accounts in
amounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
- --------------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less......... $ 7,185 5.33%
Over three through six months 4,687 5.47
Over six through 12 months... 4,998 5.37
Over 12 months............... 7,872 6.64
-------
Total........................ $24,742 5.78%
=======
</TABLE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods
presented utilize average daily balances.
<TABLE>
<CAPTION>
FOR THE EIGHT MONTHS ENDED FOR THE YEAR ENDED
AUGUST 31, 1998 DECEMBER 31, 1997
--------------------------------- -----------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- --------- --------- -------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits................ $ 9,763 3.66% --% $ 7,939 3.11% --%
Savings accounts(1)............ 66,375 24.89 2.27 64,285 25.16 2.74
Money Market accounts.......... 23,457 8.80 3.41 19,238 7.53 2.12
NOW accounts................... 27,241 10.21 1.04 24,941 9.76 1.01
Total certificates of deposit.. 139,881 52.44 5.52 139,119 54.44 5.56
-------- ------ -------- ------
Total average deposits....... $266,717 100.00% 3.87% $255,522 100.00% 3.97%
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996 1995
--------------------------------- --------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
----------- --------- -------- --------- --------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits................ $ 6,933 2.90% --% $ 5,703 2.51% --%
Savings accounts(1)............ 65,042 27.25 2.59 67,221 29.55 2.54
Money Market accounts.......... 16,825 7.05 2.62 17,754 7.80 2.81
NOW accounts................... 22,831 9.57 1.06 20,920 9.19 1.30
Total certificates of deposit.. 127,068 53.23 5.54 115,933 50.95 5.37
-------- ------ -------- ------
Total average deposits....... $238,699 100.00% 3.94% $227,531 100.00% 3.83%
======== ====== ======== ======
</TABLE>
______________________
(1) Savings accounts include mortgagors' escrow deposits.
81
<PAGE>
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at August 31, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM AUGUST 31, 1998
----------------------------------------
LESS ONE TWO
THAN TO TO OVER TOTAL AT DECEMBER 31,
ONE TWO THREE THREE AUGUST 31, ---------------------------
YEAR YEARS YEARS YEARS 1998 1997 1996 1995
--------- ------- ------ ------ ------------- ----- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%.......... $ 148 $ 13 $ 11 $34 $ 206 $ 75 $ 132 $ 3,172
4.01% to 5.00%...... 26,797 -- -- -- 26,797 3,744 29,506 24,914
5.01% to 6.00%...... 63,358 17,122 5,541 -- 86,021 107,995 85,788 63,563
6.01% to 7.00%...... 11,554 -- -- -- 11,554 15,306 7,282 16,900
7.01% to 8.00%...... -- 16,649 -- -- 16,649 16,129 15,689 15,138
-------- ------- ------ ----- -------- -------- -------- --------
Total........... $101,857 $33,784 $5,552 $34 $141,227 $143,249 $138,397 $123,687
======== ======= ====== ===== ======== ======== ======== ========
</TABLE>
BORROWED FUNDS. As part of its operating strategy, the Bank utilizes
advances from the FHLB as an alternative to retail deposits to fund its
operations. By utilizing FHLB advances, which possess varying stated
maturities, the Bank can meet its liquidity needs without otherwise being
dependent upon retail deposits, which have no stated maturities (except for
certificates of deposit), which are interest rate sensitive and which are
subject to withdrawal from the Bank at any time. These FHLB advances are
collateralized primarily by the Bank's mortgage loans and mortgage-backed
securities and secondarily by the Bank's investment in capital stock of the
FHLB. FHLB advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. The maximum
amount that the FHLB will advance to member institutions, including the Bank,
fluctuates from time-to-time in accordance with the policies of the FHLB. See
"Regulation and Supervision -- Federal Home Loan Bank System." At August 31,
1998, the Bank had $54.8 million in outstanding advances from the FHLB compared
to $41.7 million at December 31, 1997.
The following table sets forth information regarding the Bank's borrowed
funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE EIGHT MONTHS
ENDED AT OR FOR THE YEAR ENDED
AUGUST 31, DECEMBER 31,
-------------------------- --------------------------------
1998 1997 1997 1996 1995
------------ ----------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding............ $52,181 $39,176 $40,099 $26,941 $16,948
======= ======= ======= ======= =======
Maximum amount outstanding at any
month-end during the period.......... $57,758 $44,878 $44,878 $38,145 $21,494
======= ======= ======= ======= =======
Balance outstanding at end of period... $54,792 $44,878 $41,726 $35,441 $14,472
======= ======= ======= ======= =======
Weighted average interest rate during
the period........................... 5.61% 5.77% 5.84% 5.97% 6.62%
======= ======= ======= ======= =======
Weighted average interest rate at end
of period............................ 5.42% 5.75% 5.94% 5.66% 6.67%
======= ======= ======= ======= =======
</TABLE>
82
<PAGE>
TRUST SERVICES
In 1994, the Bank established the Woronoco Savings Bank Trust & Investment
Management Department (the "trust department"). The trust department provides
trust and investment services to individuals, partnerships, corporations and
institutions and acts as a fiduciary of estates and conservatorships and as a
trustee under various wills, trusts and other plans. The Bank believes that the
trust department is an important element of its operating strategy to attract
and retain customers. The Bank has implemented several policies governing the
practices and procedures of the trust department, including policies relating to
maintaining confidentiality of trust records, drafting trust documents and
instruments, investment of trust property, handling conflicts of interest, and
maintaining impartiality. Such policies are aimed at maintaining the highest
standards of fiduciary conduct. At August 31, 1998, the trust department was
managing 194 accounts with assets of $20.1 million, in the aggregate.
SUBSIDIARY ACTIVITIES
Walshingham Enterprises, Inc. was established in July 1983 for the purpose
of acquiring, holding and selling residential and commercial real estate.
However, the subsidiary no longer holds any real property and currently is
inactive. Woronoco Security Corp. and Court Street Security Corporation were
established in November 1996 and March 1998, respectively, for the purpose of
acquiring and holding investment securities of a type that are permissible for
banks to hold under applicable law. Both Woronoco Security Corp. and Court
Street Security Corporation were established to qualify as "securities
corporations" for Massachusetts tax purposes. See "Federal Tax and State
Taxation -- State Taxation." The results of operations of all of the Bank's
subsidiaries will be consolidated in the results and operations of the Company.
THE WORONOCO FOUNDATION, INC.
In 1996, the Bank established a private charitable foundation, The Woronoco
Foundation, Inc. (the "foundation"). The foundation, which is not a subsidiary
of the Bank, was established for the purpose of providing grants to charitable
organizations in the communities in which the Bank operates. The foundation was
funded in 1997 by a donation from the Bank of marketable equity securities with
a cost basis and fair value of approximately $235,000 and $549,000,
respectively, at the date of donation and transfer. The foundation's current
nine member Board of Directors consists of three of each of the Bank's current
Trustees, officers and corporators. The Bank will continue to maintain the
foundation after conversion but may, in the future, wind down its operations and
affairs. It is not expected that the existence of the Bank's current foundation
will impact the business and affairs of the Woronoco Savings Charitable
Foundation which is being established in connection with the Bank's Conversion.
See "Woronoco Savings Charitable Foundation."
83
<PAGE>
PROPERTIES
The Bank currently conducts its business through its main office located in
Westfield, Massachusetts and ten other banking offices and one stand-alone ATM.
The Bank is also currently constructing a full-service banking office in
Amherst, Massachusetts, to be located inside a supermarket/grocery store
operated by the regionally based Big Y Foods, Inc. The construction costs for
the Amherst office are estimated to be approximately $250,000 and the Bank
expects the office to become fully operational during the first quarter of 1999.
Once the banking office is established, the Company believes that the Bank's
facilities will be adequate to meet the then present and immediately foreseeable
needs of the Bank and the Company.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY
LEASED, ORIGINAL YEAR DATE OF OR LEASEHOLD
LICENSED OR LEASED LEASE/LICENSE IMPROVEMENTS
LOCATION OWNED OR ACQUIRED EXPIRATION AT AUGUST 31, 1998
- ---------------------------------- ----------- --------------- -------------- ------------------
MAIN/EXECUTIVE OFFICE: (IN THOUSANDS)
<S> <C> <C> <C> <C>
31 Court Street
Westfield, Massachusetts 01085........ Owned 1951 -- $ 988
BANKING OFFICES:
44 Little River Road
Westfield, Massachusetts 01085......... Owned 1971 -- 146
185 College Highway
Southwick, Massachusetts 01077......... Owned 1988 -- 621
74 Lamb Street
South Hadley, Massachusetts 01075...... Owned 1995 -- 464
119 Winsor Street
Ludlow, Massachusetts 01056............ Owned 1997 -- 545
608 College Highway
Southwick, Massachusetts 01077......... Leased 1977 2002 49
1359 Springfield Street
Feeding Hills, Massachusetts 01013..... Leased 1994 1999(1) 59
800 Boston Road
Springfield, Massachusetts 01119....... Licensed 1994 1999(1)(2) 127
503 Memorial Avenue
West Springfield, Massachusetts 01089.. Licensed 1994 1999(1)(2) 128
44 Willimansett Avenue
South Hadley, Massachusetts 01075...... Licensed 1997 2002(1)(2) 85
OTHER OFFICE AND PROPERTIES:
177 Montgomery Road
Westfield, Massachusetts 10185......... (3) -- -- --
2-16 Central Street
Westfield, Massachusetts 01085......... Owned(4) 1990 -- (5)
127 North Elm Street
Westfield, Massachusetts 01085......... Leased(6) 1998 2003 --
------
Total............................ $3,212
======
</TABLE>
______________________
(1) The Bank has an option to renew this lease/license for three additional
five-year periods.
(2) This banking office is located inside a supermarket/grocery store
operated by the regionally based Big Y Foods, Inc. The Bank maintains a
sublicense or, in the case of the South Hadley office, a license to
possess the property. Generally, the holder of a license or sublicense
has less property rights than the possessor of a leasehold interest.
(3) This office is located in a local high school and is operated by students
for the benefit of teachers and students of the school. This office
offers only retail deposit products and does not provide any other
banking services. The Bank does not pay rent but does pay for its
portion of the utilities. The Bank has been operating at this location
since 1990.
(4) The property consists of commercial retail space which the Bank leases to
a local glass and mirror company. The property also consists of vacant
office space which the Bank currently utilizes as a storage facility.
(5) Net book value of the property is included in net book value for the
Bank's main office.
(6) Consists of a stand-alone ATM located at a retail food and beverage
establishment. The ATM became operational in September 1998.
84
<PAGE>
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the financial condition and results of operations of the Bank.
PERSONNEL
As of August 31, 1998, the Bank had 110 full-time employees and 32 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good. See
"Management of the Bank--Other Benefit Plans" for a description of compensation
and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank will report their income on a
consolidated basis, using a calendar year and the accrual method of accounting
and will be subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Bank's treatment
of its reserve for bad debts discussed below. The following discussion of tax
matters material to the operations of the Company and Bank is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank has not been audited by the
Internal Revenue Service (the "IRS") or the Massachusetts Department of Revenue
("Massachusetts DOR") in the past five years.
BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 (the
"1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
relating to a savings institution's use of bad debt reserves for federal income
tax purposes and requires such institutions to recapture (i.e. take into income)
portions of their accumulated bad debt reserves. The effect of the 1996 Act on
the Bank is discussed below. Prior to the enactment of the 1996 Act, the Bank
was permitted to establish tax reserves for bad debts and to make annual
additions thereto, which additions, within specified formula limits, were
deducted in arriving at the Bank's taxable income. Prior to the 1996 Tax Act,
the Bank's deduction with respect to "qualifying loans," which are generally
loans secured by interests in real property, could be computed using an amount
based on a six-year moving average of the Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8% of the Bank's taxable income
(the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve. The Bank's deduction with respect to non-
qualifying loans was required to be computed under the Experience Method.
THE 1996 ACT. Under the 1996 Act, for its current and future taxable
years, as a "Small Bank" (as defined in the 1996 Act, a "small bank" is
generally defined as one with assets under $500 million) the Bank is permitted
to make additions to its tax bad debt reserves under an Experience Method based
on total loans. The Federal income tax reserve for loan losses at the Bank's
base year amounted to approximately $1.6 million. If any portion of the reserve
is used for purposes other than to absorb the losses for which established,
approximately 150% of the amount actually used (limited to the amount of the
reserve) would be subject to taxation in the fiscal year in which used. As the
Bank intends to use the reserve only to absorb loan losses, a deferred income
tax liability of approximately $831,000 has not been provided.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. The term "non-dividend
distributions" is defined as distributions in excess of the Bank's current and
accumulated earnings and
85
<PAGE>
profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not cause this pre-1988 reserve to be included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such distribution (but not in
excess of the amount of such reserves) would be includable in income for federal
income tax purposes, assuming a 35% federal corporate income tax rate. See
"Regulation and Supervision" and "Dividend Policy" for limits on the payment of
dividends by the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be
offset by net operating loss carry forwards. The adjustment to AMTI based on
book income will be an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986 and before January
1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain
modifications) over $2.0 million, is imposed on corporations, including the
Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank does
not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
excluded.
STATE TAXATION
MASSACHUSETTS COMMONWEALTH TAXATION. Prior to July, 1995, the Bank was
subject to an annual Massachusetts excise (income) tax equal to 12.54% of its
pre-tax income. In 1995, legislation was enacted to reduce the Massachusetts
bank excise (income) tax rate and to allow Massachusetts-based financial
institutions to apportion income earned in other states. Further, this
legislation expands the applicability of the tax to non-bank entities and out-
of-state financial institutions. The Massachusetts excise tax rate for savings
banks is currently 10.91% of federal taxable income, adjusted for certain items.
This rate will be reduced over the next year so that the Bank's tax rate will
become 10.5% by December 31, 1999. Taxable income includes gross income as
defined under the Code, plus interest from bonds, notes and evidences of
indebtedness of any state, including Massachusetts, less deductions, but not the
credits, allowable under the provisions of the Code. No deductions, however, are
allowed for dividends received until July 1, 1999. In addition, carry forwards
and carrybacks of net operating losses are not allowed.
A financial institution or business corporation is generally entitled to
special tax treatment as a "security corporation," provided that: (a) its
activities are limited to buying, selling, dealing in or holding securities on
its own behalf and not as a broker; and (b) it has applied for, and received,
classification as a "security corporation" by the Commissioner of the
Massachusetts DOR. A security corporation that is also a bank holding company
under the Code is subject to a tax equal to 0.33% of its gross income. A
security corporation that is not a bank holding company under the Code is
subject to a tax equal to 1.32% of its gross income. The Bank has received an
opinion from Wolf & Company, P.C. that the ownership of 100% of the stock the
ESOP Loan Subsidiary by the Company will not prevent the Company from qualifying
as a security corporation, provided that the Company: (a) applies for, and
receives, security corporation classification by the Massachusetts DOR; and (b)
does not conduct any activities deemed impermissible under the governing
statutes and the various regulations, directives, letter rulings and
administrative pronouncements issued by the Massachusetts DOR.
86
<PAGE>
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION AND SUPERVISION
GENERAL
As a savings bank chartered by the Commonwealth of Massachusetts, the Bank
is subject to extensive regulation under state law with respect to many aspects
of its banking activities; this state regulation is administered by the
Commissioner. In addition, as a bank whose deposits are insured by the FDIC
under the BIF, the Bank is subject to deposit insurance assessments, examination
and supervision by the FDIC. These laws and regulations have been established
primarily for the protection of depositors, customers and borrowers of the Bank,
not bank stockholders.
The Holding Company will also be required to file reports with, and
otherwise comply with the rules and regulations, of the OTS, the Commissioner
and of the Securities and Exchange Commission ("SEC") under the federal
securities laws. The following discussion of the laws and regulations material
to the operations of the Company and the Bank is a summary and is qualified in
its entirety by reference to such laws and regulations.
MASSACHUSETTS BANKING LAWS AND SUPERVISION
Massachusetts savings banks are regulated and supervised by the
Commissioner. The Commissioner is required to regularly examine each state-
chartered bank. The approval of the Commissioner is required to establish or
close branches, to merge with another bank, to form a holding company, to issue
stock or to undertake many other activities. Any Massachusetts bank that does
not operate in accordance with the regulations, policies and directives of the
Commissioner is subject to sanctions. The Commissioner may suspend or remove
trustees or officers of a bank who have violated the law, conducted a bank's
business in a manner which is unsafe, unsound or contrary to the depositors'
interests, or been negligent in the performance of their duties.
All Massachusetts-chartered savings banks are required to be members of the
Mutual Savings Central Fund and are subject to its assessments. The Mutual
Savings Central Fund maintains the Deposit Insurance Fund, a private deposit
insurer, which insures all deposits in member banks in excess of FDIC deposit
insurance limits. In addition, the Mutual Savings Central Fund acts as a source
of liquidity to its members in supplying them with low-cost funds, and
purchasing qualifying obligations from them.
The powers which Massachusetts-chartered savings banks can exercise under
these laws are summarized below.
LENDING ACTIVITIES. A Massachusetts-chartered savings bank may make a wide
variety of mortgage loans. Fixed-rate loans, adjustable-rate loans, variable-
rate loans, participation loans, graduated payment loans, construction and
development loans, condominium and co-operative loans, second mortgage loans and
other types of loans may be made in accordance with applicable regulations.
87
<PAGE>
Commercial loans may be made to corporations and other commercial enterprises
with or without security. Consumer and personal loans may also be made with or
without security. Loans to individual borrowers generally must be limited to 20%
of the total of the Bank's capital accounts and stockholders' equity.
INVESTMENTS AUTHORIZED. Massachusetts-chartered savings banks have broad
investment powers under Massachusetts law, including so-called "leeway"
authority for investments that are not otherwise specifically authorized. The
investment powers authorized under Massachusetts law are restricted by federal
law to permit, in general, only investments of the kinds that would be permitted
for national banks. The Bank has authority to invest in all of the classes of
loans and investments that are permitted by its existing loan and investment
policies.
PAYMENT OF DIVIDENDS. A savings bank may only pay dividends on its capital
stock if such payment would not impair the bank's capital stock and surplus
account. No dividends may be paid to stockholders of a bank if such dividends
would reduce stockholders' equity of the bank below the amount of the
liquidation account required by Massachusetts conversion regulations.
PARITY REGULATION. The Massachusetts regulation on parity with national
banks establishes procedures allowing state-chartered banks to exercise
additional or more flexible parallel powers granted to national banks under
federal law which are not otherwise permitted under state law. The procedures
and requirements for engaging in such activities range from an application
process, expedited review and notice process to activities requiring no
application or notice whatsoever. The applicable procedures and requirements
vary according to the nature of the activity to be engaged in and the
capitalization of the bank. As of the date of this prospectus, the Bank was
eligible to engage in certain of the above-referenced activities, subject to the
applicable procedure and requirements of Massachusetts regulation.
FEDERAL REGULATIONS
CAPITAL REQUIREMENTS. Under FDIC regulations, federally insured state-
chartered banks that are not members of the Federal Reserve System ("state non-
member banks"), such as the Bank, are required to comply with minimum leverage
capital requirements. For an institution determined by the FDIC to not be
anticipating or experiencing significant growth and to be in general a strong
banking organization, rated
88
<PAGE>
composite 1 under the Uniform Financial Institutions Ranking System (the rating
system) established by the Federal Financial Institutions Examination Council,
the minimum capital leverage requirement is a ratio of Tier 1 capital to total
assets of 3%. For all other institutions, the minimum leverage capital ratio is
3% plus an additional "cushion" amount of at least 100 to 200 basis points. Tier
1 capital is the sum of common stockholders' equity, noncumulative perpetual
preferred stock (including any related surplus) and minority investments in
certain subsidiaries, less intangible assets (except for certain servicing
rights and credit card relationships).
The FDIC has also adopted risk-based capital guidelines to which the Bank
is subject. The FDIC guidelines require state non-member banks to maintain
certain levels of regulatory capital in relation to regulatory risk-weighted
assets. The ratio of regulatory capital to regulatory risk-weighted assets is
referred to as the Bank's "risk-based capital ratio." Risk-based capital ratios
are determined by allocating assets and specified off-balance sheet items to
four risk-weighted categories ranging from 0% to 100%, with higher levels of
capital being required for the categories perceived as representing greater
risk. For example, under the FDIC's risk-weighting system, cash and securities
backed by the full faith and credit of the U.S. government are given a 0% risk
weight.
State non-member banks must maintain a minimum ratio of qualifying capital
to risk-weighted assets of at least 8%, of which at least one-half be Tier 1
capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 or
supplementary capital items, which include allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, and
other capital instruments. The includable amount of Tier 2 capital cannot exceed
the amount of the institution's Tier 1 capital.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
required each federal banking agency to revise its risk-based capital standards
for insured institutions to ensure that those standards take adequate account of
interest-rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as to reflect the actual performance and expected risk of
loss on multi-family residential loans. In August 1995, the FDIC, along with
the other federal banking agencies, adopted a regulation providing that the
agencies will take account of the exposure of a bank's capital and economic
value to changes in interest rate risk in assessing a bank's capital
adequacy.
The following is a summary of the Bank's regulatory capital at August 31,
1998:
GAAP Capital to Total Assets............... 9.11%
Total Capital to Risk-Weighted Assets...... 13.01%
Tier I Leverage Ratio...................... 9.08%
Tier I to Risk-Weighted Assets............. 12.35%
89
<PAGE>
STANDARDS FOR SAFETY AND SOUNDNESS. As required by statute, the federal
banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") to implement
safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems,
internal audit system, credit underwriting, loan documentation, interest rate
risk exposure, asset growth, asset quality, earnings and compensation, and fees
and benefits. Most recently, the agencies have issued guidelines for Year 2000
computer compliance. If the appropriate federal banking agency determines
that an institution fails to meet any standard prescribed by the Guidelines,
the agency may require the institution to submit to the agency an acceptable
plan to achieve compliance with the standard
INVESTMENT ACTIVITIES
Since the enactment of the FDICIA, all state-chartered FDIC insured banks,
including savings banks, have generally been limited to activities as principal
and equity investments of the type and in the amount authorized for national
banks, notwithstanding state law. FDICIA and the FDIC regulations thereunder
permit exceptions to these limitations. For example, state chartered banks,
such as the Bank, may, with FDIC approval, continue to exercise state authority
to invest in common or preferred stocks listed on a national securities exchange
or the Nasdaq National Market and in the shares of an investment company
registered under the Investment Company Act of 1940, as amended. In addition,
the FDIC is authorized to permit such institutions to engage in state authorized
activities or investments that do not meet this standard (other than non-
subsidiary equity investments) for institutions that meet all applicable capital
requirements if it is determined that such activities or investments do not pose
a significant risk to the BIF. The FDIC has recently adopted revisions to its
regulations governing the procedures for institutions seeking approval to engage
in such activities or investments. These revisions, among other things,
streamline the application procedures for healthy banks and impose quantitative
and qualitative
90
<PAGE>
restrictions on a bank's dealings with its subsidiaries engaged in activities
not permitted for national bank subsidiaries. All non-subsidiary equity
investments, unless otherwise authorized or approved by the FDIC, must have been
divested by December 19, 1996, pursuant to a FDIC-approved divestiture plan
unless such investments were grandfathered by the FDIC. The Bank received
grandfathering authority from the FDIC in February, 1993 to invest in listed
stocks and/or registered shares subject to the maximum permissible investment of
100% of Tier 1 capital, as specified by the FDIC's regulations, or the maximum
amount permitted by Massachusetts Commonwealth Banking Law, whichever is less.
Such grandfathering authority is subject to termination upon the FDIC's
determination that such investments pose a safety and soundness risk to the Bank
or in the event the Bank converts its charter, other than a mutual to stock
conversion, or undergoes a change in control. As of August 31, 1998, the Bank
had $18.7 million of securities which were subject to such grandfathering
authority.
INTERSTATE BRANCHING
In the past, branching across state lines was not generally available to a
state bank such as the Bank. Out-of-state branches of banking institutions are
authorized under the Massachusetts Banking Law, but similar authority does not
exist generally under the laws of most other states. The Interstate Banking Act
permitted, beginning June 1, 1997, the responsible federal banking agencies to
approve merger transactions between banks located in different states,
regardless of whether the merger would be prohibited under the law of the two
states. The Interstate Banking Act also permitted a state to "opt in" to the
provisions of the Interstate Banking Act prior to June 1, 1997, and permitted a
state to "opt out" of the provisions of the Interstate Banking Act by adopting
appropriate legislation before that date. Accordingly, the Interstate Banking
Act, beginning June 1, 1997, permitted a bank, such as the Bank, to acquire
branches in a state other than Massachusetts unless the other state had opted
out of the Interstate Banking Act. The Interstate Banking Act also authorizes de
novo branching into another state if the host state enacts a law expressly
permitting out of state banks to establish such branches within its
borders.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
legislation. An institution is deemed to be "well capitalized" if it has a
total risk-based capital ratio of 10% or greater. An institution is "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital ratio of 4% or greater, and generally a leverage ratio of
4% or greater. An institution is "undercapitalized" if it has a total risk-
based capital ratio of less than 8%, a Tier I risk-based capital ratio of less
than 4%, or generally a leverage ratio of less than 4%. An institution is
deemed to be "significantly undercapitalized" if it has a total risk-based
capital ratio of less than 6%, a Tier I risk-based capital ratio of less than
3%, or a leverage ratio of less than 3%. An institution is considered to be
"critically undercapitalized" if it has a ratio of tangible equity (as defined
in the regulations) to total assets that is equal to or less than 2%. As of
August 31, 1998, the Bank was a "well capitalized" institution and immediately
upon completion of the Conversion expects to be a "well capitalized"
institution.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution in an
amount equal to the lesser of 5% of the bank's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of
91
<PAGE>
additional restrictions, including but not limited to an order by the FDIC to
sell sufficient voting stock to become adequately capitalized, requirements to
reduce total assets and cease receipt of deposits from correspondent banks or
dismiss directors or officers, and restrictions on interest rates paid on
deposits, compensation of executive officers and capital distributions by the
parent holding company. "Critically undercapitalized" institutions are subject
to additional sanctions including, subject to a narrow exception, the
appointment of a receiver or conservator is within 270 days after it obtains
such status.
TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. In a holding company context, at a minimum, the parent holding company of
a savings institution and any companies which are controlled by such parent
holding company are affiliates of the savings institution . Generally, Section
23A limits the extent to which the savings institution or its subsidiaries may
engage in "covered transactions" with any one affiliate to 10% of such savings
institution's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to 20% of capital stock and surplus. The
term "covered transaction" includes, among other things, the making of loans or
other extensions of credit to an affiliate and the purchase of assets from an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings institution or its
subsidiary as similar transactions with nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts an institution
with respect to loans to directors, executive officers, and principal
stockholders ("insiders"). Under Section 22(h), loans to insiders and their
related interests may not exceed, together with all other outstanding loans to
such persons and affiliated entities, the institution's total capital and
surplus. Loans to insiders above specified amounts must receive the prior
approval of the board of directors. Further, pursuant to Section 22(h), loans to
directors, executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to other persons,
except that such insiders may receive preferential loans made pursuant to a
benefit or compensation program that is widely available to the Bank's employees
and does not give preference to the insider over the employees. Section 22(g) of
the Federal Reserve Act places additional limitations on loans to executive
officers.
ENFORCEMENT
The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease and desist orders
and to remove directors and officers. In general, these enforcement actions may
be initiated in
92
<PAGE>
response to violations of laws and regulations and unsafe or unsound practices.
The FDIC has authority under Federal law to appoint a conservator or
receiver for an insured bank under limited circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state non-member bank if that bank was "critically undercapitalized" on average
during the calendar quarter beginning 270 days after the date on which the
institution became "critically undercapitalized." See "--Prompt Corrective
Regulatory Action." The FDIC may also appoint itself as conservator or receiver
for an insured state non-member institution under specific circumstances on the
basis of the institution's financial condition or upon the occurrence of other
events, including: (i) insolvency; (ii) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; and (iv)
insufficient capital, or the incurring of losses that will deplete substantially
all of the institution's capital with no reasonable prospect of replenishment
without federal assistance.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates. The FDIC has
exercised this authority several times in the past and may raise insurance
premiums in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $46.5 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $46.5
million, the reserve requirement is $1.4 million plus 10% (subject to adjustment
by the Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements.
93
<PAGE>
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, as amended ("CRA"), as implemented by
FDIC regulations, a state non-member bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the FDIC, in
connection with its examination of an institution, to assess the institution's
record of meeting the credit needs of its community and to take such record into
account in its evaluation of applications by such institution. The CRA requires
public disclosure of an institution's CRA rating. The Bank's latest CRA rating,
received from the FDIC was "satisfactory."
MASSACHUSETTS REGULATION. The Bank is also subject to provisions of the
Massachusetts law which impose continuing and affirmative obligations upon
banking institutions organized in Massachusetts to serve the credit needs of its
local community ("MCRA"), which are similar to those imposed by the CRA. The
MCRA also requires the Commissioner to consider a bank's MCRA rating when
reviewing a bank's application to engage in specific transactions and provides
that such assessment may serve as a basis for the denial of any such
application. The Bank's latest MCRA rating received from the Division of Banks
was "high satisfactory."
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB stock at August 31, 1998 of
$3.0 million. At August 31, 1998, the Bank had $54.8 million in FHLB
advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and result in the FHLBs imposing a higher rate of interest on advances
to their members. For the eight months ended August 31, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995, cash dividends from the FHLB to
the Bank amounted to approximately $130,000, $106,000, $144,000, $127,000 and
$127,000, respectively. Further, there can be no assurance that the impact of
recent or future legislation on the FHLBs will not also cause a decrease in the
value of the FHLB stock held by the Bank.
94
<PAGE>
HOLDING COMPANY REGULATION
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" ("QTL"), discussed below, to elect to be treated as a savings
association for purposes of the savings and loan holding company provisions of
the Home Owners' Loan Act ("HOLA"). Such election results in its holding company
being regulated as a savings and loan holding company by the OTS rather than as
a bank holding company by the Federal Reserve Board. The Bank has made such
election and expects to receive approval from the OTS to become a savings and
loan holding company prior to consummation of the Conversion. The Company will
be regulated as a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As such, the Company will be required to
register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings institution.
Additionally, the Bank will be required to notify the OTS at least 30 days
before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act,
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation. Multiple savings and loan holding companies are generally
prohibited from acquiring or retaining more than 5% of a non-subsidiary company
engaged in activities other than those permitted by the HOLA.
The HOLA prohibits a savings and loan holding company from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
association or savings and loan holding company or from acquiring such an
institution or company by merger, consolidation or purchase of its assets,
without prior written approval of the OTS. In evaluating applications by
holding companies to acquire savings associations, the OTS considers the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies; and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions.
In order to elect and continue to be regulated as a savings and loan
holding company by the OTS (rather than as a bank holding company by the Federal
Reserve Board), the Bank must continue to qualify as a QTL. In order to qualify
as a QTL, the Bank must maintain compliance with the test for a "domestic
building and loan association," as defined in the Code, or with a Qualified
Thrift Lender Test ("QTL Test"). Under the QTL Test, a savings institution is
required to maintain at least 65% of its "portfolio assets" (total assets less:
(i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business) in
certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least 9 months out of each 12 month period. As of August 31, 1998, the
Bank maintained in excess of 65% of its portfolio
95
<PAGE>
assets in qualified thrift investments. The Bank also met the QTL test in each
of the prior 12 months and, therefore, met the QTL test.
MASSACHUSETTS HOLDING COMPANY REGULATION. In addition to the federal
holding company regulations, a bank holding company organized or doing business
in Massachusetts may be also subject to regulation under the Massachusetts law.
The term "bank holding company," for the purposes of Massachusetts law, is
defined generally to include any company which, directly or indirectly, owns,
controls or holds with power to vote more than 25% of the voting stock of each
of two or more banking institutions, including commercial banks and state co-
operative banks, savings banks and savings and loan associations and national
banks, federal savings banks and federal savings and loan associations. In
general, a holding company controlling, directly or indirectly, only one banking
institution will not be deemed to be a bank holding company for the purposes of
Massachusetts law. Under Massachusetts law, the prior approval of the Board of
Bank Incorporation is required before: any company may become a bank holding
company; any bank holding company acquires direct or indirect ownership or
control of more than 5% of the voting stock of, or all or substantially all of
the assets of, a banking institution; or any bank holding company merges with
another bank holding company. Although the Company will not be a bank holding
company for purposes of Massachusetts law upon the Effective Date of the
Conversion, any future acquisition of ownership, control, or the power to vote
25% or more of the voting stock of another banking institution or bank holding
company would cause it to become such. The Company has no current plan or
arrangement to acquire ownership or control, directly or indirectly, of 25% or
more of the voting stock of another banking institution.
96
<PAGE>
THRIFT RECHARTERING
The Bank is, and the Company, as a savings and loan holding company, will
be subject to extensive regulation and supervision. Such regulations, which
affect the Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations is also subject to change by
the authorities who interpret those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
Commissioner, the Commonwealth of Massachusetts, the OTS, the FDIC or the
Congress, could have a material impact on the Company, the Bank, its operations
or the Conversion.
Legislation enacted several years ago provides that the BIF and the Savings
Association Insurance Fund ("SAIF") will merge on January 1, 1999 if there are
no more savings associations as of that date. Several bills have been
introduced in the current Congress that would eliminate the federal thrift
charter and the OTS. A bill that was passed by the House of Representatives in
1998 would subject unitary savings and loan holding companies to the activities
restrictions generally applicable to multiple savings and loan holding
companies. A grandfathering provision would allow existing unitary savings and
loan holding companies to continue to engage in activities permitted a unitary
savings and loan holding company under existing law and that grandfather could
be transferred to acquirers. Unless the grandfather date in the bill is
changed, the Company would not qualify for the grandfather if the legislation is
enacted. The Bank is unable to predict whether the legislation will be enacted
or, given such uncertainty, determine the extent to which the legislation, if
enacted, would affect its business. The Bank is also unable to predict whether
the SAIF and BIF will eventually be merged.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the common stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's common stock
will be registered with the SEC under the Exchange Act. The Company will then
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the common stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the common stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under specific circumstances.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each
of which approximately contains one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Messrs. Paul S. Allen, Joseph M. Houser, Jr., Asher Nesin and
Norman H. Storey, has a term of office expiring at the first annual meeting of
stockholders, a second class, consisting of Messrs. James A. Adams, Francis J.
Ehrhardt, Cornelius D. Mahoney and D. Jeffrey Templeton, has a term expiring at
the second annual meeting of stockholders and a third class, consisting of
Messrs. William G. Aiken, Richard L. Pomeroy, Paul Tsatsos and Joseph P. Keenan
and Ms. Ann V. Schultz, has a term of office expiring at the third annual
meeting of stockholders.
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names. Information concerning the
principal occupations, employment and other information for
97
<PAGE>
each executive officer and director of the Company during the past five years is
set forth under "Management of the Bank--Biographical Information."
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH THE COMPANY
- ---- ---------------------------------
<S> <C>
Cornelius D. Mahoney...... President and Chief Executive Officer
Debra L. Murphy........... Senior Vice President and Chief Financial Officer
Agostino J. Calheno....... Senior Vice President
Terry J. Bennett.......... Corporate Secretary
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation, retirement or removal by the Board of Directors.
DIRECTOR COMPENSATION
Since formation of the Company, none of the executive officers, directors
or other personnel have received remuneration from the Company. For information
regarding fees paid to the Bank's Board of Trustees, see "Management of the
Bank--Trustee and Director Compensation."
98
<PAGE>
MANAGEMENT OF THE BANK
TRUSTEES
The Directors of the Company are also Trustees of the Bank. Upon
consummation of the Conversion, the current Trustees of the Bank will become the
Directors of the stock chartered Bank. The following table sets forth
information regarding the Board of Trustees of the Bank.
<TABLE>
<CAPTION>
TRUSTEE TERM
NAME AGE (1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- --------------------- ------- ------------------------------ ------- -------
<S> <C> <C> <C> <C>
James A. Adams 74 Trustee 1962 2000
William G. Aiken 57 Trustee 1983 2001
Paul S. Allen 78 Trustee 1974 1999
Francis J. Ehrhardt 71 Trustee 1979 2000
Joseph M. Houser, Jr. 59 Trustee 1983 1999
Joseph P. Keenan 50 Trustee 1991 2001
Cornelius D. Mahoney 53 Trustee, President and 1985 2000
Chief Executive Officer
Asher Nesin 80 Chairman of the Board and 1963 1999
Vice President
Richard L. Pomeroy 71 Trustee 1986 2001
Ann V. Schultz 64 Trustee 1991 2001
Norman H. Storey 52 Trustee 1987 1999
D. Jeffrey Templeton 57 Trustee 1988 2000
Paul Tsatsos 51 Trustee 1995 2001
</TABLE>
__________________________
(1) As of August 31, 1998
EXECUTIVE OFFICERS WHO ARE NOT TRUSTEES
The following table sets forth information regarding the executive officers
of the Bank who are not also trustees.
<TABLE>
<CAPTION>
NAME AGE (1) POSITION(S) HELD WITH THE BANK
- ------------------- --------- -------------------------------
<S> <C> <C>
Agostino J. Calheno 48 Senior Vice President - Lending
Debra L. Murphy 42 Senior Vice President and
Treasurer
</TABLE>
____________________________
(1) As of August 31, 1998.
99
<PAGE>
The executive officers of the Bank are elected annually and will hold
office in the converted Bank until the annual meeting of the Board of Directors
of the Bank held immediately after the first annual meeting of stockholders of
the Bank subsequent to Conversion, and until their successors are elected and
qualified or until death, resignation, retirement or removal by the Board of
Directors. Officers are re-elected by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
TRUSTEES
James A. Adams is president and funeral director of Adams Funeral Service,
Inc., located in Westfield, Massachusetts. Mr. Adams has served as a Trustee
since 1962.
William G. Aiken has been a pharmacy manager with Foodmart Pharmacy since
October, 1997. From 1990 to September, 1997, Mr. Aiken was the pharmacy manager
of Brooks Drug. He has been a member of the Board of Trustees since 1983.
Paul S. Allen is a certified public accountant. He has maintained a
practice with Paul S. Allen, sole proprietorship, for over fifty years. He has
served on the Board of Trustees since 1974.
Francis J. Ehrhardt is a manager of commercial real estate and a general
contractor. He has served as a Trustee since 1979.
Joseph M. Houser, Jr. has been a self-employed certified public accountant
for the past twenty-seven years and a consultant with Data Results, Inc. for the
past seven years. Mr. Houser has been a Trustee since 1983.
Joseph P. Keenan is a self-employed physician. He has been a Trustee since
1991.
Cornelius D. Mahoney joined Woronoco Savings Bank in 1975 after five years
at First Hawaiian Bank, Honolulu, Hawaii. He became President and Chief
Executive Office and Trustee of the Bank in 1986. He is the immediate Past
Chairman of America's Community Bankers, Past Chairman of the Massachusetts
Bankers Association and a former Director of the Federal Home Loan Bank of
Boston. Mr. Mahoney holds an MBA from Western New England College.
Asher Nesin has served since 1994 as Chairman of the Board of Directors of
Micro Abrasives Corp., a company that manufactures precision abrasive lapping
powders. From 1957 until 1994, Mr. Nesin was President and Chief Executive
Officer of Micro Abrasives Corp. He has been a Trustee of the Bank since 1963,
Chairman of the Board of Trustees since 1979 and Vice President of the Bank
since 1979.
Richard L. Pomeroy has been a member of the Board of Trustees since 1986.
Until his retirement in 1987, he was the owner of and an insurance agent with
Pomeroy Insurance, Inc.
Ann V. Schultz served as a vice president of the Bank from 1987 to 1990.
She has served on the Board of Trustees since 1991.
Norman H. Storey has been a real estate broker with Storey Real Estate for
the past 30 years. In addition, Mr. Storey has been a reserve police officer
for the past 30 years and Justice of the Peace for the past eight years with the
Town of Southwick, Massachusetts. Mr. Storey has served as a Trustee of the
Bank since 1987.
D. Jeffrey Templeton is the owner and President of The Mosher Company, Inc.
of Chicopee, Massachusetts, a manufacturer of buffing and polishing compounds,
abrasive slurries and distributor of related grinding, polishing and lapping
machinery. Mr. Templeton has been a member of the Board of Trustees since 1988.
100
<PAGE>
Paul Tsatsos is a self-employed certified public accountant. He has been a
Trustee with the Bank since 1995.
EXECUTIVE OFFICERS WHO ARE NOT TRUSTEES
Agostino J. Calheno joined the Bank in 1992 as Senior Vice President of
Lending. He operates as the chief lending officer of the Bank, overseeing all
lending operations. Mr. Calheno has over twenty-four years of bank lending
experience in the local area. He is a member of the Mortgage Markets and
Lending Technology Committee of America's Community Bankers and serves on
numerous boards of local charitable organizations. Mr. Calheno received a
B.B.A. from the University of Massachusetts and is a graduate of the National
School of Finance & Management and Executive Development Program at Fairfield
University.
Debra L. Murphy, CPA joined the Bank in 1988 as Senior Vice President and
Treasurer. She operates as the chief financial officer of the Bank and is
responsible for all regulatory financial reporting and management of the
investment portfolio, in addition to overseeing the human resource and training
areas of the Bank. She has ten years previous experience with KPMG Peat
Marwick as senior audit manager specializing in the audits of financial
institutions. Ms. Murphy received a B.B.A. from the University of Massachusetts
and is a graduate of the National School of Finance & Management and the
Executive Development Program at Fairfield University. She also serves on
several boards of charitable organization within the local community.
MEETINGS AND COMMITTEES OF THE BOARDS OF THE BANK AND THE COMPANY
Currently, the Bank's Board of Trustees meets every two months and may have
additional special meetings as may be called in the manner specified in the
Bylaws. During the year ended December 31, 1997, the Board held six meetings.
No Trustee attended fewer than 75% in the aggregate of the total number of
meetings of the Board or Board Committees on which such Trustee served for the
year ended December 31, 1997. After Conversion, the Bank anticipates conducting
board meetings on a monthly basis.
The Board of Trustees of the Bank has established the following committees:
The Bank's Board of Investment consists of Messrs. Nesin (Chairperson),
Ehrhardt, Aiken, Houser, Mahoney and Storey. The Board of Investment is
responsible for approving all loans made or acquired by the Bank, establishing
rates of interest charged for loans and paid for deposits, approving and
monitoring all securities investment activities and approving and monitoring
foreclosure actions. The Board of Investment meets bi-weekly or more frequently
if necessary and met 24 times in 1997. After Conversion, the Board of
Investment will be replaced with an Executive Committee. The Bank anticipates
that such committee will meet on a monthly basis.
The Audit Committee consists of Messrs. Tsatsos (Chairperson), Allen and
Templeton. This committee is responsible for reviewing the Bank's financial
statements, supervising the Bank's internal auditor and engaging the Bank's
external auditors. The committee meets quarterly and met four times in 1997.
The Long Range Planning Committee consist of Messrs. Aiken (Chairperson),
Mahoney and Nesin and Ms. Schultz. This Committee reviews and assesses the
validity of the Bank's long-term Business Plan and reaffirms the Business Plan's
underlying principles and strategies. The Committee meets annually and met once
in 1997.
The Bylaw Committee consists of Carl J. Antonellis, Jr., clerk of the Bank
(Chairperson), and Messrs. Pomeroy and Templeton. This committee is responsible
for reviewing and proposing revisions to the Bylaws of the Bank, as necessary.
The committee meets on an as-needed basis and met once in 1997.
The Building Committee consists of Messrs. Ehrhardt (Chairperson), Pomeroy
and Storey as voting members and Mr. James E. Gardner, Executive Vice President
of the Bank, in an ex officio capacity. This committee is responsible for
examining and supervising the physical structure and maintenance of the Bank's
real estate facilities. The committee meets quarterly or on an as-needed basis
and met ten times in 1997.
101
<PAGE>
The Personnel and Compensation Committee consists of Messrs. Templeton
(Chairperson), Nesin and Ehrhardt and is responsible for all matters regarding
compensation and fringe benefits for executive officers of the Bank. The
committee meets annually or on an as-needed basis and met three times in 1997.
The Trust Committee consists of Messrs. Houser (Chairperson), Adams,
Pomeroy and Mahoney. This committee is responsible for certifying the
activities of the Bank's trust department. The committee meets on a bi-monthly
basis and met six times in 1997.
Additionally, the Bank has a number of management committees including the
Asset/Liability Management Committee and the Technology Committee.
The Board of Directors of the Company has established the following
committees: the Audit Committee consisting of Messrs. Allen, Templeton and
Tsatsos; the Pricing Committee consisting of the entire Board of Directors of
the Company; the Compensation Committee consisting of Messrs. Ehrhardt, Nesin
and Templeton; and the Nominating Committee consisting of Ms. Schultz and
Messrs. Adams and Storey.
TRUSTEE AND DIRECTOR COMPENSATION
Non-employee Trustees of the Bank currently receive an annual retainer of
$1,200, except that the Chairman of the Board receives an annual retainer of
$6,000, and receive a fee of $300 for every Board of Trustee or committee
meeting attended. Members of the Bank's Board of Investment additionally
receive an annual retainer of $3,600 and a fee of $300 for every meeting
attended. The Clerk of the Board of Investment receives an annual retainer of
$900. Additionally, committee chairpersons, other than the Chairman of the
Board of Trustees, receive an annual retainer of $1,200. The Clerk of the Bank
receives an annual retainer of $600 and a fee of $350 for every Board of Trustee
meeting attended. In 1997, the Board of Trustees met six times and the Board of
Investment held 24 meetings.
After Conversion, the Bank plans to provide all non-employee directors of
the Bank with an annual retainer of $3,600 and a fee of $500 for all regular
monthly and special meetings attended. In addition, the Bank plans to replace
the Board of Investment with an executive committee. All members of the Board
committees will receive a fee of $300 for each meeting attended, except that no
committee member will receive committee fees which aggregate more than $1,200.
The Bank plans that there will be no annual retainers for committee members or
chairpersons and no fees associated with serving as a clerk or secretary of the
Board of Directors or of any committee.
The Bank currently sponsors the Trustee Indexed Fee Continuation Plan (the
"Trustee Plan") for members of its Board of Trustees. The Trustee Plan provides
an annual retirement benefit to each trustee upon the trustee's retirement from
the Board. In order to qualify for benefits under the Trustee Plan, a trustee
must have reached age 65 and completed ten years of continuous service with the
Board at the time of his or her retirement. If the trustee has completed at
least five but less than ten continuous years of service with the Board at the
time of retirement, his or her benefits will be reduced based on a vesting
schedule contained in the plan. The retirement benefit provided to each trustee
is based on an indexed formula contained in the plan. The indexed formula is
tied to the earnings on a specific life insurance policy. The Bank has funded
the Trustee Plan through the purchase of split-dollar life insurance on the
lives of the trustees. The life insurance is actuarially designed to offset
annual expenses associated with the Trustee Plan. The Bank generally expects,
given reasonable actuarial assumptions, to offset all of the expenses of the
Trustee Plan during the life of each trustee, and recover all of the plan's
costs at the trustee's death. However, the Bank does not anticipate recovering
all of the plan's expenses in the case of the three eldest Trustees.
HONORARY TRUSTEES
The Bank also maintains three Honorary Trustees. Pursuant to the Bank's
Bylaws, persons who have served as a Trustee at the Bank for at least ten years
may be elected for an indefinite term. Honorary Trustees are not officers nor
members of the Board of Trustees and therefore are not included in determining
whether a quorum is present. Such persons receive no compensation nor are they
entitled to vote.
102
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by the Bank as well as other compensation paid or accrued for
services rendered in all capacities during the year ended December 31, 1997, to
the Chief Executive Officer and to other officers of the Bank who received
salary and bonus in excess of $100,000 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(2)
------------------------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
---------------------------------- ------------ ------------ ----------
RESTRICTED SECURITIES
FISCAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
EXECUTIVE YEAR SALARY BONUS COMPENSATION(2) AWARDS OPTION/SARS PAYOUTS COMPENSATION(3)
- --------------------------- ------- --------- -------- --------------- ------------ ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cornelius D. Mahoney
President and Chief
Executive Officer 1997 $171,572 $32,200 -- -- -- -- $121,000
Agostino J. Calheno
Senior Vice
President-Lending 1997 $ 94,800 $17,940 -- -- -- -- --
Debra L. Murphy
Senior Vice President
and Treasurer 1997 $ 94,800 $17,800 -- -- -- -- --
James E. Gardner
Vice President 1997 $ 94,400 $ 9,060 -- -- -- -- --
</TABLE>
________________________________________
(1) Under Annual Compensation, the column titled "Salary" includes amounts
deferred by the Named Executive Officers under the Bank's 401(k) Plan.
"Bonus" consists of Board approved discretionary bonus.
(2) For 1997, there were no (a) perquisites over the lesser of $50,000 or 10%
of the individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock. For 1997, the Bank had no restricted stock or stock
related plans in existence.
(3) Other compensation includes insurance premiums paid by the Bank under a
split-dollar life insurance arrangement for Mr. Mahoney.
EMPLOYMENT AGREEMENTS
Upon the Conversion, the Bank and the Company each intend to enter into
employment agreements with Messrs. Mahoney and Calheno and Ms. Murphy
(individually, the "Executive") (collectively, the "Employment Agreements").
The Employment Agreements are intended to ensure that the Bank and the Company
will be able to maintain a stable and competent management base after the
Conversion. The continued success of the Bank and the Company depends to a
significant degree on the skills and competence of the above referenced
officers.
The Employment Agreements will provide for a three-year term. The term of
the Company Employment Agreements shall be extended on a daily basis unless
written notice of non-renewal is given by the Board of Directors and the term of
the Bank Employment Agreements shall be renewable on an annual basis. The
Employment Agreements provide that the Executive's base salary will be reviewed
annually. The base salaries which will be effective for such Employment
Agreements for Messrs. Mahoney and Calheno and Ms. Murphy will be $215,000,
$115,000 and $115,000, respectively. In addition to the base salary, the
Employment Agreements provide for, among other things, participation in stock
benefits plans and other fringe benefits applicable to executive personnel. The
Employment Agreements provide for termination by the Bank or the Company for
cause, as defined in the Employment Agreements, at any time. In the event the
Bank or the Company chooses to terminate the Executive's employment for reasons
other than for cause, or in the event of the Executive's resignation from the
Bank and the Company upon: (i) failure to re-elect the Executive to his/her
current offices; (ii) a material change in the Executive's functions, duties or
responsibilities; (iii) a relocation of the Executive's principal place of
employment by more than 25 miles; (iv) a reduction in the benefits and
perquisites being provided to the Executive in the Employment Agreement; (v)
liquidation or dissolution of the Bank or the Company; or (vi) a breach of the
103
<PAGE>
Employment Agreement by the Bank or the Company, the Executive or, in the event
of death, his/her beneficiary would be entitled to receive an amount equal to
the remaining base salary payments due to the Executive for the remaining term
of the Employment Agreement and the contributions that would have been made on
the Executive's behalf to any employee benefit plans of the Bank and the Company
during the remaining term of the Employment Agreement. The Bank and the Company
would also continue and pay for the Executive's life, health, dental and
disability coverage for the remaining term of the Employment Agreement. Upon any
termination of the Executive, the Executive is subject to a one year non-
competition agreement.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, the Executive or, in the
event of the Executive's death, his/her beneficiary, would be entitled to a
severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Bank and the Company would
also continue the Executive's life, health, and disability coverage for thirty-
six months. Notwithstanding that both the Bank and Company Employment
Agreements provide for a severance payment in the event of a change in control,
the Executive would only be entitled to receive a severance payment under one
agreement.
Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company's Employment Agreement would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under
Massachusetts and Delaware law, respectively. In the event of a change in
control of the Bank or the Company, the total amount of payments due under the
Agreements, based solely on the base salaries of the officers who will receive
Employment Agreements excluding any benefits under any employee benefit plan
which may be payable, would equal approximately $2.2 million.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Bank intends to enter into three-year Change in
Control Agreements with six officers, who will not be covered by an employment
agreement. The Change in Control Agreement shall be renewable on an annual
basis. The Change in Control Agreements will provide that in the event that
voluntary or involuntary termination follows a change in control of the Company
or the Bank, the officers would be entitled to receive a severance payment equal
to three times their average annual compensation for the five most recent
taxable years. The Bank would also continue and pay for the officers' life,
health and disability coverage for thirty-six months following termination. In
the event of a change in control of the Company or the Bank, the total payments
that would be due under the Change in Control Agreements, based solely on the
current annual compensation paid to the officers covered by the Change in
Control Agreements and excluding any benefits under any employee benefit plan
which may be payable, would equal approximately $1.2 million.
EMPLOYEE SEVERANCE COMPENSATION PLAN
Upon consummation of the Conversion, the Bank intends to establish the
Woronoco Savings Bank Employee Severance Compensation Plan ("Severance Plan")
which will provide eligible employees with severance pay benefits in the event
of a change in control of the Bank or the Company following Conversion. The Bank
anticipates that eligible employees will participate in the Severance Plan once
they have completed one year of service with the Bank. Management personnel
with Employment Agreements or Change in Control Agreements will not participate
in the Severance Plan.
Under the Severance Plan, in the event of a change in control of the Bank
or the Company, eligible employees who are terminated from or terminate their
employment within one year of the change in control (for reasons specified under
the Severance Plan), will be entitled to receive a severance payment. As a
severance benefit, a terminated individual will receive an amount equal to one
month's base pay for each year of service with
104
<PAGE>
the Bank, up to a maximum of two years' base salary. The Bank reserves the right
to amend or terminate the Severance Plan at any time prior to a change in
control. In the event the provisions of the Severance Plan are triggered, the
total amount of payments that would be due thereunder, based solely upon current
salary levels and the anticipated benefit described above, would equal
approximately $1.3 million.
INSURANCE PLANS
All full-time employees of the Bank, upon completion of the applicable
introductory period, may elect coverage for comprehensive hospitalization and
medical insurance.
OTHER BENEFIT PLANS
401(K) PLAN. The Bank has adopted the SBERA 401(k) Plan (the "401(k)
Plan"), a tax-qualified profit sharing plan with a qualified cash or deferred
arrangement under Section 401(k) of the Code for the benefit of its eligible
employees. The 401(k) Plan currently provides participants with savings and
retirement benefits based on employee deferrals of compensation, as well as
matching and other discretionary contributions made by the Bank. Eligible
employees may begin participating in the 401(k) Plan upon the completion of one
"Year of Service" (as defined in the 401(k) Plan) and attainment of age twenty-
one. Participants currently may make annual salary reduction contributions to
the 401(k) Plan in amounts from 1% to 15% of their compensation, subject to a
legally permissible limit ($10,000 for 1998). The Bank, effective July 1, 1998,
makes a matching contribution equal to 100% of the first 3% of compensation
deferred by each participant in the 401(k) Plan. A participant is always 100%
vested in his or her elective deferrals of compensation under the 401(k) Plan.
Participants are also always 100% vested in employer contributions to the 401(k)
Plan.
Currently, participants may invest their accounts under the 401(k) Plan in
and among eight funds sponsored by SBERA. The Bank intends to add, as an
investment option, an employer stock fund in which participants may invest a
portion of their account balances primarily in Company stock, subject to
limitations set forth in the plan document.
Generally, distributions from the 401(k) Plan may commence upon a
participant's separation from service for any reason. However, participants may
request hardship withdrawals and loans from the 401(k) Plan. Distributions from
the 401(k) Plan are generally subject to federal and state income taxes and
distributions made prior to a participant attaining age 59 1/2 are also subject
to a federal excise tax.
PENSION PLAN. The Bank also maintains a tax-qualified defined benefit
pension plan for its employees (the "Pension Plan"). Generally, eligible
employees of the Bank begin participating in the Pension Plan upon the
completion of one "Year of Service" (as defined in the Pension Plan) and the
attainment of age twenty-one. The Bank makes contributions to the Pension Plan
sufficient to fund benefits determined according to a formula set forth in the
plan. A participant's accrued benefit under the Pension Plan is actuarially
determined based on the participant's compensation (as described in the plan)
and the participant's service with the Bank. A participant becomes eligible for
a full benefit upon attainment of his normal retirement age (age 65). The
Pension Plan also provides a reduced early retirement benefit for participants
who retire between the ages of 55 and 65. Participants become vested in their
accrued benefits under the Pension Plan upon completing 3 years of service or
age sixty-two, if earlier.
105
<PAGE>
The table below reflects the annual pension benefit payable to a
participant in the Pension Plan, assuming various levels of compensation and
years of service credited as of the participant's normal retirement age. As of
August 31, 1998, Mr. Mahoney had 22.5 years of service with the Bank for
purposes of the Pension Plan.
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
--------------------------------------------
AVERAGE
ANNUAL
EARNINGS(1) 15 20 25 30 35
----------- --------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
$ 50,000 $11,823 $15,765 $19,706 $23,647 $23,647
$ 75,000 19,136 25,515 31,893 38,272 38,272
$100,000 26,448 35,265 44,081 52,897 52,897
$125,000 33,761 45,015 56,268 67,522 67,522
$150,000 41,073 54,765 68,456 82,147 82,147
$175,000 43,998 58,665 73,331 87,997 87,997
$200,000 43,998 58,665 73,331 87,997 87,997
$250,000 43,998 58,665 73,331 87,997 87,997
$300,000 43,998 58,665 73,331 87,997 87,997
$350,000 43,998 58,665 73,331 87,997 87,997
$400,000 43,998 58,665 73,331 87,997 87,997
</TABLE>
_______________________
(1) Code Section 401(a)(17) limits the amount of compensation the Bank
may consider in computing benefits under the Pension Plan to
$150,000, as periodically adjusted ($160,000 for 1998).
EMPLOYEE STOCK OWNERSHIP PLAN. The Bank intends to establish a tax-qualified
employee stock ownership plan (the ESOP) in connection with the Conversion.
Generally, eligible employees will become participants in the ESOP upon the
completion of one year of service with the Bank (with credit given for service
with the Bank prior to adoption of the plan) and attainment of age twenty-one.
With the consent of the Bank, an affiliate of the Bank may adopt the ESOP for
the benefit of its employees.
The Bank expects a committee of the Board of Directors to serve as the
administrative committee of the ESOP (the "ESOP Committee"). The ESOP
Committee will appoint an unrelated corporate trustee for the ESOP prior to the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding the investment of funds contributed to the ESOP, subject to
the terms of the plan document and the trust agreement. The Bank expects the
ESOP to purchase 8% of the common stock issued in the Conversion, including
shares issued to the Foundation. As part of the Conversion, and in order to fund
the ESOP's purchase of the common stock issued in the Conversion, the ESOP
intends to borrow funds either from the ESOP Loan Subsidiary or a third-party
lender equal to 100% of the aggregate purchase price of the common stock. The
trustee of the ESOP will repay the loan principally from the Bank's annual
contributions to the ESOP over an expected period of 12 years. Subject to
receipt of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since participants in the
ESOP are employees of the Bank or, alternatively, the Bank may reimburse the
Company for contributions made by the Company with respect to employees of the
Bank. The Bank expects the initial interest rate (which may be fixed or
variable) for the loan to be at or near the prime rate on or about the date of
Conversion.
The trustee of the ESOP will pledge shares of common stock purchased by the
ESOP in connection with the Conversion as collateral for the loan and will hold
the shares in a suspense account. As the trustee repays the loan, the trustee
will release a portion of the shares from the suspense account and allocated
them to the accounts of participants in the ESOP. The trustee will release the
pledged shares annually from the suspense account in an amount proportional to
the repayment of the ESOP loan and allocate the released shares to the
participants as follows: first, if applicable, a portion of the shares released
during the plan year will be allocated to a special
106
<PAGE>
"matching" account under the ESOP equal in value to the amount of matching
contribution, if any, to which the participant would be entitled under the terms
of the 401(k) Plan for the plan year. Second, the trustee will allocate the
remaining shares released from the suspense account (as well as any other non-
matching contributions made to the ESOP) to active participants' accounts in an
amount proportional to each participant's compensation (as determined under the
terms of the plan) relative to all participants' compensation for the plan year.
Participants will generally become fully vested in contributions made to the
ESOP by the Bank, including any matching contributions relating to employee
deferrals under the 401(k) Plan upon the completion of three years of service
(with credit given for service with the Bank prior to its adoption of the ESOP).
Benefits generally become distributable under the ESOP and become subject to
income tax upon death, retirement, disability or other separation from service.
The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
subject to its fiduciary duties under ERISA, will vote the unallocated shares
(i.e., those held in the suspense account) and allocated shares for which it
receives no proper voting instructions in a manner calculated to most accurately
reflect the instructions it receives from participants regarding the allocated
stock. In the event no shares have been allocated under the ESOP at the time
such shares are to be voted, each participant shall be deemed to have one share
allocated to his account solely for voting purposes.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation the Bank may consider in providing benefits under its tax-qualified
retirement plans, such as the 401(k) Plan, the Pension Plan and the ESOP. The
Code further limits the amount of benefit accruals and annual contributions
under such plans on behalf of any employee. Upon Conversion, the Bank intends
to implement a non-qualified deferred compensation arrangement known as a
Supplemental Executive Retirement Plan ("SERP"). The SERP will generally
provide benefits to eligible individuals (designated by the Board of Directors
of the Bank or its affiliates) that cannot be provided under the ESOP as a
result of the limitations imposed by the Code, but that would have been provided
under the ESOP but for such limitations. In addition to providing for benefits
lost under the ESOP as a result of limitations imposed by the Code, the SERP
will also make up lost ESOP benefits to designated individuals who retire, who
terminate employment in connection with a change in control, or whose
participation in the ESOP ends due to termination of the ESOP in connection with
a change in control prior to the complete scheduled repayment of the ESOP loan.
Generally, upon the retirement of an eligible individual or upon a change in
control of the Bank or the Company prior to complete repayment of the ESOP Loan,
the SERP will provide the individual with a benefit equal to what the individual
would have received under the ESOP had he remained employed throughout the term
of the ESOP or had the ESOP not been terminated prior to the scheduled repayment
of the ESOP loan less the benefits actually provided under the ESOP on behalf of
such individual. An individual's benefits under the SERP will generally become
payable upon the participant's retirement (in accordance with the standard
retirement policies of the Bank), upon the change in control of the Bank or the
Company, or as determined under the ESOP.
The Bank may establish a grantor trust in connection with the SERP to satisfy
the obligations of the Bank with respect to the SERP. The assets of the grantor
trust would remain subject to the claims of the Bank's general creditors in the
event of the Bank's insolvency until paid to the individual pursuant to the
terms of the SERP.
SPLIT DOLLAR LIFE INSURANCE ARRANGEMENT. In 1995, the Bank established a
split-dollar life insurance arrangement for Mr. Mahoney primarily in order to
restore retirement benefits lost under the Pension Plan due to limitations
imposed by the Code. Pursuant to the terms of the split-dollar arrangement, the
Bank pays the premiums on the life insurance policy, which is owned by Mr.
Mahoney. Upon Mr. Mahoney's death, or upon liquidation of the policy's cash
surrender value, the Bank will recover all of the cumulative payments it made
with respect to the policy. In connection with the split-dollar arrangement, the
Bank also agreed to reimburse Mr. Mahoney each year for the tax obligations
arising from any federal or state taxable income he recognizes as a result of
the reportable economic benefit of the arrangement and as a result of the Bank's
reimbursement for such tax liabilities.
107
<PAGE>
STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of Directors
of the Company intends to adopt a stock-based incentive plan (the "Stock-Based
Incentive Plan") which will provide for the granting of options to purchase
common stock ("Stock Options"), common stock ("Stock Awards"), Limited Option
Rights and Limited Stock Rights to eligible officers, employees, and directors
of the Company and Bank. The Company may provide such stock based benefits
under the Stock-Based Incentive Plan or may establish one or more separate plans
which would provide for the benefits described herein.
In the event the Stock-Based Incentive Plan (or any separate plan(s)) is
adopted within one year after conversion, applicable regulations require such
plan to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. Under the Stock-Based Incentive Plan, the Company intends to grant
Stock Options in an amount equal to 10% of the shares of common stock issued in
the Conversion, including shares issued to the Foundation (385,560, 453,600,
521,640 and 599,886 shares based upon the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range), and intends to grant Stock
Awards in an amount equal to 4% of the shares of common stock issued in the
Conversion, including shares issued to the Foundation (154,224, 181,440, 208,656
and 239,954 shares based upon the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range). Any common stock awarded under the Stock-
Based Incentive Plan will be awarded at no cost to the recipients. The plan may
be funded through the purchase of common stock by a trust established in
connection with the Stock-Based Incentive Plan (or any separate plan(s)) or from
authorized but unissued shares. The Board intends to appoint an independent
fiduciary to serve as trustee of a trust to be established in connection with
the Stock-Based Incentive Plan. In the event that additional authorized but
unissued shares are acquired by the Stock-Based Incentive Plan after the
Conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."
The grants of Stock Options and Stock Awards will be designed to attract and
retain qualified personnel in key positions, provide officers and key employees
with a propriety interest in the Company as an incentive to contribute to the
success of the Company and reward key employees for outstanding performance. All
employees of the Company and its subsidiaries, including the Bank, will be
eligible to participate in the Stock-Based Incentive Plan. It is expected that
the committee administering the plan will determine the terms of awards granted
to officers and employees. The committee will also determine whether Stock
Options will be Incentive or Non-Statutory Stock Options, as defined below, the
number of shares subject to each stock option and Stock Award, the exercise
price of each Non-Statutory Stock Option, whether Stock Options may be exercised
by delivering other shares of common stock, and when Stock Options become
exercisable or Stock Awards vest. Only employees may receive grants of Incentive
Stock Options. Therefore, under the Stock-Based Incentive Plan, directors may
receive only grants of Non-Statutory Stock Options. If such plan is adopted
within one year after conversion, FDIC regulations provide that no individual
officer or employee of the Bank may receive more than 25% of the stock options
available under the Stock-Based Incentive Plan (or any separate plan for
officers and employees) and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate, of the stock options available under the
Stock-Based Incentive Plan (or any separate plan for directors). FDIC
regulations also provide that no individual officer or employee of the Bank may
receive more than 25% of the restricted stock awards available under the Stock-
Based Incentive Plan (or any separate plan for officers and employees) and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the restricted stock awards available under the Stock-Based
Incentive Plan (or any separate plan for directors).
The Stock-Based Incentive Plan will provide for the grant of: (i) Stock
Options intended to qualify as incentive Stock Options under Section 422 of the
Code ("Incentive Stock Options"); (ii) Stock Options that do not so qualify
("Non-Statutory Stock Options"); and (iii) limited option rights ("Limited
Option Rights"). Limited Option Rights are exercisable only upon a change in
control of the Bank or the Company. It is anticipated that all Stock Options
granted contemporaneously with stockholder approval of the Stock-Based Incentive
Plan will qualify as Incentive Stock Options to the extent permitted under
Section 422 of the Code. Unless sooner terminated, the Stock-Based Incentive
Plan will be in effect for a period of ten years from the earlier of adoption by
the Board of Directors or approval by the Company's Stockholders. Subject to
stockholder approval, the Company intends to grant Stock Options with Limited
Option Rights under the plan at an exercise price equal to at least the fair
market value of the underlying common stock on the date of grant.
108
<PAGE>
An individual will not be deemed to have received taxable income upon the
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been a disqualifying disposition. In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
common stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
The Stock-Based Incentive Plan will provide for the granting of Stock Awards
and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of the Company or Bank as described in the
plan. Subject to any applicable Massachusetts or FDIC regulations, upon the
exercise of a Limited Stock Right, the recipient will be entitled to receive a
cash payment equal to the fair market value of all unvested Stock Awards in
exchange for any rights to such unvested Stock Awards. Grants of Stock Awards
and Limited Stock Rights to officers and employees may be made in the form of
base grants and/or performance grants (the vesting of which would be contingent
upon performance goals established by the committee administering the plan). In
establishing any performance goals, the committee may utilize the annual
financial results of the Bank, actual performance of the Bank as compared to
targeted goals such as the ratio of the Bank's net worth to total assets, the
Bank's return on average assets, or such other performance standards as
determined by the committee with the approval of the Board of Directors.
When a participant becomes vested with respect to Stock Award, the
participant will realize ordinary income equal to the fair market value of the
common stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted Stock Awards become vested and shares of common stock are actually
distributed to participants, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of Stock
Awards may direct the voting of the shares awarded to them. Shares not subject
to grants and shares allocated subject to the achievement of performance goals
will be voted by the trustee in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they vest.
The vesting periods for awards under the Stock-Based Incentive Plan will be
determined by the Committee administering the Plan. If the Stock-Based Incentive
Plan (or any separate plans for employees and directors) is adopted within one
year after conversion, awards would become vested and exercisable subject to
applicable regulations, which such regulations require that any awards begin
vesting no earlier than one year from the date of shareholder approval of the
plan and, thereafter, vest at a rate of no more than 20% per year and may not be
accelerated except in the case of death or disability. Stock Options could be
exercisable for three months following the date on which the employee or
director ceases to perform services for the Bank or the Company, except that in
the event of death or disability, options accelerate and become fully vested and
could be exercisable for up to one year thereafter or such longer period as
determined by the Company. In the case of death or disability, Stock Options may
be exercised for a period of 12 months. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee would be treated as a Non-Statutory Stock
Option. In the event of retirement, if the optionee continues to perform
services as a director or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a consultant or
director. In the event of death, disability or normal retirement, the Company,
if requested by the optionee, or the optionee's beneficiary, could elect, in
exchange for vested options, to pay the optionee, or the optionee's beneficiary
in the event of death, the amount by which the fair market value of the common
stock exceeds the exercise price of the
109
<PAGE>
options on the date of the employee's termination of employment.
Subject to any applicable regulatory requirements, the Stock-Based Incentive
Plan (or any separate plans for employees and directors) may be amended
subsequent to the expiration of the one-year period to provide for accelerated
vesting of previously granted Stock Options or Stock Awards in the event of a
change in control of the Company or the Bank. A change in control would
generally be considered to occur when a person or group of persons acting in
concert acquires beneficial ownership of 20% or more of any class of equity
security of the Company or the Bank or in the event of a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which resulted in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.
TRANSACTIONS WITH RELATED PERSONS
Federal regulations require that all loans or extensions of credit to
executive officers and trustees must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a trustee or executive officer in excess of the greater
of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Trustees.
The Bank currently makes loans to its executive officers and trustees on the
same terms and conditions offered to the general public. The Bank's policy
provides that all loans made by the Bank to its executive officers and trustees
be made in the ordinary course of business, on substantially the same terms,
including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. As of August 31, 1998, 19
of the Bank's executive officers or trustees had loans with outstanding balances
totaling $1.4 million in the aggregate. All such loans were made by the Bank in
the ordinary course of business, with no favorable terms and such loans do not
involve more than the normal risk of collectibility or present unfavorable
features.
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no less
favorable to the Company than could have been obtained by it in arm's length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of the Company not having any interest in the
transaction.
110
<PAGE>
SUBSCRIPTIONS OF TRUSTEES AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of common stock that the
Bank's trustees and executive officers and their associates propose to purchase,
assuming shares of common stock are sold at the minimum and maximum of the
Estimated Price Range and that sufficient shares will be available to satisfy
their subscriptions. The table also sets forth the total expected beneficial
ownership of common stock as to all trustees and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED PRICE OF THE ESTIMATED PRICE
RANGE (1) RANGE (1)
---------------------------- ----------------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES SOLD OF SHARES SOLD
- ---- -------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
James A. Adams..................... $ 30,000 3,000 0.08 3,000 0.06%
William G. Aiken................... 15,000 1,500 0.04 1,500 0.03
Paul S. Allen...................... 5,000 500 0.01 500 0.01
Francis J. Ehrhardt................ 15,000 1,500 0.04 1,500 0.03
Joseph M. Houser, Jr............... 10,000 1,000 0.03 1,000 0.02
Joseph P. Keenan................... 200,000(2) 20,000 0.56 20,000 0.41
Cornelius D. Mahoney............... 15,000 1,500 0.04 1,500 0.03
Asher Nesin........................ 50,000 5,000 0.14 5,000 0.10
Richard L. Pomeroy................. 10,000 1,000 0.03 1,000 0.02
Ann V. Schultz..................... 15,000 1,500 0.04 1,500 0.03
Norman H. Storey................... 25,000 2,500 0.07 2,500 0.05
D. Jeffrey Templeton............... 50,000 5,000 0.14 5,000 0.10
Paul Tsatsos....................... 40,000 4,000 0.11 4,000 0.08
Agostino J. Calheno................ 15,000 1,500 0.04 1,500 0.03
Debra L. Murphy.................... 15,000 1,500 0.04 1,500 0.03
--------- ------- -------- --------- -------
All Trustees and Executive Officers $510,000 51,000 1.43% 51,000 1.06%
as a Group (15 persons)(3)....... ========= ======= ======== ========= =======
</TABLE>
______________________________
(1) Includes proposed subscriptions, if any, by associates. Does not include
orders by the ESOP. Intended purchases by the ESOP are expected to be 8%
of the shares issued in the Conversion, including shares issued to the
Foundation. Also does not include common stock which may be awarded
under the Stock-Based Incentive Plan to be adopted equal to 4% of the
common stock issued in the Conversion, including shares issued to the
Foundation, and common stock which may be purchased pursuant to options
which may be granted under the Stock-Based Incentive Plan equal to 10% of
the number of shares of common stock issued in the Conversion, including
shares issued to the Foundation.
(2) Such amount represents the maximum allowable purchase for such
individual.
(3) Including the effect of shares issued to the Foundation, the aggregate
beneficial ownership of all trustees and executive officers as a group
would be 1.32% and 0.98% at the minimum and maximum of the Estimated
Price Range, respectively.
111
<PAGE>
THE CONVERSION
THE BOARD OF TRUSTEES OF THE BANK AND THE COMMISSIONER OF BANKS OF THE
COMMONWEALTH OF MASSACHUSETTS HAVE APPROVED THE PLAN OF CONVERSION, SUBJECT TO
APPROVAL BY THE CORPORATORS OF THE BANK ENTITLED TO VOTE ON THE MATTER AND THE
SATISFACTION OF CERTAIN OTHER CONDITIONS. HOWEVER, SUCH APPROVAL BY THE
COMMISSIONER DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF
CONVERSION BY SUCH AGENCY.
GENERAL
On August 26, 1998, the Bank's Board of Trustees unanimously adopted a Plan
of Conversion (the "Plan"), which was subsequently amended, pursuant to which
the Bank will be converted from a Massachusetts-chartered mutual savings bank to
a Massachusetts-chartered stock savings bank. It is currently intended that all
of the capital stock of the Bank will be held by the Company, which is
incorporated under Delaware law. The Plan has been approved by the Commissioner
and the Bank has received a notice of intent not to object to the Plan from the
FDIC, subject to, among other things, approval of the Plan by the Bank's
corporators. A special meeting of the Bank's corporators has been called for
this purpose to be held on ___________, 1999 (the "Special Meeting").
The Company expects to receive approval from the OTS to become a savings
and loan holding company and to acquire all of the common stock of the Bank to
be issued in the Conversion. The Company plans to retain 50% of the net
proceeds from the sale of the common stock and to use the remaining 50% to
purchase all of the common stock of the Bank to be issued in the Conversion.
The Conversion will be effected only upon completion of the sale of all of the
shares of common stock of the Company or all of the common stock of the Bank, if
the holding company form of organization is not utilized, to be issued in the
Conversion.
The Plan provides that the Board of Trustees of the Bank, at any time prior
to the issuance of the common stock and for any reason, may decide not to use
the holding company form of organization in implementing the Conversion. Such
reasons may include possible delays resulting from overlapping regulatory
processing, or policies or conditions, which could adversely affect the Bank's
or the Company's ability to consummate the Conversion and transact its business
after the Conversion as contemplated herein and in accordance with the Bank's
operating policies. In the event that such a decision is made, the Bank will
withdraw the Company's registration statement from the SEC and will take all
steps necessary to complete the Conversion without the Company, including filing
any necessary documents with the Commissioner, FDIC and any other appropriate
regulatory authority. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Bank determines
not to complete the Conversion, if permitted by the Commissioner, the Bank will
issue and sell the common stock of the Bank and subscribers will be notified of
the elimination of the Company and resolicited (i.e., be permitted to affirm
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
funds will be promptly refunded with interest, or be permitted to modify or
rescind their subscriptions) and notified of the time period within which
subscribers must affirmatively notify the Bank of their intention to affirm,
modify or rescind their subscription. The following description of the Plan
assumes that a holding company form of organization will be used in the
Conversion. In the event that a holding company form of organization is not
used, all other pertinent terms of the Plan as described below will apply to the
conversion of the Bank from the mutual to stock form of organization and the
sale of the Bank's common stock.
The Plan provides generally that the Bank will convert from a mutual
savings bank to a capital stock savings bank and that non-transferable
subscription rights to subscribe for the common stock in a subscription offering
(the "Subscription Offering") will be granted in the following order of
priority: (1) holders of deposit accounts of the Bank which totalled $50 or
more on July 31, 1997 ("Eligible Account Holders"); (2) holders of deposit
accounts of the Bank which totalled $50 or more on June 30, 1998 ("Supplemental
Eligible Account Holders"); (3) the Employee Plans, consisting of the ESOP which
intends to subscribe for up to 8% of the common stock issued in connection with
the Conversion, including shares issued to the Foundation; and (4) trustees,
112
<PAGE>
corporators, directors, officers and employees of the Bank and Company who do
not otherwise qualify as an Eligible Account Holder or Supplemental Eligible
Account Holder. Concurrently with the Subscription Offering, subject to the
approval of the Commissioner, shares will be offered in a direct community
offering to the general public (the "Direct Community Offering") with a
preference given to natural persons residing in Hampden and Hampshire Counties,
Massachusetts (such natural persons are referred to as "Preferred Subscribers"),
subject to the prior rights of holders of subscription rights. It is anticipated
that all shares not subscribed for in the Subscription and Direct Community
Offerings will be offered for sale by the Company to the general public in a
syndicated community offering (the "Syndicated Community Offering"). The Bank
and Company have the right to accept or reject, in whole or in part, any orders
to purchase shares of the common stock received in the Direct Community Offering
or Syndicated Community Offering.
The aggregate price of the shares of common stock to be sold in the
Conversion will be determined based upon an independent appraisal prepared by
Keller of the estimated pro forma market value of the common stock giving effect
to the Conversion. All shares of common stock to be issued and sold in the
Conversion will be sold at the same price. Keller's independent appraisal will
be updated and the final price of the shares will be determined at the
completion of the Subscription and Direct Community Offerings, if all shares are
subscribed for, or at the completion of the Syndicated Community Offering. The
independent appraisal has been performed by Keller, a consulting firm
experienced in the valuation and appraisal of savings institutions. See "--
Stock Pricing" for a determination of the estimated pro forma market value of
the common stock.
THE FOLLOWING IS A BRIEF SUMMARY OF MATERIAL ASPECTS OF THE CONVERSION.
THE SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PROVISIONS OF THE
PLAN. A COPY OF THE PLAN IS AVAILABLE UPON WRITTEN REQUEST FROM THE BANK AND IS
AVAILABLE FOR INSPECTION AT THE MAIN OFFICE OF THE BANK. THE PLAN IS ALSO FILED
AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART,
COPIES OF WHICH MAY BE OBTAINED FROM THE SEC. SEE "ADDITIONAL INFORMATION."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Bank's commitment to its local community,
the Plan of Conversion provides for the establishment of a charitable foundation
in connection with the Conversion. The Plan provides that the Bank and the
Company will establish the Foundation, and will fund the Foundation with common
stock of the Company, as further described below. The Company and the Bank
believe that the funding of the Foundation with common stock of the Company is a
means of establishing a common bond between the Bank and its community and
thereby enables the Bank's community to share in the potential growth and
success of the Company over the long-term. By further enhancing the Bank's
visibility and reputation in its local community, the Bank believes that the
Foundation will enhance the long-term value of the Bank's community banking
franchise.
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and community activities
within the Bank's local community and has previously formed a charitable
foundation. See "Business of the Bank--The Woronoco Foundation, Inc." The Bank
received a "satisfactory" CRA rating in its last CRA examination by the FDIC.
The Bank's latest MCRA rating received from the Commissioner was "high
satisfactory." The Foundation is being formed as a complement to the Bank's
existing community activities and its existing foundation's activities, not as a
replacement for such activities. The Bank intends to continue to emphasize
community lending and community activities following the Conversion. However,
such activities are not the Bank's sole corporate purpose. The Foundation,
conversely, will be completely dedicated to community activities and the
promotion of charitable causes, and may be able to support such activities in
manners that are not presently available to the Bank. The Bank believes that
the Foundation will enable the Company and the Bank to assist within the
communities in which the Bank maintains a banking office in areas beyond
community development and lending and will enhance its current activities
under the CRA. In this regard, the Board of Trustees believes the
establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Board
113
<PAGE>
further believes that the funding of the Foundation with common stock of the
Company is a means of enabling the Bank's community to share in the potential
growth and success of the Company long after completion of the Conversion. The
Foundation will accomplish that goal by providing for continued ties between the
Foundation and Bank, thereby forming a partnership within the communities in
which the Bank maintains a banking office. Charitable foundations have been
formed by other financial institutions for this purpose, among others. The Bank,
however, does not expect the contribution to the Foundation to take the place of
the Bank's traditional community lending and charitable activities. For the
years 1997, 1996 and 1995, the Bank made cash charitable contributions to
community organizations in the aggregate amount of $169,000, $81,000 and
$150,000, respectively. The Bank expects in future periods to continue making
charitable contributions within its communities. Upon Conversion, the Company
intends to contribute to the Foundation shares of its common stock equal to 8%
of the common stock sold in the Conversion, or stock valued at $3,864,000 based
on the purchase price of $10.00 per share, at the maximum of the Estimated Price
Range. The Conversion presents this Bank and the Company with a unique
opportunity to provide a substantial and continuing benefit to the communities
in which the Bank operates, and to receive the associated tax benefits, without
any significant cash cost to the Bank, and without any significant adverse
impact to the mutual depositors who are the current owners of the Bank.
Purchasers of the Company's stock make their investment decision with full
knowledge of the proposed contribution to the Foundation.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's Board of Directors will be comprised of seven members, all of
whom are existing Directors, Trustees or officers of the Company or the Bank.
The certificate of incorporation of the Foundation provides that the
corporation is organized exclusively for charitable purposes, including
community development, as set forth in Section 501(c)(3) of the Code. The
Foundation's certificate of incorporation further provides that no part of the
net earnings of the Foundation will inure to the benefit of, or be distributable
to, its directors, officers or members.
The Board of Directors of the Foundation will be responsible for
establishing the policies of the Foundation with respect to grants or donations
by the Foundation, consistent with the purposes for which the Foundation was
established. As directors of a nonprofit corporation, directors of the
Foundation will at all times be bound by their fiduciary duty to advance the
Foundation's charitable goals, to protect the assets of the Foundation and to
act in a manner consistent with the charitable purpose for which the Foundation
is established. The Directors of the Foundation will also be responsible for
directing the activities of the Foundation, including the management of the
common stock of the Company held by the Foundation. However, all shares of
common stock held by the Foundation will be voted in the same ratio as all
other shares of the common stock on all proposals considered by stockholders
of the Company.
The Foundation's place of business will be located at the Company's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the Bank.
The Board of Directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation.
The Company intends to capitalize the Foundation with common stock of the
Company in an amount equal
114
<PAGE>
to 8% of the total amount of common stock to be sold in connection with the
Conversion. At the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, the contribution to the Foundation would equal 285,600,
336,000, 386,400 and 444,360 shares, which would have a market value of $2.9
million, $3.4 million, $3.9 million and $4.4 million, respectively, assuming the
Purchase Price of $10.00 per share.
The Foundation will receive working capital from any dividends that may be
paid on the Company's common stock in the future, and subject to applicable
federal and state laws, loans collateralized by the common stock or from the
proceeds of the sale of any of the common stock in the open market from time to
time as may be permitted to provide the Foundation with additional liquidity.
As a private foundation under Section 501(c)(3) of the Code, the Foundation will
be required to distribute annually in grants or donations, a minimum of 5% of
the average fair market value of its net investment assets. One of the
conditions imposed on the gift of common stock by the Company is that the
amount of common stock that may be sold by the Foundation in any one year shall
not exceed 5% of the average market value of the assets held by the Foundation,
except where the Board of Directors of the Foundation determines that the
failure to sell an amount of common stock greater than such amount would result
in a long-term reduction of the value of the Foundation's assets and/or would
otherwise jeopardize the Foundation's capacity to carry out its charitable
purposes. Upon completion of the Conversion and the contribution of shares to
the Foundation immediately following the Conversion, the Company would have
3,855,600, 4,536,000, 5,216,400 and 5,998,860 shares issued and outstanding at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range. Because the Company will have an increased number of shares outstanding,
the voting and ownership interests of shareholders in the Company's common stock
would be diluted by 7.4%, as compared to their interests in the Company if the
Foundation was not established. For additional discussion of the dilutive
effect, see "Pro Forma Data."
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
will qualify as a Section 501(c)(3) exempt organization under the Code, and will
be classified as a private foundation. The Foundation will submit a request to
the IRS to be recognized as an exempt organization. As long as the Foundation
files its application for tax-exempt status within 15 months from the date of
its organization, and provided the IRS approves the application, the effective
date of the Foundation's status as a Section 501(c)(3) organization will be the
date of its organization. The Company's independent accountants, however, have
not rendered any advice on the regulatory condition to the contribution agreed
to by the Foundation which requires that all shares of common stock of the
Company held by the Foundation must be voted in the same ratio as all other
outstanding shares of common stock of the Company on all proposals considered by
stockholders of the Company. See "--Regulatory Conditions Imposed on the
Foundation."
Under Delaware law, the Company is authorized by statute to make charitable
contributions and case law has recognized the benefits of such contributions to
a Delaware corporation. In this regard, Delaware case law provides that a
charitable gift must be within reasonable limits as to amount and purpose to be
valid. Under the Code, the Company may deduct up to 10% of its taxable income
before the charitable contribution deduction in any one year and any
contributions made by the Company in excess of the deductible amount will be
deductible over each of the five succeeding taxable years, subject to a 10%
limitation each year. The Company and the Bank believe that the Conversion
presents a unique opportunity to establish and fund a charitable foundation
given the substantial amount of additional capital being raised in the
Conversion. In making such a determination, the Company and the Bank considered
the dilutive impact of the contribution of common stock to the Foundation on the
amount of common stock available to be offered for sale in the Conversion.
Based on such consideration, the Company and Bank believe that the contribution
to the Foundation in excess of the 10% annual limitation is
115
<PAGE>
justified given the Bank's capital position and its earnings, the substantial
additional capital being raised in the Conversion and the potential benefits of
the Foundation within the communities in which the Bank maintains a banking
office. In this regard, assuming the sale of the common stock at the midpoint of
the Estimated Price Range, the Company would have pro forma consolidated capital
of $69.8 million or 17.33% of pro forma consolidated assets and the Bank's pro
forma leverage and risk-based capital ratios would be 12.63% and 17.82%,
respectively. See "Regulatory Capital Compliance," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No Foundation." Thus,
the amount of the contribution will not adversely impact the financial condition
of the Company and the Bank and the Company and the Bank therefore believe that
the amount of the charitable contribution is reasonable given the Company's and
the Bank's pro forma capital positions. As such, the Company and the Bank
believe that the contribution does not raise safety and soundness concerns.
The Company and the Bank have received an opinion of their independent tax
advisors that the Company's contribution of its own stock to the Foundation
should not constitute an act of self-dealing, and that the Company will be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution less the nominal par value that the Foundation is
required to pay the Company for such stock, subject to a limitation based on 10%
of the Company's annual taxable income before the charitable contribution
deduction. The Company would be able to carry forward for federal income
purposes any unused portion of the deduction for five years following the
contribution. However, the Company would not be able to carry forward any
unused portion of its charitable contribution for Commonwealth of Massachusetts
income tax purposes. If the Foundation had been established in 1997, assuming
the sale of the common stock at the maximum Estimated Price Range, the Company
would have received a charitable contribution deduction of approximately $1.4
million (based on the Bank's pre-tax income for 1997, an assumed tax rate of 37%
and a contribution of common stock equal to $3.9 million). The Company is
permitted under the Code to carry over the excess contribution over the five
year period following the contribution to the Foundation. Assuming the close of
the Offerings at the midpoint of the Estimated Price Range, the Company
estimates that all of the deduction should be deductible over the six-year
period. Neither the Company nor the Bank expect to make any further
contributions to the Foundation within the first five years following the
initial contribution. After that time, the Company and the Bank may consider
future contributions to the Foundation. Any such decisions would be based on an
assessment of, among other factors, the financial condition of the Company and
the Bank at that time, the interests of shareholders and depositors of the
Company and the Bank, and the financial condition and operations of the
Foundation.
Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company will be entitled to a deduction for
the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, the Company's tax benefit related
to the contribution to the Foundation would be expensed without tax benefit,
resulting in a reduction in earnings in the year in which the IRS makes such a
determination. See "Risk Factors--Establishment of the Charitable Foundation."
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions to be agreed to by the
Foundation in writing as a condition to receiving the FDIC's non-objection to
the Bank's Conversion:
1. the Foundation will be subject to examination by the FDIC;
2. the Foundation must comply with supervisory directives imposed by the
FDIC;
116
<PAGE>
3. the Foundation will operate in accordance with written policies adopted
by the Foundation's board of directors, including a conflict of interest
policy acceptable to the FDIC;
4. the Foundation shall not engage in self-dealing and shall comply with
all laws necessary to maintain its tax-exempt status under the Code; and
5. any shares of common stock of the Company held by the Foundation must be
voted in the same ratio as all other shares of common stock of the
Company voted on all proposals considered by stockholders of the
Company; provided, however, the FDIC may waive this voting restriction
under certain circumstances, such as in the event the restriction would
result in the loss of the tax-exempt status of the Foundation, but may
impose additional conditions as part of the granting of such waiver.
There can be no assurances that the FDIC would grant a waiver,
unconditional or otherwise, of the voting restriction. If the voting
restriction is waived or becomes unenforceable, the FDIC may impose such other
conditions relating to control of the Foundation's common stock as is determined
by the FDIC to be appropriate at the time. The Foundation will also be subject
to substantially similar conditions imposed by the Commissioner and the
Massachusetts Division of Banks, as well as the requirement that the Foundation
be approved by the affirmative vote of two-thirds of the corporators present and
voting at the Special Meeting.
PURPOSES OF CONVERSION
The Bank, as a mutual bank, currently does not have stockholders and has no
authority to issue stock. By converting to the stock form of organization and
simultaneously forming its holding company, the Bank will be structured in the
form used by commercial banks, most business entities and a growing number of
savings institutions. The Board of Trustees of the Bank currently contemplates
that all of the stock of the Bank shall be held by the Company, a business
corporation organized under the laws of the State of Delaware, and that the
Company will issue and sell the common stock pursuant to the Plan. The
Conversion will be important to the future growth and performance of the Bank by
enhancing the net worth position of the Bank to enable the Bank to expand the
Bank's franchise, compete more effectively with commercial banks and other
financial institutions for new business opportunities and, as a stock
institution, to increase its equity capital base and access the capital markets
when needed. The business purposes of the Conversion are to provide the Bank
with equity capital which will enable it to increase its reserves and net worth
to support future lending and operational growth and branching activities and to
increase its ability to render services to the communities it serves. The Bank
believes that by combining quality service and products with a local ownership
base, its customers and community members who become stockholders will be more
inclined to do business with, and perhaps bring additional business to the Bank.
The holding company form of organization would provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock financial institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. While there are benefits
associated with the holding company form of organization, such form of
organization may involve additional costs associated with its maintenance and
regulation as a savings and loan company, such as additional administrative
expenses, taxes and regulatory filings or examination fees.
The potential impact of Conversion upon the Bank's capital base is
significant. At August 31, 1998, the Bank had Tier I Leverage capital of $33.3
million, or 9.08% of average assets. Assuming that $40.7 million (based on the
$42.0 million at the midpoint of the Estimated Price Range) of net proceeds are
realized from the sale of common stock (see "Pro Forma Data" for the basis of
this assumption) and assuming that 50% of the net proceeds are used by the
Company to purchase the capital stock of the Bank, the Bank's Tier I Leverage
capital would increase to $48.2 million, resulting in a pro forma leverage
capital ratio of 12.63% giving effect to the Conversion. In the event that the
holding company form of organization is not utilized and all the net proceeds,
at the midpoint
117
<PAGE>
of the Estimated Price Range, are retained by the Bank, the Bank's Tier I
Leverage capital would increase to $73.9 million, resulting in a pro forma Tier
I Leverage capital ratio of 18.6% at August 31, 1998. The investment of the net
proceeds from the sale of the common stock will provide the Bank with additional
income to further increase its capital position.
After completion of the Conversion, the unissued common stock and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and applicable regulatory approvals, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present time,
the Company has no plans with respect to additional offerings of securities,
other than the issuance of additional shares upon exercise of stock options
under the Stock-Based Incentive Plan or the possible issuance of authorized but
unissued shares to the Stock-Based Incentive Plan. Following the Conversion, the
Company will also be able to use stock-based benefit plans to attract and retain
executive and other personnel for itself and its subsidiaries. See "Management
of the Bank--Executive Compensation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution. However,
this ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the account
is reduced.
Consequently, mutual savings bank depositors normally have no way to
realize the value of their ownership interest, which may have realizable value
only in the unlikely event that the mutual savings bank is liquidated. In such
event, the depositors of record at that time, as owners, would have a claim to
share pro rata in any residual surplus and reserves after other claims,
including claims of depositors to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, depositors lose all
rights to the net worth of the mutual savings bank, except to the extent
depositors have rights to claim a pro rata share of funds representing the
liquidation account established in connection with the Conversion.
Additionally, permanent nonwithdrawable capital stock is created and offered to
depositors which represents the ownership of the institution's net worth. THE
COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS
NOT INSURED BY THE FDIC, THE MUTUAL SAVINGS CENTRAL FUND, INC. OR ANY OTHER
GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of the
permanent stock. The stock certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
deposit account the seller may hold in the institution.
No assets of the Company or the Bank will be distributed in connection with
the Conversion other than pursuant to the payment of expenses incurred in
connection therewith.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
Commissioner, the FDIC and the Mutual Savings Central Fund, Inc. After
Conversion, the Bank will continue to provide services for depositors and
borrowers under current policies by its present management and staff.
The Trustees of the Bank at the time of Conversion will serve as Directors
of the Bank after the Conversion. The Directors of the Company will consist of
the same individuals who will serve on the Board of Directors of the Bank. All
officers of the Bank at the time of Conversion will retain their positions after
the Conversion.
118
<PAGE>
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion, and each deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC and the Mutual Savings Central Fund, Inc. to the same extent
as before the Conversion. Depositors will continue to hold their existing
passbooks and other evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as it was contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF CORPORATORS. The Bank presently maintains a
board of 85 corporators. Generally, the Bank's corporators are depositors of
the Bank and residents of the communities served by the Bank. Corporators are
nominated by the Bank's nominating committee and elected by ballot at the annual
meeting of corporators. Generally, corporators promote the goodwill of the Bank
and are, therefore, individuals who are successful in their occupations and
respected in their communities. Corporators of the Bank also possess all voting
rights in the Bank. Upon Conversion, corporators will cease to exist and will
no longer be entitled to vote at meetings of the Bank. Upon Conversion, all
voting rights in the Bank will be vested in the Company as the sole stockholder
of the Bank. Exclusive voting rights with respect to the Company will be vested
in the holders of common stock. Depositors of the Bank will not have voting
rights after the Conversion except to the extent that they become stockholders
of the Company through the purchase of common stock.
TAX EFFECTS. The Bank has received opinions with regard to Federal and
Massachusetts income taxation which indicate that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for Federal or Massachusetts income tax purposes to the Bank or its Eligible
Account Holders or Supplemental Eligible Account Holders or the Company, subject
to the limitations and qualifications in such opinions. See "--Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings bank were to liquidate,
all claims of creditors (including those of depositors, to the extent of deposit
balances) would be paid first. Thereafter, if there were any assets remaining,
depositors would have a claim to receive such remaining assets, pro rata, based
upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account," if any, to certain depositors (as
described in "--Liquidation Rights," below), with any assets remaining
thereafter distributed to the Company as the holder of the Bank's capital stock.
Pursuant to applicable rules and regulations, a post-conversion merger,
consolidation, sale of bulk assets or similar combination or transaction with
another insured savings institution would not be considered a liquidation and in
such a transaction, the liquidation account would be required to be assumed by
the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the common stock
must be based on the appraised pro forma market value of the common stock, as
determined on the basis of an independent appraisal. The Bank and the Company
have retained Keller, which is experienced in the evaluation and appraisal of
business entities, to make such appraisal. For its services in making such
appraisal, Keller will receive a fee of $31,000, including expenses and fees
related to the preparation of a business plan for the Bank and the Company. The
Bank and the Company have agreed to indemnify Keller and its employees and
affiliates against specific losses (including any losses in connection with
claims under the federal securities laws) arising out of its services as the
independent appraiser, except where Keller's liability results from its own
negligence or fault.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
Keller also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the Bank,
including liquidity, capitalization, asset composition, funding mix, amount of
intangible assets owned, and level of interest rate risk; the economic,
demographic and competitive aspects of the Bank's existing marketing area; the
quality and depth of the
119
<PAGE>
Bank's management; historical, financial and other information relating to the
Bank; a comparative evaluation of the operating and financial statistics of the
Bank with those of other savings institutions; the aggregate size of the
offering of the common stock; the impact of Conversion on the Bank's net worth
and earnings potential; the proposed dividend policy of the Company and the
Bank; the trading market for securities of comparable institutions and general
conditions in the market for such securities; and recent regulatory matters. In
particular, the appraisal considered the Bank's financial condition and
projected and historical operating results, including income and expense trends,
asset size, loan portfolio composition, nonperforming loans and assets, interest
rate sensitivity position, capital position, and yields on assets and costs of
liabilities in comparison to a select group of publicly-traded thrifts with
assets equal to or less than $700 million. The Board of Trustees of the Bank and
Board of Directors of the Company have reviewed the appraisal of Keller in
determining the reasonableness and adequacy of such appraisal consistent with
applicable regulations and have reviewed the methodology and reasonableness of
assumptions utilized by Keller in the preparation of such appraisal and
established the Estimated Price in a manner consistent with this appraisal.
On the basis of the foregoing, Keller has advised the Company and the Bank
that, in its opinion dated as of October 23, 1998, the estimated pro forma
market value of the common stock being sold in connection with the Conversion
ranged from a minimum of $35.7 million to a maximum of $48.3 million with a
midpoint of $42.0 million. The Board of Directors established the Estimated
Price Range of $35.7 million to $48.3 million within the Valuation Price Range
based on the issuance of 3,570,000 to 4,830,000 shares at the Purchase Price of
$10.00 per share. The Estimated Price Range may be amended with the approval of
the Commissioner and FDIC, if required, if necessitated by subsequent
developments in the financial condition of the Company or the Bank or market
conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES OF
COMMON STOCK. KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID KELLER VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS
THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE
LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS NECESSARILY
BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE
SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS
PURCHASING SUCH SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SUCH
SHARES AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING
VALUATION OF THE PRO FORMA MARKET VALUE THEREOF.
Following commencement of the Subscription and Direct Community Offerings,
the maximum of the Estimated Price Range may be increased up to 15% and the
number of shares of common stock being sold in the Conversion may be increased
to 5,554,500 shares due to regulatory considerations, or changes in the market
and general financial and economic conditions, without the resolicitation of
subscribers. See "--Limitations on common stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the event
of an increase in the Estimated Price Range to fill unfilled orders in the
Subscription and Direct Community Offerings.
No sale of shares of common stock in the Conversion may be consummated
unless prior to such consummation Keller confirms that nothing of a material
nature has occurred which, taking into account all relevant factors, would cause
it to conclude that the aggregate price is materially incompatible with the
estimate of the pro forma valuation of the aggregate market value of the common
stock at the time of the sale of the common stock. If such is not the case, a
new Estimated Price Range may be set, a new Subscription and Direct Community
Offering and/or Syndicated Community Offering may be held or such other action
may be taken as the Company and the Bank shall determine and the Commissioner
and FDIC may permit.
Copies of the appraisal report of Keller including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."
120
<PAGE>
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Direct Community Offerings, the total number of shares to
be sold in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the Estimated Price Range or
more than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and the Keller estimate of the pro forma
market value of the common stock ranging from a minimum of $35.7 million to a
maximum, as increased by 15%, of $55.5 million, the number of shares of common
stock expected to be sold is between a minimum of 3,570,000 shares and a
maximum, as adjusted by 15%, of 5,554,500 shares. The actual number of shares
issued between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to the approval of the Commissioner
and FDIC.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Bank after consultation with
the Commissioner and FDIC, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the Commissioner and FDIC. If the number of shares issued in the
Conversion is increased due to an increase of up to 15% in the Estimated Price
Range to reflect changes in market or financial conditions, persons who
subscribed for the maximum number of shares will not be given the opportunity to
subscribe for an adjusted maximum number of shares. See "--Limitations on
Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
The number of shares to be issued and outstanding as a result of the sale
of common stock in the Conversion will be increased by a number of shares equal
to 8% of the common stock sold in the Conversion to fund the Foundation.
Assuming the sale of shares in the Offerings at the maximum of the Estimated
Price Range, the Company will issue 386,400 shares of its common stock from
authorized but unissued shares to the Foundation immediately following the
completion of the Conversion. In that event, the Company will have total shares
of common stock outstanding of 5,216,400 shares. Of that amount, the Foundation
will own 8%. Funding the Foundation with authorized but unissued shares will
have the effect of diluting the ownership and voting interests of persons
purchasing shares in the Conversion by 7.4% since a greater number of shares
will be outstanding upon completion of the Conversion than would be if the
Foundation were not established. See "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of common stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts with the Bank who had a balance of $50 or more as of July 31,
1997 ("Eligible Account Holders"); (2) holders of deposit accounts with a
balance of $50 or more as of June 30, 1998 ("Supplemental Eligible Account
Holders"); (3) the Employee Plans, including the ESOP; and (4) trustees,
corporators, directors, officers and employees who do not otherwise qualify as
Eligible or Supplemental Eligible Account Holders. All subscriptions received
will be subject to the availability of common stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion and as described below under "--Limitations on Common
121
<PAGE>
Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of: (1)
$200,000 of common stock but which may be increased to 5.0% of the common stock
offered or decreased to 0.10% of the common stock offered without the further
approval of the corporators or resolicitation of subscribers; (2) one-tenth of
one percent (.10%) of the total offering of shares of common stock; or (3)
fifteen times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of the Eligible Account Holder's
Qualifying Deposit (defined by the Plan as any deposit account in the Bank with
a balance of $50 or more as of July 31, 1997) and the denominator is the total
amount of Qualifying Deposits of all Eligible Account Holders ($___) in each
case on the Eligibility Record Date. All of such subscription rights amounts are
subject to the overall maximum purchase limitation. See "--Limitations on Common
Stock Purchases." Subscription rights received by trustees, corporators and
officers of the Bank and their associates based on increased deposits in the
Bank in the one-year period preceding July 31, 1997 will be subordinated to all
other subscription rights of Eligible Account Holders.
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of common stock in excess of the total number of such shares
eligible for subscription, the shares of common stock will be allocated so as to
permit each subscribing Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective Qualifying Deposits bear to the total amount of Qualifying Deposits
of all remaining Eligible Account Holders whose subscriptions remain unfilled;
provided, however, that no fractional shares shall be issued. If the amount so
allocated exceeds the amount subscribed for by any one or more Eligible Account
Holders, the excess shall be reallocated (one or more times as necessary) among
those Eligible Account Holders whose subscriptions are still not fully satisfied
on the same principle until all available shares have been allocated or all
subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his or her stock order form all accounts in which such Eligible Account
Holder has an ownership interest. Failure to list an account could result in
less shares being allocated than if all accounts had been disclosed.
PRIORITY 2: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent there
are sufficient shares remaining after the satisfaction of subscriptions by
Eligible Account Holders, each Supplemental Eligible Account Holder will
receive, without payment therefor, as second priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of: (1) $200,000 of common stock but which may be increased to 5.0% of
the Common stock offered or decreased to 0.10% of the common stock offered
without the further approval of the corporators or resolicitation of
subscribers; (2) one tenth of one percent (.10%) of the total offering of shares
of common stock; or (3) fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of common stock
to be issued by a fraction of which the numerator is the amount of the
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator is
the total amount of Qualifying Deposits of all Supplemental Eligible Account
Holders ($_____), in each case on the Supplemental Eligibility Record Date.
All of such subscription rights amounts are subject to the overall maximum
purchase limitation. See "--Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of common stock in excess of the
total number of shares eligible for subscription after the satisfaction of
subscriptions by Eligible Account Holders, the shares of common stock will be
allocated so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his
total allocation equal to the lesser of 100 shares or the number of shares
subscribed for. Thereafter, unallocated shares will be allocated among the
remaining subscribing Supplemental Eligible Account Holders whose
122
<PAGE>
subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of Qualifying Deposits
of all remaining Supplemental Eligible Account Holders whose subscriptions
remain unfilled; provided, however, that no fractional shares shall be issued.
If the amount so allocated exceeds the amount subscribed for by any one or more
Supplemental Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his or her stock order form all accounts in which such
Supplemental Eligible Account Holder has an ownership interest. Failure to list
an account could result in less shares being allocated than if all accounts had
been disclosed. The subscription rights received by Eligible Account Holders
will be applied in partial satisfaction of the subscription rights to be
received as a Supplemental Eligible Account Holder.
PRIORITY 3: EMPLOYEE PLANS. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by Eligible Account
Holders and Supplemental Eligible Account Holders, the Employee Plans, including
the ESOP, will receive, without payment therefor, as third priority,
nontransferable subscription rights to purchase, in the aggregate, up to 8% of
common stock issued in the Conversion, including any increase in the number of
shares of common stock to be issued in the Conversion after the date hereof as a
result of an increase of up to 15% in the maximum of the Estimated Price Range.
The ESOP intends to purchase 8% of the shares to be issued in connection with
the Conversion, including shares issued to the Foundation, or 308,448, 362,880,
417,312 and 479,908 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively. If, after the filling of
subscriptions of Eligible Account Holders and Supplemental Eligible Account
Holders, a sufficient number of shares are not available to fill the
subscriptions by the ESOP, the subscription by the ESOP shall be filled to the
maximum extent possible. If all the shares of common stock offered in the
Subscription Offering are purchased by Eligible Account Holders and Supplemental
Account Holders, then the ESOP will purchase shares in the open market following
consummation of the conversion. The ESOP shall not be deemed to be an Associate
or Affiliate of, or a Person Acting in Concert with, any trustee, corporator,
director or officer of the Company or the Bank. Subscriptions by the ESOP will
not be aggregated with shares of common stock purchased directly by or which are
otherwise attributable to any other participants in the Subscription and Direct
Community Offerings, including subscriptions of any of the Bank's trustees,
corporators, officers, employees or associates thereof. See "Management of the
Bank--Other Benefit Plans--Employee Stock Ownership Plan."
PRIORITY 4: TRUSTEES, CORPORATORS, DIRECTORS, OFFICERS AND EMPLOYEES.
Trustees, corporators, directors, officers and employees of the Bank and the
Company shall be entitled to purchase up to 30% of the total offering of shares
of capital stock, but only to the extent that shares are available after
satisfying the subscriptions of Eligible Account Holders, Supplemental Eligible
Account Holders and the Tax-Qualified Employee Stock Benefit Plan. The shares
shall be allocated among trustees, corporators, directors, officers and
employees on an equitable basis such as by giving weight to the period of
service, compensation and position of the individual, subject to the 5%
limitation on the amount of shares which may be purchased by any Person or
Participant, together with any Associate or group of persons Acting in Concert.
However, trustees, corporators, directors and officers of the Bank and the
Company shall not be deemed to be Associates or Persons Acting in Concert solely
as a result of their board membership or employment.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on ________, 1999 at 12:00 noon, Eastern time (the "Expiration
Date"), unless extended for up to 45 days by the Bank and Company or such
additional periods with the approval of the Commissioner and FDIC, if required.
Subscription rights which have not been exercised prior to the Expiration Date
will become void. The Bank will not execute orders until all shares of common
stock have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the Commissioner and FDIC, all funds
delivered to the Bank pursuant to the Subscription Offering will be returned
promptly to the subscribers with interest and all withdrawal authorizations will
be canceled. If an extension beyond the 45 day period following the Expiration
Date is granted, the Bank will notify subscribers of the extension of time and
of any rights of subscribers to modify or rescind their subscriptions and have
their funds returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Bank of their intention to confirm,
modify, or rescind their subscription. If an affirmative response to any
resolicitation is
123
<PAGE>
not received by the Company from a subscriber, such order will be rescinded and
all subscription funds will be promptly returned with interest. Such extensions
may not go beyond August 26, 2000.
DIRECT COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, Supplemental Eligible Account
Holders, the ESOP and trustees, corporators, directors, officers and employees,
the Bank has determined to offer shares pursuant to the Plan to the general
public with a preference given to Preferred Subscribers. Such persons, together
with associates of and persons acting in concert with such persons, may purchase
up to $200,000 of common stock, subject to the maximum overall purchase
limitation and exclusive of shares issued pursuant to an increase in the
Estimated Price Range by up to 15%. See "--Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% of the common
stock issued or decreased to less than $200,000 at the discretion of the Company
and the Bank, subject to the approval of the Commissioner and the FDIC. Orders
accepted in the Direct Community Offering shall be filled up to a maximum of 2%
of the total offering and thereafter remaining shares shall be allocated on an
equal number of shares basis per order until all orders have been filled. THE
OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE DIRECT COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN ITS
SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS, IN WHOLE OR IN PART,
EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING
THE EXPIRATION DATE.
RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The Company will make reasonable efforts to comply with the securities laws
of all states of the United States in which persons entitled to subscribe for
Conversion stock pursuant to the Plan reside. However, no such person will be
offered any subscription rights or sold any Conversion stock under the Plan who
resides in a foreign country or who resides in a state of the United States with
respect to which the Bank determines that compliance with the securities laws of
such state would be impracticable for reasons of cost or otherwise. No payments
will be made in lieu of the granting of subscription rights to such persons.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a consultant and
financial advisor to advise the Company and the Bank with respect to the
Subscription and Direct Community Offerings and Sandler O'Neill has agreed to
use its best efforts to solicit subscription and purchase orders for shares of
common stock in the Offerings. Sandler O'Neill is a registered broker-dealer
and a member of the National Association of Securities Dealers, Inc. ("NASD").
Sandler O'Neill will assist the Company and the Bank in the Conversion by, among
other things: (i) developing marketing materials; (ii) targeting potential
investors in the Subscription Offering and other investors eligible to
participate in the Direct Community Offering; (iii) soliciting potential
investors by phone or in person; (iv) training management and staff to perform
tasks in connection with the Conversion; (v) managing and setting up the
Conversion Center; and (vi) managing the subscription campaign.
Based on negotiations between the Bank and the Company concerning the fee
structure, Sandler O'Neill will receive a fee equal to 1.25% of the aggregate
dollar amount of all stock sold in the Subscription and Direct Community
Offerings. Such amount is exclusive of any shares sold to the ESOP, trustees,
corporators, directors, officers and employees and associates as defined in the
Bank's Plan of Conversion. Such fee will be paid upon completion of the
Conversion. In addition, Sandler O'Neill will perform conversion agent services
and records management services for the Bank in the Conversion and will receive
a fee for these services of $20,000. Sandler O'Neill shall be reimbursed for
its reasonable out-of-pocket expenses, in an amount not to exceed $50,000,
including legal fees. Sandler O'Neill has not prepared any report or opinion
constituting a recommendation or advice to the Company or the Bank or to persons
who subscribe in the Offerings, nor has it prepared an opinion as to the
fairness to the Company or the Bank of the Purchase Price or the terms of the
Offerings. Sandler O'Neill expresses no opinion as to the prices at which
common stock to be issued in the Offerings may trade. The Bank has agreed to
indemnify Sandler O'Neill against
124
<PAGE>
certain liabilities including certain liabilities under the Securities Act and
certain misrepresentations or breaches by the Company or the Bank relating to
the agreement with Sandler O'Neill. Total marketing fees to Sandler O'Neill are
expected to be $401,000 to $628,000 at the minimum and 15% above the maximum of
the Estimated Price Range, respectively. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
Trustees, directors and officers of the Bank and the Company may
participate in the solicitation of offers to purchase common stock. Questions of
prospective purchasers will be directed to officers or registered
representatives. Other employees of the Bank may participate in the Offerings
in ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase common stock or provide advice regarding the purchase of common stock.
The Company will rely on Rule 3a4-1 under the Exchange Act, and sales of common
stock will be conducted within the requirements of Rule 3a4-1, so as to permit
trustees, directors, officers and employees to participate in the sale of common
stock. No trustee, director, officer or employee of the Company or the Bank will
be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the common stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND DIRECT COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a prospectus.
To purchase shares in the Subscription and Direct Community Offerings, an
executed stock order and certification form with the required payment for each
share subscribed for, or with appropriate authorization for withdrawal from the
Bank's deposit account (which may be given by completing the appropriate blanks
in the stock order form), must be physically received by the Bank at any of its
full-service banking offices by 12:00 noon, Eastern time, on the Expiration
Date. Stock order forms which are: (i) returned as undeliverable by the United
States Postal Service; (ii) not received by such time; (iii) executed
defectively; or (iv) received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. In addition, the Bank and
Company are not obligated to accept orders submitted on photocopied or
facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. Notwithstanding the foregoing,
the Company and Bank shall have the right, each in their sole discretion, to
permit institutional investors to submit irrevocable orders together with a
legally binding commitment for payment and to thereafter pay for the shares of
common stock for which they subscribe in the Direct Community Offering at any
time prior to 48 hours before the completion of the Conversion. The Company and
the Bank have the right to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that they will do so. Once
received, an executed stock order form may not be modified, amended or rescinded
without the consent of the Bank unless the Conversion has not been completed
within 45 days after the end of the Subscription and Direct Community Offerings,
unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and trustees, corporators, directors, officers and employees are
properly identified as to their stock purchase priorities, depositors as of the
Eligibility Record Date (July 31, 1997) and the Supplemental Eligibility Record
Date (June 30, 1998) must list all accounts on the stock order form giving all
names, account numbers and social security/tax identification numbers relating
to each account. Failure to list all such names, account numbers and social
security/tax identification numbers relating to each account may result in a
reduction in the number of shares allocated to a subscribing member.
Payment for subscriptions may be made (i) in cash if delivered in person at
any full-service banking office of the Bank; (ii) by check, bank draft or money
order, provided that checks will only be accepted subject to collection; or
(iii) by authorization of withdrawal from deposit accounts maintained at the
Bank. The funds authorized to be withdrawn from a deposit account will continue
to accrue interest at the contractual rates until
125
<PAGE>
completion or termination of the Conversion, but a hold will be placed on such
funds, thereby making them unavailable to the depositor until completion or
termination of the Conversion. No wire transfers or third party checks will be
accepted. Interest will be paid on payments made by cash, check, bank draft or
money order at the Bank's passbook rate of interest from the date payment is
received until the completion or termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of common stock subscribed for
at the Purchase Price upon consummation of the Subscription and Direct Community
Offering, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company or the ESOP
Loan Subsidiary to lend to the ESOP, at such time, the aggregate Purchase Price
of the shares for which it subscribed.
Owners of self-directed IRAs and other Qualified Plan accounts, such as
Keogh accounts, may use the assets of such IRAs and other Qualified Plan
accounts, to purchase shares of common stock in the Subscription and Direct
Community Offerings, provided that such IRAs or other Qualified Plan accounts
are not maintained at the Bank. Persons with IRAs or Qualified Plan accounts
maintained at the Bank must have their accounts transferred to an unaffiliated
institution or broker to purchase shares of common stock in the Subscription and
Direct Community Offerings. In addition, the provisions of ERISA and IRS
regulations require that officers, directors and ten percent shareholders who
use self-directed IRA or Qualified Plan account funds to purchase shares of
common stock in the Subscription and Direct Community Offerings, make such
purchases for the exclusive benefit of the IRAs or Qualified Plan accounts. For
further information regarding the transfer of the above-mentioned accounts,
please call the Conversion Center at (413) ___-____.
Certificates representing shares of common stock purchased will be mailed
to purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
common stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to the rules and regulations of the Commissioner and the FDIC, no
person with subscription rights may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of common stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they
are granted and only for his or her account. Stock purchased in the
Subscription Offering must be registered in the name(s) of the registered
account holder(s) and failure to do so will result in the rejection of the
order. Joint registrations will only be allowed if the qualifying account is so
registered. Each person exercising such subscription rights will be required to
certify that he or she is purchasing shares solely for his or her own account
and that he or she has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of common stock prior to the completion of
the Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
126
<PAGE>
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of common stock not purchased in the Subscription and Direct Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the common stock. THE COMPANY
AND THE BANK HAVE THE RIGHT TO REJECT ORDERS IN WHOLE OR IN PART IN THEIR SOLE
DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Sandler O'Neill nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the common stock in the Syndicated Community Offering, however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which common stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing." Subject
to the overall maximum purchase limitation, no person, together with any
associate or group of persons acting in concert, will be permitted to subscribe
in the Syndicated Community Offering for more than $200,000 of common stock;
provided, however, that shares of common stock purchased in the Direct Community
Offering by any persons, together with associates of or persons acting in
concert with such persons, will be aggregated with purchases in the Syndicated
Community Offering and be subject to an overall maximum purchase limitation of
1.0% of the shares offered, exclusive of an increase in shares issued pursuant
to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before 12:00 noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before 12:00 noon of the next business day following the debit
date will send order forms and funds to the Bank for deposit in a segregated
account. Although purchasers' funds are not required to be in their accounts
with selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of common stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
common stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company with
the approval of the Commissioner and FDIC. Such extensions may not be beyond
August 26, 2000. See "--Stock Pricing" above for a discussion of rights of
subscribers, if any, in the event an extension is granted.
127
<PAGE>
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
common stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of: (1) $200,000 of common
stock; (2) one-tenth of one percent (.10%) of the total offering of
shares of common stock; or (3) fifteen times the product (rounded down
to the next whole number) obtained by multiplying the total number of
shares of common stock to be issued by a fraction of which the
numerator is the amount of the Eligible Account Holder's Qualifying
Deposit (defined by the Plan as any deposit account in the Bank with a
balance of $50 or more as of July 31, 1997) and the denominator is the
total amount of Qualifying Deposits of all Eligible Account Holders, in
each case on the Eligibility Record Date, subject to the overall
maximum purchase limitation described in (8) below;
(3) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of: (1)
$200,000 of common stock; (2) one tenth of one percent (.10%) of the
total offering of shares of common stock; or (3) fifteen times the
product (rounded down to the next whole number) obtained by multiplying
the total number of shares of common stock to be issued by a fraction
of which the numerator is the amount of the Supplemental Eligible
Account Holder's Qualifying Deposit (defined by the Plan as any deposit
account in the Bank with a balance of $50 or more as of June 30, 1998)
and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall maximum purchase
limitation described in (8) below;
(4) The Employee Plans, including the ESOP, are permitted to purchase, in
the aggregate, up to 10% of the shares of common stock issued in the
Conversion, including shares issued in the event of an increase in the
Estimated Price Range of 15%, and the ESOP intends to purchase 8% of
the shares of common stock issued in connection with the Conversion,
including shares issued to the Foundation;
(5) Trustees, corporators, directors, officers and employees of the Bank
and the Company shall be entitled to purchase up to 30% of the total
offering of shares of capital stock, but only to the extent that shares
are available after satisfying the subscriptions of Eligible Account
Holders, Supplemental Eligible Account Holders and the Tax-Qualified
Employee Stock Benefit Plan;
(6) Persons purchasing shares of common stock in the Direct Community
Offering, together with associates of and groups of persons acting in
concert with such persons, may purchase in the Direct Community
Offering up to $200,000 of common stock, subject to the overall maximum
purchase limitation described in (8) below;
(7) Persons purchasing shares of common stock in the Syndicated Community
Offering, together with associates of and persons acting in concert
with such persons, may purchase in the Syndicated Community Offering up
to $200,000 of common stock subject to the overall maximum purchase
limitation described in (8) below and, provided further, that shares of
common stock purchased in the Direct Community Offering by any persons,
together with associates of and persons acting in concert with such
persons, will be aggregated with purchases in the Syndicated Community
Offering in applying the $200,000 purchase limitation; and
128
<PAGE>
(8) Eligible Account Holders, Supplemental Eligible Account Holders and
trustees, corporators, directors, officers and employees may purchase
stock in the Direct Community Offering and Syndicated Community
Offering, subject to the purchase limitations described in (6) and (7)
above, provided that, except for the ESOP, the overall maximum number
of shares of common stock subscribed for or purchased in all categories
of the Conversion by any person, together with associates of and groups
of persons acting in concert with such persons, shall not exceed 1.0%
of the shares of common stock offered in the Conversion and exclusive
of an increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of depositors of
the Bank or subscribers for common stock, both the individual amount permitted
to be subscribed for and the overall maximum purchase limitation may be
increased to up to a maximum of 5% of the common stock to be issued at the sole
discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit.
The overall maximum purchase limitation may not be reduced to less than
1.0%, and the individual amount permitted to be subscribed for may not be
reduced by the Bank to less than .10% without the further approval of members or
resolicitation of subscribers. An Eligible Account Holder, Supplemental
Eligible Account Holder, or trustee, corporator, director, officer or employee
of the Bank or the Company may not purchase individually in the Subscription
Offering the overall maximum purchase limit of 1.0% of the shares offered, but
may make such purchase, together with associates of and persons acting in
concert with such person, by also purchasing in other available categories of
the Conversion, subject to availability of shares and the maximum overall
purchase limit for purchases in the Conversion.
The term "acting in concert" is defined in the Plan of Conversion to mean:
knowing participation in a joint activity or interdependent conscious parallel
action toward a common goal whether or not pursuant to an express agreement; a
combination or pooling of voting or other interest in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or a
person or company which acts in concert with another person or company ("other
party") shall also be deemed to be acting in concert with any person or company
who is also in concert with that other party, except that any Tax-Qualified
Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan
will not be deemed to be acting in concert with any other Tax-Qualified Employee
Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan or with its
director or a person who serves in a similar capacity solely for the purpose of
determining whether stock held by the director and stock held by the plan will
be aggregated. The Company and the Bank may presume that certain Persons are
acting in concert based upon, among other things, joint account relationships
and the fact that such Persons have filed joint Schedules 13D with the SEC with
respect to other companies. When Persons act together for such a common
purpose, their group is deemed to have acquired their stock.
The term "associate" of a person is defined to mean: any corporation or
organization (other than the Company, the Bank or a majority-owned subsidiary of
the Bank) of which such person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities; any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a similar
fiduciary capacity except that (i) the term "Associate" does not include any
Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified Employee
Stock Benefit Plan in which a person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity; and (ii) for purposes of
aggregating total shares that may be held by officers and trustees, the term
"Associate" does not include any Tax-Qualified or Non-Tax-Qualified Employee
Stock Benefit Plan; and any relative or spouse of such person, or any relative
of such spouse, who has the same home as such person or who is a director,
trustee or officer of the Company, the Bank, or any of its parents or
subsidiaries. Trustees and directors are not treated as associates of each
other solely because of their board membership.
129
<PAGE>
The term "Officer" means the chairman of the board, chief executive
officer, president, any officer at the level of vice president or above, clerk
and the treasurer of the Bank.
For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion, see
"Management of the Bank--Subscriptions of Trustees and Executive Officers," "--
Restrictions on Purchase or Transfer of Shares After Conversion" and
"Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive their pro rata share
of any assets of the Bank remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). To the extent there are remaining assets, a depositor would have a
claim to receive a pro rata share of any such remaining assets in the same
proportion as the value of such depositor's deposit accounts to the total value
of all deposit accounts in the Bank at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation, would have a
claim as a creditor of the same general priority as the claims of all other
general creditors of the Bank. However, except as described below, their claim
would be solely in the amount of the balance in their deposit account plus
accrued interest. Such depositor would not have an interest in the value or
assets of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion. Such
liquidation account will not be reflected as an asset or liability on the
Company's or the Bank's financial statements subsequent to the Conversion.
Additionally, no dividends may be paid to stockholders of the Bank if such
dividends would reduce stockholders' equity in the Bank below the amount of such
liquidation account. Eligible Account Holders and Supplemental Eligible Account
Holders, if they were to continue to maintain their deposit account at the Bank,
would, on a complete liquidation of the Bank, have a claim to an interest in the
liquidation account after payment of all creditors prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, including, but not limited to, demand
accounts, NOW accounts, money market deposit accounts, and certificate of
deposit accounts, with a balance of $50 or more held in the Bank on July 31,
1997 and June 30, 1998, respectively. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a claim to a pro rata interest in
the total liquidation account for each of his deposit accounts based on the
proportion that the balance of each such deposit account on the July 31, 1997
Eligibility Record Date or the June 30, 1998 Supplemental Eligibility Record
Date bore to the balance of all qualifying deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders on such date.
If, however, at the close of business on the last day of any period for
which the Bank or Company has prepared audited financial statements subsequent
to the effective date of the Conversion ("annual closing date"), the amount in
any deposit account is less than the amount in such deposit account on any other
annual closing date, then such person's interest in the liquidation account
relating to such deposit account would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is withdrawn or closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Any assets remaining after the above liquidation
rights of Eligible Account Holders and Supplemental Eligible Account Holders are
satisfied would be distributed to the Company as the sole stockholder of the
Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel with
respect to matters of federal income taxation material to the operations of the
Company and the Bank, and an opinion of its independent auditors with respect to
130
<PAGE>
matters of Massachusetts commonwealth taxation material to the operations of the
Company and the Bank, to the effect that the Conversion will not be a taxable
transaction to the Company, the Bank, Eligible Account Holders or Supplemental
Eligible Account Holders, except as noted below. The federal and Massachusetts
tax consequences will remain unchanged in the event that a holding company form
of organization is not utilized.
No private ruling has been requested from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, which has been filed with the SEC as an exhibit to
the Company's Registration Statement to the effect that for federal income tax
purposes, among other matters:
1. the Bank's change in form from mutual to stock ownership will constitute
a reorganization under section 368(a)(1)(F) of the Internal Revenue Code
and neither the Bank nor the Company will recognize any gain or loss as
a result of the Conversion;
2. no gain or loss will be recognized by the Bank or the Company upon the
purchase of the Bank's capital stock by the Company or by the Company
upon the purchase of its common stock in the Conversion;
3. no gain or loss will be recognized by Eligible Account Holders or
Supplemental Eligible Account Holders upon the issuance to them of
deposit accounts in the Bank in its stock form plus their interests in
the liquidation account in exchange for their deposit accounts in the
Bank;
4. the tax basis of the depositors' deposit accounts in the Bank
immediately after the Conversion will be the same as the basis of their
deposit accounts immediately prior to the Conversion;
5. the tax basis of each Eligible Account Holder's or Supplemental Eligible
Account Holder's interest in the liquidation account will be zero;
6. no gain or loss will be recognized by Eligible Account Holders or
Supplemental Eligible Account Holders upon the distribution to them of
nontransferable subscription rights to purchase shares of the common
stock, provided that the amount to be paid for the common stock is equal
to the fair market value of such stock; and
7. the tax basis to the stockholders of the common stock of the Company
purchased in the Conversion will be the amount paid therefor and the
holding period for the shares of common stock purchased by such persons
will begin on the date on which their subscription rights are exercised.
Wolf & Company, P.C. has opined, subject to the limitations and qualifications
in its opinion, that: the foregoing tax effects of the Conversion under
Massachusetts law are substantially the same as they are under Federal law.
Certain portions of both the Federal and the state tax opinions are based upon
the opinion of Keller that subscription rights issued in connection with the
Conversion will have no value.
In the opinion of Keller, which opinion is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the common stock
at a price equal to its estimated fair market value, which will be the same
price as the Purchase Price for the unsubscribed shares of common stock. If the
subscription rights granted to eligible subscribers are deemed to have an
ascertainable value, such recipients could be taxed either on the receipt or
exercise of such subscription rights.
Unlike private rulings, an opinion of counsel is not binding on the IRS and
the IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
131
<PAGE>
RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of common stock purchased in connection with the Conversion by
trustees, corporators, directors, officers of the Bank or Company or their
associates will be subject to a restriction that the shares not be sold for a
period of one year following the Conversion, except in the event of the death of
such trustee, corporator, director, officer or associate. Each certificate for
such restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of such restriction. Any shares of common
stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the restriction that
they may not be sold for a period of one year following the Conversion. The
directors and officers of the Bank or Company will also be subject to the
insider trading rules promulgated pursuant to the Exchange Act.
Purchases of outstanding shares of common stock of the Company by
directors, officers (or any person who was an officer or trustee of the Bank
after adoption of the Plan of Conversion) and their associates during the three-
year period following Conversion may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the
Commissioner. This restriction does not apply, however, to the purchase of
common stock pursuant to the Stock-Based Incentive Plan.
Shares purchased by an affiliate of the Company will be subject to the
resale restrictions of Rule 144 under the Securities Act. If the Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of: (i) 1% of the outstanding shares of the Company or (ii) the average
weekly volume of trading in such shares during the preceding four calendar
weeks. Provision may be made in the future by the Company to permit affiliates
to have their shares registered for sale under the Securities Act.
INTERPRETATION, AMENDMENT AND TERMINATION
To the extent permitted by law, all interpretations of the Plan by the Bank
will be final; however, such interpretations have no binding effect on the
Commissioner or the FDIC. The Plan provides that, if deemed necessary or
desirable by the Board of Trustees, the Plan may be substantively amended by the
Board of Trustees as a result of comments from regulatory authorities or
otherwise, prior to the date of mailing of material to the Bank's corporators in
connection with the Special Meeting called to consider the Plan and at any time
thereafter with the concurrence of the Commissioner and the FDIC, if required.
Completion of the Conversion requires the sale of all shares of the common
stock within 24 months following approval of the Plan by the Board of Trustees
of the Bank. If this condition is not satisfied, the Plan will be terminated
and the Bank will continue its business in the mutual form of organization. The
Plan may be terminated by the Board of Trustees at any time with the approval of
the Commissioner.
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, new
stock Charter and Bylaws to be approved by the corporators of the Bank eligible
to vote at the Special Meeting. The Plan also provides for the concurrent
formation of a holding company. See "The Conversion--General." As described
below and elsewhere herein, certain provisions in the Company's Certificate of
Incorporation and Bylaws and in its management remuneration provided for in the
Conversion, together with provisions of Delaware corporate law, may have anti-
takeover effects. In addition, the Bank's Charter and Bylaws and management
remuneration provided for in the Conversion may also have "anti-takeover"
effects. Finally, regulatory restrictions may make it difficult for persons or
companies to acquire
132
<PAGE>
control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of the Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Certificate of Incorporation and Bylaws and other
statutory and regulatory provisions relating to stock ownership and transfers,
the Board of Directors and business combinations, which might be deemed to have
a potential anti-takeover effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual Company stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following
description of provisions of the Certificate of Incorporation and Bylaws of the
Company is necessarily general and reference should be made in each case to such
Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
common stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of common
stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any of
his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options or otherwise and shares as to which
such person and his affiliates have sole or shared voting or investment power,
but shall not include shares that are subject to a publicly solicited revocable
proxy and that are not otherwise deemed to be beneficially owned by such person
and his affiliates. No Director or officer (or any affiliate thereof) of the
Company shall, solely by reason of any or all of such Directors or officers
acting in their capacities as such, be deemed to beneficially own any shares
beneficially owned by any other Director or officer (or affiliate thereof) nor
will the ESOP or any similar plan of the Company or the Bank or any director
with respect thereto (solely by reason of such director's capacity) be deemed to
beneficially own any shares held under any such plan. The Certificate of
Incorporation of the Company further provides that the provisions limiting
voting rights may only be amended upon the vote of the holders of at least 80%
of the voting power of all then outstanding shares of capital stock entitled to
vote thereon (after giving effect to the provision limiting voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of the members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of Directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the Whole Board of
Directors. The Certificate of Incorporation and the Bylaws provide that any
vacancy occurring in the Board, including a vacancy created by an increase in
the number of Directors or resulting from death, resignation, retirement,
disqualification, removal from office or other cause, shall be filled for the
remainder of the unexpired term exclusively by a majority vote of the Directors
then in office. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the
Company. Directors may be removed by the shareholders only for cause by the
affirmative vote of the holders of at least 80% of the voting power of all then
outstanding shares of capital stock entitled to vote thereon.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders choice.
133
<PAGE>
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by a resolution adopted by a majority of the whole Board of
Directors of the Company. The Certificate of Incorporation also provides that
any action required or permitted to be taken by the stockholders of the Company
may be taken only at an annual or special meeting and prohibits stockholder
action by written consent in lieu of a meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the
issuance of 16,000,000 million shares of common stock and 2,000,000 shares of
preferred stock. The shares of common stock and preferred stock were authorized
in an amount greater than that to be issued in the Conversion to provide the
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and employee stock options. However, these additional authorized shares
may also be used by the Board of Directors consistent with its fiduciary duty to
deter future attempts to gain control of the Company. The Board of Directors
also has sole authority to determine the terms of any one or more series of
preferred stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
preferred stock, the Board has the power to the extent consistent with its
fiduciary duty to issue a series of preferred stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby assist management
to retain its position. The Company's Board currently has no plans for the
issuance of additional shares, other than the issuance of shares in the
Conversion, including shares contributed to the Foundation, and the issuance of
additional shares upon exercise of stock options.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH INTERESTED
STOCKHOLDERS. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock
entitled to vote thereon to approve certain "Business Combinations" with an
"Interested Stockholder," each as defined therein, and related transactions.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of common stock of the
Company and any other affected class of stock. Under the Certificate of
Incorporation, the approval of the holders of at least 80% of the shares of
capital stock entitled to vote thereon is required for any business combination
involving an Interested Stockholder (as defined below) except (i) in cases where
the proposed transaction has been approved by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were Directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
stockholders a fair price in consideration for their shares. In each such case,
where stockholder approval is required, the approval of only a majority of the
outstanding shares of voting stock is sufficient. The term "Interested
Stockholder" is defined to include, among others, any individual, a group acting
in concert, corporation, partnership, association or other entity (other than
the Company or its subsidiary) who or which is the beneficial owner, directly or
indirectly, of 10% or more of the outstanding shares of voting stock of the
Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include: (i) any merger or
consolidation of the Company or any of its subsidiaries with any Interested
Stockholder or Affiliate (as defined in the Certificate of Incorporation) of an
Interested Stockholder or any corporation which is, or after such merger or
consolidation would be, an Affiliate of an Interested Stockholder; (ii) any
sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or
with any Interested Stockholder or Affiliate of 25% or more of the assets of the
Company or combined assets of the Company and its subsidiary; (iii) the issuance
or transfer to any Interested Stockholder or its Affiliate by the Company (or
any subsidiary) of any securities of the Company (or any subsidiary) in exchange
for any cash, securities or other property the value of which equals or exceeds
25% of the fair market value of the common stock of the Company; (iv) the
adoption of any plan for the liquidation or dissolution of the Company proposed
by or on behalf of any Interested Stockholder or Affiliate thereof; and (v) any
reclassification of securities, recapitalization, merger or consolidation of the
Company with any of its subsidiaries which has the effect of increasing the
proportionate share of common stock or any class of equity or convertible
securities of the Company or subsidiary owned directly or indirectly, by an
Interested Stockholder or Affiliate thereof. The Trustees and executive
officers of the Bank are purchasing in the aggregate approximately 1.06% of the
shares of the common stock to be sold
134
<PAGE>
in the Conversion based on the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the common stock issued in
connection with the Conversion, including shares issued to the Foundation.
Additionally, if at a meeting of stockholders following the Conversion
stockholder approval of the proposed Stock-Based Incentive Plan is received, the
Company expects to acquire 4% of the common stock issued in connection with the
Conversion, including shares issued to the Foundation, on behalf of the Stock-
Based Incentive Plan and expects to issue options to purchase up to 10% of the
common stock issued in connection with the Conversion, including shares issued
to the Foundation, under the Stock-Based Incentive Plan to directors and
executive officers. As a result, directors, executive officers and employees
have the potential to control the voting of approximately 22.1% of the Company's
common stock on a diluted basis at the maximum of the Estimated Price Range,
thereby enabling them to prevent the approval of the transactions requiring the
approval of at least 80% of the Company's outstanding shares of voting stock
described herein above.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein), to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company and the stockholders of the Company, give due
consideration to all relevant factors, including, without limitation, those
factors that directors of any subsidiary (including the Bank) may consider in
evaluating any action that may result in a change or potential change of control
of such subsidiary, and the social and economic effects of acceptance of such
offer on: the Company's present and future customers and employees and those of
its subsidiaries (including the Bank); the communities in which the Company and
the Bank operate or are located; the ability of the Company to fulfill its
corporate objectives as a bank holding company; and the ability of the Bank to
fulfill the objectives of a stock savings bank under applicable statutes and
regulations. By having these standards in the Certificate of Incorporation of
the Company, the Board of Directors may be in a stronger position to oppose such
a transaction if the Board concludes that the transaction would not be in the
best interest of the Company, even if the price offered is significantly greater
than the then market price of any equity security of the Company.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of the holders of at
least 80% of the outstanding voting stock entitled to vote (after giving effect
to the provision limiting voting rights) is required to amend or repeal specific
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
Directors, Director and officer indemnification by the Company and amendment of
the Company's Bylaws and Certificate of Incorporation. The Company's Bylaws may
be amended by a majority of the whole Board of Directors, or by a vote of the
holders of at least 80% (after giving effect to the provision limiting voting
rights) of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
BYLAW PROVISIONS. The Bylaws of the Company also require a stockholder who
intends to nominate a candidate for election to the Board of Directors, or to
raise new business at an annual stockholder meeting to give at least 90 days'
advance notice to the Secretary of the Company. The notice provision requires a
stockholder who desires to raise new business to provide information to the
Company concerning the nature of the new business, the stockholder and the
stockholder's interest in the business matter. Similarly, a stockholder wishing
to nominate any person for election as a director must provide the Company with
information concerning the nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and other transactions which have not been
negotiated with and approved by members of its Board of Directors. Provisions
of the Stock-Based Incentive Plan provide for accelerated benefits to
participants in the event of a change in control of the Company or the Bank or a
tender or exchange offer for their stock. See
135
<PAGE>
"Management of the Bank--Other Benefit Plans--Stock-Based Incentive Plan." The
Company and the Bank have also entered into agreements with key officers and
intends to establish the Severance Compensation Plan which will provide such
officers and eligible employees with additional payments and benefits on the
officer's termination in connection with a change in control of the Company or
the Bank. See "Management of the Bank--Employment Agreements," "--Change in
Control Agreements" and "--Employee Severance Compensation Plan." The foregoing
provisions and limitations may make it more difficult for companies or persons
to acquire control of the Bank. Additionally, the provisions could deter offers
to acquire the outstanding shares of the Company which might be viewed by
stockholders to be in their best interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws are in the best interest of the Company
and its stockholders. An unsolicited non-negotiated takeover proposal can
seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the Board of Directors believes it is in the best
interests of the Company and its stockholders to encourage potential acquirors
to negotiate directly with management and that these provisions will encourage
such negotiations and discourage non-negotiated takeover attempts.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
Interested Stockholder) may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, excluding, for purposes of
determining the number of shares outstanding, shares owned by the corporation's
directors who are also officers and specific employee stock plans; (iii) any
business combination with an Interested Stockholder that is approved by the
board of directors and by a two-thirds vote of the outstanding voting stock not
owned by the Interested Stockholder; and (iv) certain business combinations that
are proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the board of directors. A corporation may exempt itself from the requirements
of the statute by adopting an amendment to its certificate of incorporation or
bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Trustees of the Bank is not aware of any effort that
might be made to obtain control of the Bank after Conversion, the Board of
Trustees believes that it is appropriate to adopt provisions permitted by
Massachusetts General Laws to protect the interests of the converted Bank and
its stockholders from any hostile takeover. Such provisions may, indirectly,
inhibit a change in control of the Company, as the Bank's sole stockholder. See
"Risk Factors--Anti-Takeover Provisions Which May Discourage Takeover Attempts."
The Bank's stock Charter will contain a provision whereby the acquisition
of beneficial ownership of more than 10% of the issued and outstanding shares of
any class of equity securities of the Bank by any person (i.e., any
136
<PAGE>
individual, corporation, group acting in concert, trust, partnership, joint
stock company or similar organization), either directly or through an affiliate
thereof, will be prohibited for a period of three years following the date of
completion of the Conversion. In the event shares are acquired in violation of
this provision of the Bank's stock Charter, all shares beneficially owned by any
person in excess of 10% shall be considered "excess shares" and shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matters submitted to the
stockholders for a vote. This limitation shall not apply to any transaction in
which the Bank forms a holding company without a change in the respective
beneficial ownership interests of its stockholders other than pursuant to the
exercise of any dissenter or appraisal rights. In the event that holders of
revocable proxies for more than 10% of the shares of the common stock of the
Company seek, among other things, to elect one-third or more of the Company's
Board of Directors, to cause the Company's stockholders to approve the
acquisition or corporate reorganization of the Company or to exert a continuing
influence on a material aspect of the business operations of the Company, which
actions could indirectly result in a change in control of the Bank, the Board of
Trustees of the Bank will be able to assert this provision of the Bank's stock
Charter against such holders. Although the Board of Trustees of the Bank is not
currently able to determine when and if it would assert this provision of the
Bank's stock Charter, the Board, in exercising its fiduciary duty, may assert
this provision if it were deemed to be in the best interests of the Bank, the
Company and its stockholders. It is unclear, however, whether this provision, if
asserted, would be successful against such persons in a proxy contest which
could result in a change in control of the Bank indirectly through a change in
control of the Company.
In addition, stockholders will not be permitted to call a special meeting
of stockholders or to cumulate their votes in the election of Directors.
Furthermore, the Bank's Bylaws provide for the election of three classes of
directors to staggered terms. The staggered terms of the Board of Directors
could have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board of Directors since only one-
third of the Board is elected each year. The purpose of these provisions is to
assure stability and continuity of management of the Bank in the years
immediately following the Conversion.
Finally, the stock Charter provides for the issuance of shares of preferred
stock on such terms, including conversion and voting rights, as may be
determined by the Bank's Board of Directors without stockholder approval.
Although the Bank has no arrangements, understandings or plans at the present
time for the issuance or use of the shares of undesignated preferred stock (the
"Preferred Stock") proposed to be authorized, the Board believes that the
availability of such shares will provide the Bank with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
corporate needs which may arise. In the event of a proposed merger, tender
offer or other attempt to gain control of the Bank of which management does not
approve, the Board can authorize the issuance of one or more series of Preferred
Stock with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board does not intend
to issue any Preferred Stock except on terms which the Board deems to be in the
best interest of the Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
MASSACHUSETTS DIVISION OF BANKS CONVERSION REGULATIONS. Regulations issued
by the Commissioner provide that for a period of three years following the date
of the completion of the Conversion, no person shall directly or indirectly
offer to acquire or acquire the beneficial ownership of more than ten percent
(10%) of any class of any equity security of the Company without prior written
notice to the Company and the prior written approval of the Commissioner. Where
any person, directly or indirectly, acquires beneficial ownership of more than
ten percent (10%) of any class of any equity security of the Company without
prior written notice to the Company and the prior written approval of the
Commissioner, the securities beneficially owned by such person in excess of ten
percent (10%) shall not be voted by any person or counted as voting shares in
connection with any matter submitted to the stockholders for a vote, and shall
not be counted as outstanding for purposes of determining the affirmative vote
necessary to approve any matter submitted to the stockholders for a vote. The
Commissioner may take any further action to enforce these regulatory
restrictions as he deems appropriate.
137
<PAGE>
CHANGE IN BANK CONTROL ACT. In addition to the foregoing restrictions, the
acquisition of ten percent (10%) or more of the common stock outstanding may, in
certain circumstances, be subject to the provisions of the Change in Bank
Control Act. The FDIC has also adopted a regulation pursuant to the Change in
Bank Control Act which generally requires persons who at any time intend to
acquire control of an FDIC-insured state-chartered non-member bank, including a
converted savings bank such as the Bank, to provide 60 days prior written notice
and certain financial and other information to the FDIC.
The 60-day notice period does not commence until the information is deemed
to be substantially complete. Control for the purpose of this Act exists in
situations in which the acquiring party has voting control of at least twenty-
five percent (25%) of any class of the Bank's voting stock or the power to
direct the management or policies of the Bank. However, under FDIC regulations,
control is presumed to exist where the acquiring party has voting control of at
least ten percent (10%) of any class of the Bank's voting securities if (i) the
Bank has a class of voting securities which is registered under Section 12 of
the Exchange Act, or (ii) the acquiring party would be the largest holder of a
class of voting shares of the Bank. The statute and underlying regulations
authorize the FDIC to disapprove a proposed acquisition on certain specified
grounds. In some circumstances, similar filings with the Commissioner may be
required under the Massachusetts Change in Bank Control Act.
FEDERAL RESERVE BOARD REGULATIONS. In the event the Bank does not qualify
to be a QTL, attempts to acquire control of the Bank become subject to
regulations of the FRB under the Change in Bank Control Act.
MASSACHUSETTS BANKING LAW. Massachusetts banking law also prohibits any
"company," defined to include banking institutions as well as corporations, from
directly or indirectly controlling the voting power of 25% or more of the voting
stock of two or more banking institutions without the prior approval of the
Board of Bank Incorporation. Additionally, an out-of-state company which
already directly or indirectly controls voting power of 25% or more of the
voting stock of two or more banking institutions may not also acquire direct or
indirect ownership or control of more than 5% of the voting stock of a
Massachusetts banking institution without the prior approval of the Board of
Bank Incorporation. Finally, for a period of three years following completion
of a conversion to stock form, no person may directly or indirectly offer to
acquire or acquire beneficial ownership of more than 10% of any class of equity
security of a converting mutual savings bank without prior written approval of
the Board of Bank Incorporation.
Prior approval of the Commissioner is also required before any action is
taken that causes any stock banking institution to acquire all of the capital
stock of any other stock banking institution. The Commissioner will approve
such a plan of acquisition, following approval by a majority vote of the boards
of directors of the acquiror and the acquiree and a two-thirds approval of the
stockholders of the acquiree, provided the Commissioner finds that competition
among banking institutions will not be unreasonably affected and that public
convenience and advantage will be promoted. Any such company shall engage
directly or indirectly only in such activities as are now or may hereafter be
proper activities for bank holding companies under the BHC Act.
DESCRIPTION OF CAPITAL STOCK
OF THE COMPANY
GENERAL
The Company is authorized to issue 16,000,000 million shares of common
stock having a par value of $0.01 per share and 2,000,000 shares of preferred
stock having a par value of $0.01 per share (the "Preferred Stock"). Based on
the sale of common stock in connection with the Conversion and issuance of
authorized but unissued common stock in an amount equal to 8% of the common
stock sold in the Conversion to the Foundation, the Company currently expects to
issue up to 5,998,860 shares of common stock (based on the maximum of the
Estimated Price Range, as adjusted by 15%) and no shares of Preferred Stock in
the Conversion. Except for shares issued in connection with the Conversion, the
Company presently does not have plans to issue common stock. Each share of the
Company's common stock will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. Upon payment
of the Actual Purchase Price for the common stock, in accordance with the Plan
of Conversion, all such stock will be duly authorized, fully paid and
nonassessable.
138
<PAGE>
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC
OR THE MUTUAL SAVINGS CENTRAL FUND, INC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulations. See "Dividend Policy" and "Regulation and
Supervision." The holders of common stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the
Company issues Preferred Stock, the holders thereof may have a priority over the
holders of the common stock with respect to dividends.
VOTING RIGHTS. Upon the Conversion, the holders of common stock of the
Company will possess exclusive voting rights in the Company. They will elect
the Company's Board of Directors and act on such other matters as are required
to be presented to them under Delaware law or as are otherwise presented to them
by the Board of Directors. Except as discussed in "Restrictions on Acquisition
of the Company and the Bank," each holder of common stock will be entitled to
one vote per share. Stockholders will not have any right to cumulate votes in
the election of Directors. If the Company issues Preferred Stock, holders of the
Preferred Stock may also possess voting rights. Specific matters require an 80%
stockholder vote (after giving effect to the provision limiting voting rights).
See "Restrictions on Acquisition of the Company and the Bank."
As a Massachusetts-chartered mutual savings bank, corporate powers and
control of the Bank are vested in its Board of Trustees, who elect the officers
of the Bank and who fill any vacancies on the Board of Trustees as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Bank, which will
be the Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the common stock will not have direct control of
the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The Conversion--
Liquidation Rights"), all assets of the Bank available for distribution. In the
event of liquidation, dissolution or winding up of the Company, the holders of
its common stock would be entitled to receive, after payment or provision for
payment of all of its debts and liabilities, all of the assets of the Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the common stock in the event of
liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Company
will not be entitled to preemptive rights with respect to any shares which may
be issued. The common stock is not subject to redemption.
INDEMNIFICATION AND LIMIT ON LIABILITY. The Company's Certificate of
Incorporation contains provisions which limit the liability of directors,
officers and employees of the Company and indemnify such individuals. Such
provisions provide that each person who was or is made a party or is threatened
to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she is or was a director or officer of the Company shall
be indemnified and held harmless by the Company to the fullest extent authorized
by the Delaware General Corporation Law against all expense, liability and loss
reasonably incurred. Under certain circumstances, the right to indemnification
shall include the right to be paid by the Company the expenses incurred in
defending any such proceeding in advance of its final disposition. In addition,
a Director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages except for liability for any breach of the
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law, under Section 174 of the
Delaware General Corporation, or for any transaction from which the Director
derived an improper personal benefit.
139
<PAGE>
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Company presently does not have plans to issue Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
In the event the holding company form of organization is not utilized in
connection with the Conversion, the Bank may offer shares of its common stock in
connection with the Conversion. The following is a discussion of the capital
stock of the Bank.
The stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of capital stock consisting of 16,000,000 million shares
of common stock, par value $1.00 per share, and 2,000,000 shares of preferred
stock, par value $1.00 per share, which preferred stock may be issued in series
and classes having such rights, preferences, privileges and restrictions as the
Board of Directors may determine. Each share of common stock of the Bank will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. After the Conversion, the Board of Directors
will be authorized to approve the issuance of common stock up to the amount
authorized by the stock charter without the approval of the Bank's stockholders.
Assuming that the holding company form of organization is utilized, all of the
issued and outstanding common stock of the Bank will be held by the Company as
the Bank's sole stockholder. THE CAPITAL STOCK OF THE BANK WILL REPRESENT NON-
WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT
BE INSURED BY THE FDIC OR THE MUTUAL SAVINGS CENTRAL FUND, INC.
COMMON STOCK
DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation--Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held.
Shareholders shall not be entitled to cumulate their votes for the election of
directors. See "Restrictions on Acquisition of the Company and the Bank--Anti-
Takeover Effects of the Company's Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding up
of the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit accounts
and accrued interest thereon), and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If additional preferred stock is issued subsequent to the Conversion, the
holders thereof may also have priority over the holders of common stock in the
event of liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. Upon receipt by the Bank of the full specified purchase
price therefor, the common stock will be fully paid and non-assessable.
140
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is________________.
EXPERTS
The financial statements of the Bank as of December 31, 1997, and for the
three years ended December 31, 1997 have been included in this Prospectus in
reliance upon the report of Wolf & Company, P.C., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro forma
market value of the common stock upon Conversion and its valuation with respect
to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and Company by Muldoon, Murphy &
Faucette, Washington, D.C., special counsel to the Bank and Company. The
federal income tax consequences of the Woronoco Savings Charitable Foundation
will be passed upon for the Bank and the Company by Wolf & Company, P.C.
independent certified public accountants who have served as the Bank's and the
Company's independent tax advisors. Muldoon, Murphy & Faucette will rely as to
all matters of Delaware corporate law on the opinion of Morris, Nichols, Arsht &
Tunnell. Massachusetts commonwealth income tax consequences will be passed upon
by Wolf & Company, P.C. Certain legal matters will be passed upon for Sandler
O'Neill by Silver, Freedman & Taff, L.L.P.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the common stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information,
including the Conversion Valuation Appraisal Report, which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
In addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. The
Conversion Valuation Appraisal Report may also be inspected by depositors of the
Bank at the offices of the Bank during normal business hours. This prospectus
and all exhibits to the Registration Statement electronically filed with the SEC
are available at the SEC's Web site. This Prospectus contains a description of
the material terms and features of all material contracts, reports or exhibits
to the registration statement required to be described; however, the statements
contained in this Prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions thereof and are not necessarily complete; each such statement
is qualified by reference to such contract or document.
The Bank has filed an application for approval of conversion with the
Commissioner and the FDIC. This Prospectus omits certain information contained
in that application. The application may be examined at the Office of the
Commissioner, Commonwealth of Massachusetts, Leverett Saltonstall Building, Room
2004, 100 Cambridge Street, Boston, Massachusetts 02202 and 15 Braintree Hill,
Office Park, Braintree, Massachusetts 02184.
The Company has filed with the Office of Thrift Supervision an Application
to form a Holding Company. This Prospectus omits certain information contained
in such Application. Such Application may be inspected at the offices of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552.
In connection with the Conversion, the Company will register its common
stock with the SEC under
141
<PAGE>
Section 12(b) of the Exchange Act, and, upon such registration, the Company and
the holders of its stock will become subject to the proxy solicitation rules,
reporting requirements and restrictions on stock purchases and sales by
directors, officers and greater than 10% stockholders, the annual and periodic
reporting and other requirements of the Exchange Act. Under the Plan, the
Company has undertaken that it will not terminate such registration for a period
of at least three years following the Conversion. In the event that the Bank
amends the Plan to eliminate the concurrent formation of the Company as part of
the Conversion, the Bank will register its stock with the Federal Deposit
Insurance Corporation under Section 12(b) of the Exchange Act and, upon such
registration, the Bank and the holders of its stock will become subject to the
same obligations and restrictions.
A copy of the Plan of Conversion, Certificate of Incorporation and the
Bylaws of the Company and the stock Charter and Bylaws of the Bank are available
without charge from the Bank. The Bank's main office is located at 31 Court
Street, Westfield, Massachusetts 01085. Its telephone number is (413) 658-9141.
142
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of August 31, 1998 (unaudited) and
December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the Eight Months Ended
August 31, 1998 and 1997 (unaudited) and for the Years
Ended December 31, 1997, 1996 and 1995 50
Consolidated Statements of Changes in Surplus for the Eight
Months Ended August 31, 1998 and 1997 (unaudited) and for
the Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the Eight Months
Ended August 31, 1998 and 1997 (unaudited) and for the
Years Ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
All schedules are omitted because they are not required or applicable, or the
required information is shown in the consolidated financial statements.
The consolidated financial statements of Woronoco Bancorp, Inc. have been
omitted because Woronoco Bancorp, Inc. has not yet issued any stock, has no
assets and no liabilities, and has not conducted any business other than of an
organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Audit Committee
Woronoco Savings Bank
Westfield, Massachusetts
We have audited the consolidated balance sheets of Woronoco Savings Bank and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in surplus and cash flows for each of the three
years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Woronoco Savings
Bank and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
Boston, Massachusetts
February 27, 1998, except for Note 16 as to which the date
is August 26, 1998
F-2
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
December 31,
August 31, -------------------------------
1998 1997 1996
----------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 11,023 $ 9,246 $ 8,716
Interest-bearing balances 1,900 2,440 1,403
Federal funds sold - - 350
----------- ------------- -------------
Total cash and cash equivalents 12,923 11,686 10,469
Securities available for sale (Notes 2 and 7) 71,482 55,640 61,626
Federal Home Loan Bank stock, at cost (Note 7) 2,984 2,433 2,101
Loans, net (Notes 3 and 7) 265,564 261,723 234,135
Other real estate owned, net (Note 4) 335 381 423
Banking premises and equipment, net (Note 5) 7,270 5,919 3,827
Accrued interest receivable 1,648 1,479 1,427
Net deferred tax asset (Note 8) 927 - -
Cash surrender value of life insurance (Note 11) 1,818 1,716 1,592
Other assets 1,267 932 1,108
----------- ------------- -------------
$366,218 $341,909 $316,708
=========== ============= =============
LIABILITIES AND SURPLUS
Deposits (Note 6) $273,567 $262,679 $248,982
Federal Home Loan Bank advances (Note 7) 54,792 41,726 35,441
Mortgagors' escrow accounts 836 647 515
Net deferred tax liability (Note 8) - 452 91
Accrued expenses and other liabilities (Note 11) 3,646 3,073 2,605
----------- ------------- -------------
Total liabilities 332,841 308,577 287,634
----------- ------------- -------------
Commitments and contingencies (Note 9)
Surplus:
Surplus (Note 10) 33,259 30,950 27,932
Net unrealized gain on securities available
for sale, after tax effects of $1,397
and $827 (Notes 2 and 8) - 2,382 1,142
Accumulated other comprehensive income 118 - -
----------- ------------- -------------
Total surplus 33,377 33,332 29,074
----------- ------------- -------------
$366,218 $341,909 $316,708
=========== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS
EIGHT MONTHS ENDED AUGUST 31, 1998 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Net
Unrealized
Accumulated Gain on
Other Securities
Comprehensive Comprehensive Available Total
Income Income Surplus For Sale Surplus
------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 23,123 $ (862) $ 22,261
Net income 2,335 - 2,335
Change in net unrealized gain on
securities available for sale,
after tax effects - 1,625 1,625
-------- ------- --------
Balance at December 31, 1995 25,458 763 26,221
Net income 2,474 - 2,474
Change in net unrealized gain on
securities available for sale,
after tax effects - 379 379
-------- ------- --------
Balance at December 31, 1996 27,932 1,142 29,074
Net income 3,018 - 3,018
Change in net unrealized gain on
securities available for sale,
after tax effects - 1,240 1,240
-------- ------- --------
Balance at December 31, 1997 30,950 $ 2,382 33,332
=======
Comprehensive income:
Balance at December 31, 1997 $ 2,382
Net income (unaudited) $ 2,309 2,309 2,309
Change in net unrealized gain on
securities available for sale,
after tax effects and reclassification
adjustment (unaudited) (2,264) (2,264) - (2,264)
-------- -------- -------- --------
Comprehensive income (unaudited) $ 45
========
Balance at August 31, 1998 (unaudited) $ 118 $ 33,259 $ 33,377
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
----------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,309 $ 2,101 $ 3,018 $ 2,474 $2,335
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 160 120 180 180 210
Provision for losses on other real estate owned 10 - 21 52 65
Charitable contribution in the form of equity
securities 102 549 549 - -
Net (accretion) amortization of investments (9) (7) (12) 15 56
Amortization (accretion) of net deferred loan
fees (costs) 153 97 152 109 (27)
Depreciation and amortization 432 357 550 487 425
Deferred taxes (51) (180) (209) 222 (8)
Gain on sales and disposition of securities, net (1,218) (1,441) (1,895) (751) (578)
Gain on sales of loans, net (290) - - (16) (41)
Gain on sales of property - - (17) - -
Loss (gain) on other real estate owned 5 16 7 (16) 31
Changes in operating assets and liabilities:
Accrued interest receivable (169) (95) (52) (61) (111)
Accrued expenses and other liabilities 572 746 468 350 (175)
Other, net (440) (114) 53 (562) (98)
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 1,566 2,149 2,813 2,483 2,084
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 6,371 6,088 9,416 11,478 7,946
Purchase of securities available for sale (12,658) (5,900) (10,285) (26,608) (6,495)
Proceeds from maturities of securities available for sale 530 1,514 2,461 2,747 -
Proceeds from maturities and calls of securities held
to maturity - - - - 641
Principal payments on mortgage-backed investments 6,516 4,756 7,561 6,183 7,948
Purchase of Federal Home Loan Bank stock (551) (268) (332) (202) -
Loans originated, net of loan payments received (22,954) (18,312) (28,201) (35,574) (26,641)
Proceeds from the sale of loans - - - 830 12,983
Purchases of banking premises and equipment (1,784) (1,512) (2,751) (541) (1,217)
Proceeds on sales of property - - 126 - -
Proceeds from sales of foreclosed real estate 58 82 295 665 326
Purchase of life insurance - - - (1,500) -
---------- ---------- ---------- ---------- ----------
Net cash used by investing activities (24,472) (13,552) (21,710) (42,522) (4,509)
---------- ---------- ---------- ---------- ----------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
----------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 10,888 9,962 13,697 17,293 12,833
Net increase (decrease) in mortgagors' escrow accounts 189 374 132 (74) (188)
Net increase (decrease) in Federal Home Loan Bank
advances with maturities of three months or less (6,910) 7,460 6,320 16,000 (7,500)
Proceeds from Federal Home Loan Bank advances with
maturities in excess of three months 50,000 17,000 22,000 19,000 10,000
Repayment of Federal Home Loan Bank advances
with maturities in excess of three months (30,024) (15,023) (22,035) (14,031) (10,028)
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities 24,143 19,773 20,114 38,188 5,117
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,237 8,370 1,217 (1,851) 2,692
Cash and cash equivalents at beginning of year 11,686 10,469 10,469 12,320 9,628
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year $ 12,923 $ 18,839 $ 11,686 $ 10,469 $ 12,320
========== ========== ========== ========== ==========
Supplemental cash flow information:
Interest paid on deposits $ 6,878 $ 6,610 $ 10,192 $ 9,450 $ 8,685
Interest paid on advances 1,866 1,485 2,346 1,535 1,173
Income taxes paid, net 898 651 1,701 1,855 1,205
Transfers from loans to other real estate owned 22 61 281 524 272
Transfers from other real estate owned to banking
premises and equipment - - - 41 -
Securitization of loans to mortgage-backed securities 19,068 - - - -
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1998 AND 1997 (UNAUDITED) AND DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Woronoco
Savings Bank (the "Bank") and its wholly-owned subsidiaries Walshingham
Enterprises, Inc., which previously held certain real estate and Woronoco
Security Corporation which engages exclusively in securities transactions.
All significant intercompany balances and transactions have been eliminated
in consolidation.
The financial information included herein for the interim periods ended
August 31, 1998 and 1997 is unaudited; however, in the opinion of management
the information reflects all adjustments (consisting solely of normal
recurring adjustments) that are necessary for a fair presentation. The
results shown for eight months ended August 31, 1998 are not necessarily
indicative of the results to be obtained for a full year.
BUSINESS
The Bank provides a variety of financial services, including trust and
financial management services, mutual funds and various deposit and lending
products to individuals and small businesses through its nine offices in
western Massachusetts. Its primary deposit products are checking, savings
and term certificate accounts and its primary lending products are
residential, commercial mortgage, consumer and home equity loans.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the consolidated balance sheet and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. A material estimate that is particularly susceptible to
significant change in the near term relates to the determination of the
allowance for loan losses.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks, interest-bearing balances
with maturities of ninety days or less and federal funds sold.
F-7
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
Investments are classified as "available for sale" and reflected on the
consolidated balance sheet at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of surplus, net
of tax effects.
Purchase premiums and discounts are amortized to earnings by a method which
approximates the interest method over the terms of the investments.
Declines in the value of investments that are deemed to be other than
temporary are reflected in earnings when identified. Gains and losses on
disposition of investments are recorded on the trade date and determined
using the specific identification method.
LOANS
Loans, as reported, have been adjusted by unadvanced loan funds, net
deferred loan costs, and the allowance for loan losses.
Interest on loans is recognized on a simple interest basis and is generally
not accrued on loans which are identified as impaired or loans which are
ninety days or more past due. Interest income previously accrued on such
loans is reversed against current period interest income. Interest income on
all nonaccrual loans is recognized only to the extent of interest payments
received.
Net deferred loan costs are amortized to interest income over the
contractual lives of the related loans on the interest method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to earnings and is maintained at a level considered adequate
by management to provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the
nature and volume of the loan portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant change. Ultimately losses may vary from current estimates and
future additions to the allowance may be necessary.
F-8
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONCLUDED)
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if
any, are credited to the allowance.
Loans are considered impaired when, based on current information and events,
it is probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent. Substantially all of the Bank's loans which
have been identified as impaired have been measured by the fair value of
existing collateral.
Large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment, and loans that are measured at fair value fall
outside the scope of evaluation for impairment.
OTHER REAL ESTATE OWNED
Other real estate owned includes both formally foreclosed properties and
repossessed properties, whereby the Bank has taken physical possession of
the property without formal foreclosure proceedings.
Foreclosed real estate is initially recorded at the lower of cost or fair
value at the date of acquisition. Costs relating to the development and
improvement of property are capitalized, whereas costs relating to holding
property are expensed.
F-9
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER REAL ESTATE OWNED (CONCLUDED)
Valuations are periodically performed by management, and an allowance for
losses is established through a charge to earnings if the carrying value of
a property exceeds its fair value less estimated costs to sell.
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and improvements and equipment are
stated at cost, less accumulated depreciation and amortization, computed on
the straight-line method over the estimated useful lives of the assets or
the terms of the leases, if shorter.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for betterments are capitalized
and depreciated.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
accordingly through the provision for income taxes. The Bank's base amount
of its federal income tax reserve for loan losses for tax purposes is a
permanent difference for which there is no recognition of a deferred tax
liability. However, the loan loss allowance maintained for financial
reporting purposes is treated as a temporary difference with allowable
recognition of a related deferred tax asset, if it is deemed realizable.
PENSION PLAN
The compensation cost of an employee's pension benefit is recognized on the
net periodic pension cost method over the employee's approximate service
period. The aggregate cost method is utilized for funding purposes.
ADVERTISING COSTS
Advertising costs are charged to earnings when incurred.
F-10
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRUST ASSETS
Trust assets held in a fiduciary or agency capacity are not included in
these consolidated financial statements because they are not assets of the
Bank. Trust assets totaled $21,043, $15,496 and $10,446 at August 31, 1998
(unaudited), December 31, 1997 and 1996, respectively.
COMPREHENSIVE INCOME
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income. The adoption of SFAS
No. 130 had no effect on the Bank's net income or shareholders' equity.
The components of other comprehensive income and related tax effects are as
follows:
<TABLE>
<CAPTION>
Eight Months
Ended
August 31,
1998
------------
(unaudited)
<S> <C>
Unrealized holding losses on available for
sale securities $ (2,628)
Less: Reclassification adjustment for gains
realized in income (964)
------------
Net unrealized gains (3,592)
Tax effect 1,328
------------
$ (2,264)
============
</TABLE>
F-11
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
RECENT ACCOUNTING PRONOUNCEMENT
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for fiscal quarters of all fiscal years
beginning after June 15, 1999. This Statement standardizes the accounting
for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those
items as assets or liabilities in the balance sheet and measure them at fair
value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability, or of an unrecognized firm
commitment that are attributable to a particular risk; (2) A hedge of the
exposure to variability in the cash flows of a recognized asset or
liability, or of a forecasted transaction, that is attributable to a
particular risk; or, (3) a hedge of the foreign currency exposure of an
unrecognized firm commitment, an available-for-sale security, a forecasted
transaction, or a net investment in a foreign operation. The Company will
adopt the requirements of this statement during the year ended December 31,
2000.
2. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for
sale, with gross unrealized gains and losses, follows:
<TABLE>
<CAPTION>
August 31, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Marketable equity
securities $ 19,475 $ 849 $(1,638) $ 18,686
Mortgage-backed:
FHLMC 11,446 444 (15) 11,875
FNMA 37,861 494 (82) 38,273
GNMA 2,513 135 - 2,648
---------- ---------- ---------- -----------
$ 71,295 $1,922 $(1,735) $ 71,482
========== ========== ========== ===========
</TABLE>
F-12
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Marketable equity
securities $ 12,602 $ 3,399 $ (274) $ 15,727
Mortgage-backed:
FHLMC 13,765 435 (22) 14,178
FNMA 22,680 234 (119) 22,795
GNMA 2,814 126 - 2,940
---------- ---------- ---------- ----------
$ 51,861 $ 4,194 $ (415) $ 55,640
========== ========== ========== ==========
<CAPTION>
December 31, 1996
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Marketable equity
securities $ 12,103 $ 1,992 $ (250) $ 13,845
Debt Securities:
Corporate 250 - - 250
Mortgage-backed:
FHLMC 16,966 382 (45) 17,303
FNMA 27,401 116 (287) 27,230
GNMA 2,937 61 - 2,998
---------- ---------- ---------- ----------
$ 59,657 $ 2,551 $ (582) $ 61,626
========== ========== ========== ==========
</TABLE>
At August 31, 1998 (unaudited) and December 31, 1997 and 1996, the Bank has
pledged securities available for sale with an amortized cost of $2,063, $997
and $997, and a fair value of $2,072, $992 and $990, respectively, as
collateral against its treasury, tax and loan account and sweep account.
F-13
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE (CONCLUDED)
Proceeds from the sale of securities available for sale for the eight months
ended August 31, 1998 and 1997 (unaudited) amounted to $6,371 and $6,088,
respectively. Gross gains of $1,221 and $1,198, and gross losses of $72 and
$71, were realized during the eight months ended August 31, 1998 and 1997
(unaudited), respectively.
Proceeds from sales of securities available for sale during the years ended
December 31, 1997, 1996 and 1995 amounted to $9,416, $11,478 and $7,946,
respectively. Gross realized gains of $1,601, $758 and $726, and gross
realized losses of $20, $7 and $157, were realized during the years ended
December 31, 1997, 1996 and 1995, respectively.
During 1995, proceeds from calls of securities held to maturity amounted to
$141 resulting in a gross realized gain of $9.
During 1997, the Bank established a private charitable foundation (the
"Foundation") to provide grants to charitable organizations in the Westfield
area. The Foundation, which is not a subsidiary of the Bank, was funded by
a donation from the Bank of marketable equity securities with a cost basis
and fair value of $235 and $549, respectively, at the date of transfer.
Such securities had been classified as available for sale and, accordingly,
the transfer resulted in the Bank recognizing the unrealized appreciation of
the securities of $314 in the consolidated statement of income.
During the eight months ended August 31, 1998 (unaudited), additional
marketable equity securities with a cost basis and fair value of $33 and
$102, respectively, were transferred from the Bank, resulting in the Bank
recognizing the unrealized appreciation of $69 in the consolidated statement
of income.
F-14
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
December 31,
August 31, -----------------------
1998 1997 1996
------------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Residential Mortgage $ 160,615 $ 158,858 $ 156,115
Home equity 64,144 62,227 43,662
Commercial real estate 21,088 21,757 19,697
Construction 4,150 2,868 1,124
Consumer 14,135 14,578 12,366
Commercial 4,588 4,319 3,879
------------- ---------- ----------
Total loans 268,720 264,607 236,843
Less: Allowance for loan losses (2,061) (1,952) (1,911)
Net deferred loan costs 892 934 598
Unadvanced loan funds (1,987) (1,866) (1,395)
------------- ---------- ----------
Loans, net $ 265,564 $ 261,723 $ 234,135
============= ========== ==========
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
--------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,952 $ 1,911 $ 1,911 $ 1,838 $ 1,657
Provision for loan losses 160 120 180 180 210
Recoveries 19 20 32 29 46
Loans charged-off (70) (104) (171) (136) (75)
--------- --------- --------- --------- ---------
Balance at end of period $ 2,061 $ 1,947 $ 1,952 $ 1,911 $ 1,838
========= ========= ========= ========= =========
</TABLE>
F-15
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
LOANS (CONCLUDED)
The following is a summary of the impaired and non-accrual loans:
<TABLE>
<CAPTION>
December 31,
August 31, ------------------
1998 1997 1996
--------- -------- --------
(unaudited)
<S> <C> <C> <C>
Total impaired loans with no
valuation allowance $ 893 $ 929 $ 983
======= ======== =======
Non-accrual loans $ 862 $1,159 $ 252
======= ======== =======
</TABLE>
No additional funds are committed to be advanced in connection with impaired
loans.
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
-------------------- ----------------------------
1998 1997 1997 1996 1995
--------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Average recorded investment in
impaired loans $ 888 $ 952 $ 953 $ 753 $ 256
========= ======== ======== ======== ========
Interest income recognized on
a cash basis on impaired loans $ 47 $ 52 $ 57 $ 38 $ 21
========= ======== ======== ======== ========
</TABLE>
The Bank has sold mortgage loans in the secondary mortgage market and has
retained the servicing responsibility and receives fees for the services
provided. Loans sold and serviced for others amounted to $45,511, $29,868
and $32,986 at August 31, 1998 (unaudited), December 31, 1997 and 1996,
respectively. All loans serviced for others were sold without recourse
provisions and are not included in the accompanying consolidated balance
sheets.
F-16
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. OTHER REAL ESTATE OWNED
Other real estate owned consists of the following:
<TABLE>
<CAPTION>
December 31,
August 31, ------------------
1998 1997 1996
--------- -------- --------
(unaudited)
<S> <C> <C> <C>
Real estate acquired in settlement of loans $ 871 $ 727 $ 865
Real estate in possession 12 192 75
--------- -------- --------
883 919 940
Less allowance for losses (548) (538) (517)
--------- -------- --------
$ 335 $ 381 $ 423
========= ======== ========
</TABLE>
An analysis of the allowance for losses on other real estate owned is as
follows:
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
-------------------- -----------------------------
1998 1997 1997 1996 1995
--------- -------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 538 $ 517 $ 517 $ 613 $ 1,127
Provision for losses 10 - 21 52 65
Charge-offs - - - (148) (554)
Transfer upon adoption of
SFAS No. 114 (Note 1) - - - - (25)
-------- -------- -------- -------- ---------
Balance at end of period $ 548 $ 517 $ 538 $ 517 $ 613
======== ======== ======== ======== =========
</TABLE>
Expenses applicable to other real estate owned consist of the following:
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
-------------------- ----------------------------
1998 1997 1997 1996 1995
--------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net (gain) loss on sales of other
real estate owned $ (5) $ 16 $ 7 $ (16) $ 31
Provision for losses 10 - 21 52 65
Operating expenses, net of rental income 37 50 82 175 93
------- -------- -------- -------- --------
$ 42 $ 66 $ 110 $ 211 $ 189
======= ======== ======== ======== ========
</TABLE>
F-17
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives follows:
<TABLE>
<CAPTION>
December 31,
August 31, -------------------- Estimated
1998 1997 1996 Useful Lives
---------- --------- --------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Banking premises:
Land $ 560 $ 589 $344
Buildings and improvements 3,792 3,893 3,205 5 - 40 years
Equipment 3,370 2,838 2,348 3 - 10 years
Construction in progress 2,640 1,289 91
---------- --------- ---------
10,362 8,609 5,988
Less accumulated depreciation
and amortization (3,092) (2,690) (2,161)
---------- --------- ---------
$ 7,270 $ 5,919 $3,827
========== ========= ========
</TABLE>
The balance of construction in progress represents costs incurred to date in
connection with expansion of the Bank's main office. As part of the
expansion project, on January 2, 1997, the Bank entered into an agreement
with a builder for expansion work at a cost of up to $3,300.
Depreciation and amortization expense for the eight months ended August 31,
1998 and 1997 (unaudited) and the years ended December 31, 1997, 1996 and
1995 amounted to $432, $357, $550, $487 and $425, respectively.
F-18
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. DEPOSITS
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
December 31,
August 31, ------------------------
1998 1997 1996
---------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Demand $ 11,657 $ 8,264 $ 7,565
NOW 29,305 25,862 23,845
Money market deposit 24,904 22,234 16,649
Regular 66,474 63,070 62,526
---------- ----------- -----------
Total non-certificate accounts 132,340 119,430 110,585
---------- ----------- -----------
Certificate accounts less than $100,000 116,485 117,855 113,918
Certificate accounts $100,000 or more 24,742 25,394 24,479
---------- ----------- -----------
Total certificate accounts 141,227 143,249 138,397
---------- ----------- -----------
$273,567 $262,679 $248,982
========== ========== ==========
</TABLE>
A summary of certificate accounts, by maturity, is as follows:
<TABLE>
<CAPTION>
August 31, 1998 December 31, 1997 December 31, 1996
------------------------ ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
----------- ----------- ----------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Within 1 year $101,857 5.31% $106,334 5.42% $96,237 5.24%
Over 1 year to 3 years 39,336 6.25 36,895 6.26 32,693 5.96
Over 3 years to 5 years 34 2.50 20 2.50 9,467 7.23
----------- ----------- -----------
$141,227 5.54% $143,249 5.63% $138,397 5.54%
=========== =========== ==========
</TABLE>
F-19
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DEPOSITS (CONCLUDED)
Interest on deposits, classified by type, is as follows:
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
--------- --------- ---------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
NOW $ 189 $ 165 $ 253 $ 243 $ 272
Money market deposit 533 272 407 441 499
Regular 1,003 1,110 1,759 1,684 1,707
Certificate accounts 5,151 5,032 7,740 7,045 6,223
--------- --------- ---------- --------- ---------
$6,876 $6,579 $10,159 $9,413 $8,701
========= ========= ========== ========= ========
</TABLE>
F-20
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank of Boston ("FHLB") advances consist of the following:
<TABLE>
<CAPTION>
December 31,
Interest August 31, ----------------------
Maturity Date Rate 1998 1997 1996
- ------------------- -------- ------------ ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
September 23, 1998 5.59% $ 9,000 $ - $ -
October 6, 1998 5.55 4,000 - -
October 15, 1998 5.54 5,000 - -
December 16, 1998 5.56 5,000 - -
January 6, 1999 5.56 10,000 - -
February 8, 1999 4.99 10,000 - -
February 24, 1999 4.89 10,000 - -
January 7, 1998 5.62 - 10,000 -
February 27, 1998 5.73 - 3,000 -
March 9, 1998 5.77 - 4,000 -
March 19, 1998 5.78 - 4,000 -
March 24, 1998 5.77 - 10,000 -
April 15, 1998 5.64 - 5,000 -
January 21, 1997 5.47 - - 5,000
March 3, 1997 5.38 - - 4,000
March 11, 1997 5.44 - - 10,000
March 21, 1997 5.66 - - 10,000
April 17, 1997 5.67 - - 5,000
December 30, 2004 8.51 1,382 1,406 1,441
------------ ---------- ----------
54,382 37,406 35,441
Line of credit 410 4,320 -
------------ ---------- ----------
$54,792 $41,726 $35,441
============ ========== ==========
</TABLE>
The advance due on December 30, 2004 requires monthly principal and interest
payments.
The interest rate on the line of credit adjusts daily. Borrowings under the
line are limited to 2% of the Bank's total assets. All borrowings from the
Federal Home Loan Bank of Boston are secured by a blanket lien on qualified
collateral, defined principally as 75% of the carrying value of first
mortgage loans on owner-occupied residential property and 90% of the market
value of U.S. government and federal agency securities.
Additionally, as a member of the FHLB, the Bank is eligible to borrow
amounts up to the level of qualified collateral maintained.
F-21
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
--------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current tax provision:
Federal $1,041 $ 868 $1,385 $ 927 $ 984
State 233 298 365 433 424
--------- --------- --------- --------- ---------
1,274 1,166 1,750 1,360 1,408
--------- --------- --------- --------- ---------
Deferred tax provision (benefit):
Federal (28) (134) (165) 165 (44)
State (23) (46) (44) 57 36
--------- --------- --------- --------- ---------
(51) (180) (209) 222 (8)
--------- --------- --------- --------- ---------
$1,223 $ 986 $1,541 $1,582 $1,400
======== ======== ======== ======== ========
</TABLE>
The reasons for the differences between the statutory federal income tax
rate and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
--------------------- ----------------------------
1998 1997 1997 1996 1995
--------- --------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 3.9 5.4 4.6 8.0 8.1
Dividends received deduction (2.9) (3.3) (2.6) (3.8) (4.3)
Non-taxable appreciation of securities donated (0.4) (3.5) (2.3) - -
Other, net - (0.7) 0.1 0.8 (0.3)
--------- --------- -------- -------- --------
Effective tax rates 34.6% 31.9% 33.8% 39.0% 37.5%
========= ========= ======== ======== ========
</TABLE>
F-22
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES (CONTINUED)
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31,
August 31, ---------------------
1998 1997 1996
----------- --------- ----------
(unaudited)
<S> <C> <C> <C>
Deferred tax asset:
Federal $ 985 $ 952 $ 930
State 340 316 321
---------- --------- ----------
1,325 1,268 1,251
---------- --------- ----------
Deferred tax liability:
Federal (312) (1,521) (979)
State (86) (199) (363)
---------- --------- ----------
(398) (1,720) (1,342)
---------- --------- ----------
Net deferred tax asset (liability) $ 927 $ (452) $ (91)
========== ========= ==========
</TABLE>
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31,
August 31, ------------------
1998 1997 1996
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
Cash basis of accounting $ 20 $ (7) $ (17)
Net unrealized gain on securities
available for sale (69) (1,397) (827)
Charitable donation - - (205)
Depreciation (66) (65) (65)
Deferred income (235) (221) (196)
Allowance for loan losses 838 792 773
Employee benefit plans 451 412 412
Other (12) 34 34
---------- -------- --------
Net deferred tax asset (liability) $ 927 $ (452) $ (91)
========== ======== ========
</TABLE>
F-23
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES (CONCLUDED)
A summary of the change in the net deferred tax asset (liability) is as
follows:
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
-------------------- -----------------------------
1998 1997 1997 1996 1995
--------- -------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ (452) $ (91) $ (91) $ 406 $ 1,031
Deferred tax (provision) benefit 51 180 209 (222) 8
Deferred tax effects on net unrealized gain
on securities available for sale 1,328 (250) (570) (275) (633)
-------- -------- -------- -------- ---------
Balance at end of period $ 927 $ (161) $ (452) $ (91) $ 406
======== ======== ======== ======== =========
</TABLE>
There was no valuation allowance for deferred tax assets as of August 31,
1998 and December 31, 1997 and 1996.
The federal income tax reserve for loan losses at the Bank's base year is
approximately $1,551. If any portion of the reserve is used for purposes
other than to absorb loan losses, approximately 150% of the amount actually
used, (limited to the amount of the reserve) would be subject to taxation in
the fiscal year in which used. As the Bank intends to use the reserve to
absorb only loan losses, a deferred tax liability of approximately $831 has
not been provided.
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial
statements.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters
of credit, interest rate swap agreements, interest rate cap agreements and
interest rate floor agreements. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional
amounts of these instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments.
F-24
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of these
commitments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
For interest rate swap, cap, and floor transactions, the notional amounts do
not represent exposure to credit loss. Rather, the credit loss exposure
relates to the net fair value to be received if such contracts were to be
offset in the marketplace. The Bank controls the credit risk of such
contracts through credit approvals, limits, and monitoring procedures.
LOAN COMMITMENTS
A summary of outstanding loan commitments whose contract amounts represent
credit risk is as follows:
<TABLE>
<CAPTION>
December 31,
August 31, -------------------
1998 1997 1996
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Commitments to grant loans:
Fixed $ 5,136 $ 4,539 $ 4,971
Variable 3,307 1,261 328
Unadvanced funds on lines of credit 53,968 48,324 42,254
Standby letters of credit 87 87 32
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The commitments for lines of
credit may expire without being drawn upon, therefore, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. These
financial instruments are generally collateralized by real estate or other
business assets.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These letters of
credit are primarily issued to support borrowing arrangements and are
generally written for one year terms. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Standby letters of credit are collateralized by
real estate and deposit accounts.
F-25
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
INTEREST RATE SWAP AGREEMENTS
The Bank periodically enters into interest rate swap agreements with the
FHLB to moderate its exposure to interest rate changes and offset deposit
costs. Interest rate swap agreements generally involve the exchange of
fixed and floating-rate interest payment obligations without the exchange of
the underlying principal, or notional, amounts. These transactions are
accounted for using the accrual method. Net interest income resulting from
the differential between exchanging floating and fixed-rate payments is
recorded on a current basis.
The notional principal amount of the Bank's outstanding interest rate swaps
was $5,000 at December 31, 1996. Under the terms of the swap agreement, the
FHLB agreed to pay semi-annual fixed rate payments of 6.635% while the Bank
must pay quarterly floating rate payments. The agreement matured on June
29, 1997 and the original term was three years. Net interest income
resulting from the differential between the floating and fixed-rate interest
payments amounted to $20, $53 and $22 for the years ended December 31, 1997,
1996 and 1995, respectively, and is recorded against interest expense on
deposits.
INTEREST RATE CAP AND FLOOR AGREEMENTS
The Bank periodically enters into interest cap and floor agreements to
moderate its exposure to interest rate changes and offset borrowing costs.
Interest rate cap and floor agreements generally involve the payment of a
premium in return for cash receipts if interest rates rise above or fall
below a specified interest rate level. Payments are based on a notional
principal amount.
During the eight months ended August 31, 1998 (unaudited), the Bank entered
into two interest rate cap agreements. The notional principal amount of the
cap agreements amounted to $10,000. Under the terms of the cap agreements,
the Bank paid premiums of $80 in exchange for future cash paymnents if LIBOR
increases above 6%. Amortization for the eight month period ended August 31,
1998 amounted to $8. The agreements have a term of three years and mature in
May and June 2001.
During 1996 and 1995 the notional principal amount of the Bank's interest
rate cap was $5,000, this interest rate cap matured on January 16, 1996.
Cash payments received during 1996 and 1995 related to this interest rate
cap totaled $12 and $52, respectively, and are recorded as a credit to
interest on advances.
F-26
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
INTEREST RATE CAP AND FLOOR AGREEMENTS (CONCLUDED)
The notional principal amount of the Bank's outstanding interest rate floor
was $10,000 at August 31, 1998 (unaudited) and December 31, 1997 and 1996.
Under the terms of the floor agreement, the Bank paid a premium of $134
during 1996 which is included in other assets and is being amortized over
five years which is the term of the agreement. Amortization for the eight
months ended August 31, 1998 and the years ended December 31, 1997 and 1996
totaled $18, $27 and $16, respectively, and is recorded as interest expense
on advances. If LIBOR falls below 5.75%, the Bank receives cash payments on
a quarterly basis. Cash payments received during the eight months ended
August 31, 1998 (unaudited) and the years ended December 31, 1997 and 1996
totaled $2, $12 and $4, respectively, and are recorded as a credit to
interest on advances.
LEASE COMMITMENTS
Pursuant to the terms of noncancelable lease agreements in effect at
August 31, 1998 (unaudited) and December 31, 1997, future minimum rent
commitments pertaining to banking premises are as follows:
<TABLE>
<CAPTION>
Years Ending August 31, December 31,
December 31, 1998 1997
----------- ----------- -----------
(unaudited)
<S> <C> <C>
1998 $ 47 $ 141
1999 129 129
2000 53 53
2001 53 53
2002 50 50
Thereafter 825 825
----------- -----------
$1,157 $1,251
=========== ===========
</TABLE>
Annual real estate taxes assessed to the leased premises will be added to
the basic rental scheduled above. The leases contain options to extend for
periods from five to twenty-five years. The cost of such rentals is not
included above.
F-27
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES (CONCLUDED)
LEASE COMMITMENTS (CONCLUDED)
Rent expense for the eight months ended August 31, 1998 and 1997 (unaudited)
and the years ended December 31, 1997, 1996 and 1995 amounted to $94, $72,
$119, $96 and $106, respectively.
CONTINGENCIES
Various legal claims arise from time to time in the ordinary course of
business. In the opinion of management, these claims will have no material
effect on the Bank's consolidated financial position.
10. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined) to risk weighted
assets (as defined) and to average assets (as defined). Management believes,
as of August 31, 1998 (unaudited) and December 31, 1997 and 1996, that the
Bank meets all capital adequacy requirements to which it is subject.
As of August 31, 1998 (unaudited) and December 31, 1997 and 1996, the most
recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
F-28
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONCLUDED)
The Bank's actual capital amounts and ratios as of August 31, 1998
(unaudited) and December 31, 1997 and 1996 are also presented in the table.
<TABLE>
<CAPTION>
Minimum
To Be Well
Capitalized Under
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of August 31, 1998 (unaudited):
--------------------------------
Total Capital to Risk
Weighted Assets $34,530 13.5% $20,477 8.0% $25,596 10.0%
Tier 1 Capital to Risk
Weighted Assets 32,469 12.7 10,238 4.0 15,358 6.0
Tier 1 Capital to Average
Assets 32,469 9.1 10,688 3.0 17,813 5.0
17,813 5.0
As of December 31, 1997:
-----------------------
Total Capital to Risk
Weighted Assets $32,902 15.1% $17,389 8.0% $21,736 10.0%
Tier 1 Capital to Risk
Weighted Assets 30,950 14.2 8,694 4.0 13,042 6.0
Tier 1 Capital to Average
Assets 30,950 9.1 10,225 3.0 17,043 5.0
17,043 5.0
As of December 31, 1996:
-----------------------
Total Capital to Risk
Weighted Assets $29,843 15.7% $15,234 8.0% $19,042 10.0%
Tier 1 Capital to Risk
Weighted Assets 27,932 14.7 7,617 4.0 11,425 6.0
Tier 1 Capital to Average
Assets 27,932 8.9 9,375 3.0 15,626 5.0
15,626 5.0
</TABLE>
F-29
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. PENSION PLANS
DEFINED BENEFIT PLAN
The Bank provides basic and supplemental pension benefits for eligible
employees through the Savings Banks Employees Retirement Association
("SBERA") Pension Plan. Each employee reaching the age of 21 and having
completed at least 1,000 hours of service in one twelve-month period,
beginning with such employee's date of employment, automatically becomes a
participant in the retirement plan. All participants are fully vested after
three years of such service.
Net periodic pension cost consists of the following:
<TABLE>
<CAPTION>
Plan Years Ended October 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned during year $ 282 $ 270 $ 206
Interest cost on projected benefits 259 244 222
Actual return on plan assets (464) (377) (377)
Amortization of net loss 194 183 216
----- ----- -----
$ 271 $ 320 $ 267
===== ===== =====
</TABLE>
Actuarial assumptions used in accounting were:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Discount rates on benefit obligations 7.25% 7.50%
Rates of increase in compensation levels 6.00 6.00
Expected long-term rates of return on plan assets 8.00 8.00
</TABLE>
According to SBERA, a reconciliation of the funded status of the plan is as
follows:
<TABLE>
<CAPTION>
October 31,
---------- ---------
1997 1996
---------- ---------
<S> <C> <C>
Plan assets at fair value, primarily consisting of U.S.
government securities and equity securities $ 3,399 $ 3,071
Actuarial present value of projected benefit obligation 3,891 3,460
---------- ---------
Projected benefit obligation in excess of plan assets (492) (389)
Unamortized net surplus since adoption of SFAS No. 87 46 50
Unrecognized net gain (561) (657)
---------- ---------
Accrued pension liability $(1,007) $(996)
========= ========
</TABLE>
The accumulated benefit obligation (substantially all vested) at October 31,
1997 was $1,975 which was less than the plan assets at fair value.
F-30
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
PENSION PLANS (CONCLUDED)
DEFINED BENEFIT PLAN (CONCLUDED)
Total pension expense for the eight months ended August 31, 1998 and 1997
(unaudited) and the years ended December 31, 1997, 1996 and 1995 amounted to
$292, $192, $336, $386 and $294, respectively.
DEFINED CONTRIBUTION PLAN
In addition to the defined benefit plan, the Bank has a 401(k) plan. Each
employee reaching the age of 21 and having completed at least 1,000 hours of
service in one twelve month period, beginning with such employee's date of
hire, automatically becomes a participant in the plan. The plan provides
for voluntary contributions by participating employees up to 15% of their
compensation, subject to certain limits based on federal tax laws.
Presently, the Bank does not make matching contributions.
TRUSTEES' RETIREMENT PLAN
During 1996, the Board of Trustees voted to adopt a Trustee's Indexed Fee
Continuation Program effective as of January 1, 1997. Under the terms of
the plan, Trustees are eligible to participate in the plan upon election to
the Board of Trustees and the retirement benefits vest over a 10 year
period. The retirement benefit for any plan year is determined by the
performance of the insurance contracts, as defined in the plan. During,
1996, the Bank purchased life insurance contracts for $1,500. Plan expenses
for eight months ended August 31, 1998 and 1997 (unaudited) and the year
ended December 31, 1997 were $15, $17 and $50, respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Bank has entered into a Split Dollar Life Insurance Arrangement with its
President and Chief Executive Officer intended to provide supplemental
retirement benefits. The Bank pays the annual premiums and records its
share of the cash surrender value in other assets.
12. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to officers,
trustees and their affiliates amounting to approximately $1,448, $1,579 and
$1,448 at August 31, 1998 (unaudited), and December 31, 1997 and 1996,
respectively.
F-31
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
RELATED PARTY TRANSACTIONS (CONCLUDED)
An analysis of the activity of these loans is as follows:
<TABLE>
<CAPTION>
Eight Months
Ended Years Ended
August 31, December 31,
----------- ---------------------------
1998 1997 1996
----------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Balance at beginning of period $1,579 $1,448 $1,922
Additions 196 416 290
Repayments (327) (285) (764)
---------- --------- ---------
Balance at end of period $1,448 $1,579 $1,448
========= ======== ========
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair values of all financial instruments
where it is practicable to estimate such values. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. Accordingly, the derived fair value
estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the
instrument. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Bank.
The following methods and assumptions were used by the Bank in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
-------------------------
instruments approximate fair values.
Securities available for sale: Fair values for securities available
-----------------------------
for sale are based on quoted market prices.
Federal Home Loan Bank stock: The carrying value of Federal Home Loan
----------------------------
Bank stock approximates fair value based on the redemption provisions
of the Federal Home Loan Bank of Boston.
F-32
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Loans receivable: Fair values for performing 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. Fair values for non-performing loans are estimated using
underlying collateral values, where applicable.
Deposit liabilities: The fair values of non-certificate accounts are,
-------------------
by definition, equal to the amount payable on demand at the reporting
date which is their carrying amounts. Fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances: The fair values of the Bank's
-------------------------------
borrowings are estimated using discounted cash flow analyses based on
the Bank's current incremental borrowing rates for similar types of
borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate
----------------
fair value.
Loan commitments: Fair values for loan commitments are based on fees
----------------
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties' credit
standing, and are not significant since fees charged are not material.
Interest rate swap, cap, and floor agreements: The fair value of
---------------------------------------------
interest rate swap, cap, and floor agreements are obtained from dealer
quotes. These values represent the estimated amount the Bank would
receive or pay to terminate agreements taking into consideration
current interest rates.
F-33
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)
The carrying or notional amounts and estimated fair values of the Bank's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
August 31, 1998 1997 1996
----------------------- --------------------- ---------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
---------- ---------- ---------- --------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $12,923 $12,923 $11,686 $11,686 $10,469 $10,469
Securities available for sale 71,482 71,482 55,640 55,640 61,626 61,626
Federal Home Loan Bank
stock 2,984 2,984 2,433 2,433 2,101 2,101
Loans, net 265,564 267,157 261,723 263,564 234,135 232,947
Accrued interest receivable 1,648 1,648 1,479 1,479 1,427 1,427
Financial liabilities:
Deposits 273,567 274,330 262,679 263,383 248,982 250,043
Federal Home Loan Bank
advances 54,792 54,956 41,726 41,835 35,441 35,540
<CAPTION>
Notional Fair Notional Fair Notional Fair
Amount Value Amount Value Amount Value
---------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Other:
Interest rate swap
agreement $ - $ - $ - $ - $5,000 $(23)
Interest rate floor
agreement 10,000 139 10,000 102 10,000 167
Interest rate cap
agreements 10,000 41 -- -- -- --
</TABLE>
16. PLAN OF CONVERSION (UNAUDITED)
On August 26, 1998, the Board of Trustees of the Bank approved a Plan of
Conversion, as amended, for Woronoco Savings Bank ("Plan"). The Plan
provides for the conversion of the Bank from a state-chartered mutual
savings bank to a state-chartered stock savings bank. It is currently
intended that all of the stock of the Bank will be held by a holding
company, Woronoco Bancorp, Inc. (the "Company"), a Delaware corporation.
The Plan is subject to the approval of the Bank's Corporators and various
regulatory agencies.
F-34
<PAGE>
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(DOLLARS IN THOUSANDS)
PLAN OF CONVERSION (CONCLUDED)
As part of the Conversion, the Bank will establish a liquidation account for
the benefit of eligible and supplemental eligible account holders. 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
and supplemental eligible account holder will be entitled to receive
balances for accounts then held.
In addition, pursuant to the Plan of Conversion, the Company intends to
establish a charitable foundation and the Bank an Employees' Stock Ownership
Plan. Also, the Company and Bank each intend to enter into employment
agreements, change in control agreements and severance agreements with
certain offices.
Subsequent to the Conversion, the Company and the Bank may not declare or
pay dividends on and the Company may not repurchase any of its shares of
common stock if the effect thereof would cause stockholders' equity to be
reduced below applicable regulatory capital maintenance requirements or if
such declaration, payment or repurchase would otherwise violate regulatory
requirements.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold. If the Conversion is not completed, all costs will be
expensed. As of August 31, 1998, no offering costs have been incurred.
F-35
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY WORONOCO BANCORP, INC., WORONOCO SAVINGS BANK OR SANDLER O'NEILL &
PARTNERS, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF WORONOCO BANCORP, INC. OR WORONOCO SAVINGS BANK
SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE
DATE HEREOF.
_____________________________
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Question and Answers About the Stock Offering
Summary........................................................................
Risk Factors...................................................................
Selected Consolidated Financial and Other Data of the Bank.....................
Recent Developments............................................................
Woronoco Bancorp, Inc..........................................................
Woronoco Savings Bank..........................................................
Woronoco Savings Charitable Foundation.........................................
Regulatory Capital Compliance..................................................
Use of Proceeds................................................................
Dividend Policy................................................................
Market for the Common Stock....................................................
Capitalization.................................................................
Pro Forma Data.................................................................
Comparison of Valuation and Pro Forma Information
with No Foundation............................................................
Woronoco Savings Bank Consolidated Statements of Income........................
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....................................................
Business of the Company........................................................
Business of the Bank...........................................................
Federal and State Taxation.....................................................
Regulation and Supervision.....................................................
Management of the Company......................................................
Management of the Bank.........................................................
The Conversion.................................................................
Restrictions on Acquisition of the
Company and the Bank.........................................................
Description of Capital Stock of the Company....................................
Description of Capital Stock of the Bank.......................................
Transfer Agent and Registrar...................................................
Experts........................................................................
Legal and Tax Opinions.........................................................
Additional Information.........................................................
Index to Consolidated..........................................................
Financial Statements.........................................................
</TABLE>
_____________________________
UNTIL _________, 1999 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
4,830,000
[LOGO]
Woronoco Bancorp, Inc.
(Proposed Holding Company for
Woronoco Savings Bank)
COMMON STOCK
(par value $0.01 per share)
__________
PROSPECTUS
__________
SANDLER O'NEILL & PARTNERS, INC.
__________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
Massachusetts filing fee...................................... $ 5,000
SEC filing(1)................................................. 16,677
OTS holding company filing fee................................ 2,000
NASD filing fee(1)............................................ 6,499
AMEX listing fee(1)........................................... 27,500
Printing, postage and mailing................................. 350,000
Legal fees and expenses....................................... 225,000
Accounting fees and expenses.................................. 80,000
Appraisers' fees and expenses (including
business plan)............................................ 31,000
Marketing fees and selling commissions(1)..................... 628,000
Underwriter's expenses (including counsel's fees)............. 50,000
Conversion agent fees and expenses............................ 20,000
Transfer agent fees and expenses.............................. 10,000
Certificate printing.......................................... 5,000
Telephone, temporary help and other equipment................. 10,000
Miscellaneous................................................. 21,324
----------
TOTAL......................................................... $1,488,000
==========
</TABLE>
______________________
(1) Unless otherwise noted, based upon the registration and issuance of
5,998,860 shares at $10.00 per share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof)
<PAGE>
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full
by the Corporation within sixty days after a written claim has been received by
the Corporation, except in the case of a claim for an advancement of expenses,
in which case the applicable period shall be twenty days, the indemnitee may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim. If successful in whole or in part in any such suit, or in
a suit brought by the Corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expenses of prosecuting or defending such suit. In (i) any suit brought by
the indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of expenses)
it shall be a defense that, and (ii) in any suit by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for indemnification set
forth in the Delaware General Corporation Law. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses conferred
in this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
<PAGE>
ELEVENTH:
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or
(iv) for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Woronoco Savings Bank and Sandler O'Neill &
Partners, L.P.*
1.2 Draft Form of Agency Agreement between Woronoco Savings Bank and Sandler
O'Neill & Partners, L.P.
2.1 Amended Plan of Conversion (including the Stock Charter and Stock Bylaws
of Woronoco Savings Bank)*
3.1 Certificate of Incorporation of Woronoco Bancorp, Inc.*
3.2 Bylaws of Woronoco Bancorp, Inc.*
3.3 Stock Charter and Stock Bylaws of Woronoco Savings Bank
(See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of Woronoco Bancorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of Wolf & Company, P.C. re: State Tax Matters*
10.1 Form of Woronoco Savings Bank Employee Stock Ownership Plan Trust
Agreement*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Employment Agreement between Woronoco Savings Bank and certain
executive officers*
10.4 Form of Employment Agreement between Woronoco Bancorp, Inc. and certain
executive officers*
10.5 Form of Change in Control Agreement between Woronoco Savings Bank and
certain executive officers*
10.6 Form of Woronoco Savings Bank Employee Severance Compensation Plan*
10.7 Form of Woronoco Savings Bank Supplemental Executive Retirement Plan*
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.*
24.0 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of Keller & Company, Inc. (P)*
99.2 Draft of Woronoco Savings Charitable Foundation Gift Instrument*
99.3 Organizational Resolutions of Woronco Bancorp, Inc.
99.4 Stock Certification and Order Form
- --------------------------------------
* Previously filed
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Westfield, Commonwealth
of Massachusetts, on December 30, 1998.
Woronoco Bancorp, Inc.
By: /s/ Cornelius D. Mahoney
-------------------------------
Cornelius D. Mahoney
Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Cornelius D. Mahoney Chairman of the Board, President December 30, 1998
- ------------------------------ and Chief Executive Officer
Cornelius D. Mahoney (principal executive officer)
/s/ Debra L. Murphy Senior Vice President and Chief December 30, 1998
- ------------------------------ Financial Officer
Debra L. Murphy (principal accounting and
financial officer)
/s/ * Director
- ------------------------------
James A. Adams
/s/ * Director
- ------------------------------
William G. Aiken
/s/ * Director
- ------------------------------
Paul S. Allen
/s/ * Director
- ------------------------------
Francis J. Ehrhardt
/s/ * Director
- ------------------------------
Joseph M. Houser, Jr.
/s/ * Director
- ------------------------------
Joseph P. Keenan
/s/ * Director
- ------------------------------
Asher Nesin
/s/ * Director
- ------------------------------
Richard L. Pomeroy
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ * Director
- ------------------------------
Norman H. Storey
/s/ * Director
- ------------------------------
Ann V. Schultz
/s/ * Director
- ------------------------------
D. Jeffrey Templeton
/s/ * Director
- ------------------------------
Paul Tsatsos
</TABLE>
* Pursuant to the Power of Attorney filed as Exhibit 24.0 to the
Registration Statement on Form S-1 for Woronoco Bancorp, Inc. filed on November
13, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Cornelius D. Mahoney Chairman of the Board, December 30, 1998
- ----------------------------- President and Chief
Cornelius D. Mahoney Executive Officer
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on December 30, 1998
Registration No. 333-67255
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
EXHIBITS
TO THE
PRE EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
WORONOCO BANCORP, INC.
(Exact name of registrant as specified in its charter)
================================================================================
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
1.1 Engagement Letter between Woronoco Savings Bank and Sandler O'Neill &
Partners, L.P.*
1.2 Draft Form of Agency Agreement between Woronoco Savings Bank and Sandler
O'Neill & Partners, L.P.
2.1 Amended Plan of Conversion (including the Stock Charter and Stock Bylaws
of Woronoco Savings Bank)*
3.1 Certificate of Incorporation of Woronoco Bancorp, Inc.*
3.2 Bylaws of Woronoco Bancorp, Inc.*
3.3 Stock Charter and Stock Bylaws of Woronoco Savings Bank
(See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of Woronoco Bancorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of Wolf & Company, P.C. re: State Tax Matters*
10.1 Form of Woronoco Savings Bank Employee Stock Ownership Plan Trust
Agreement*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Employment Agreement between Woronoco Savings Bank and certain
executive officers*
10.4 Form of Employment Agreement between Woronoco Bancorp, Inc. and certain
executive officers*
10.5 Form of Change in Control Agreement between Woronoco Savings Bank and
certain executive officers*
10.6 Form of Woronoco Savings Bank Employee Severance Compensation Plan*
10.7 Form of Woronoco Savings Bank Supplemental Executive Retirement Plan*
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.*
24.0 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of Keller & Company, Inc. (P)*
99.2 Draft of Woronoco Savings Charitable Foundation Gift Instrument*
99.3 Organizational Resolutions of Woronoco Bancorp, Inc.
99.4 Stock Certification and Order Form.
- --------------------------------------
* previously filed
<PAGE>
EXHIBIT 1.2
4,830,000 Shares
(subject to increase up to 5,554,500 shares
in the event of an oversubscription)
WORONOCO BANCORP, INC.
(a Delaware corporation)
Common Stock
(par value $0.01 per share)
AGENCY AGREEMENT
_______, 1999
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
Woronoco Bancorp, Inc., a Delaware corporation (the "Company"), and
Woronoco Savings Bank, a Massachusetts savings bank (the "Bank"), hereby confirm
their agreement with Sandler O'Neill & Partners, L.P. ("Sandler O'Neill" or the
"Agent") with respect to the offer and sale by the Company of 4,830,000 shares
(subject to increase up to 5,554,500 shares in the event of an oversubscription)
of the Company's common stock, par value $0.01 per share (the "Common Stock").
The shares of Common Stock to be sold by the Company are hereinafter called the
"Securities." In addition, as described herein, the Company expects to
contribute shares of Common Stock in an amount equal to 8% of the shares of
Common Stock sold in the Offerings (as hereinafter defined) to the Woronoco
Savings Charitable Foundation (the "Foundation"), such shares hereinafter being
referred to as the "Foundation Shares."
The Securities are being offered for sale and the Foundation Shares are
being contributed in accordance with the plan of conversion (the "Plan") adopted
by the Board of Directors of the Bank pursuant to which the Bank intends to
convert from a Massachusetts chartered mutual savings bank to a Massachusetts
chartered stock savings bank and issue all of its stock to the Company. Pursuant
to the Plan, the Company is offering to the Bank's tax qualified employee
benefit plans, including the Employee Stock Ownership Plan (the "ESOP")
(collectively, the "Employee Plans") and to certain of the Bank's depositors
rights to subscribe for the Securities in a subscription offering (the
"Subscription Offering"). To the extent Securities are not subscribed for
in the Subscription Offering, such Securities may be offered to certain members
of the general public, with preference given to natural persons residing in
Hampden and Hampshire Counties,
<PAGE>
-2-
Massachusetts, in a direct community offering (the "Community Offering" and
together with the Subscription Offering, as each may be extended or reopened
from time to time, the "Subscription and Community Offering") to be commenced
concurrently with the Subscription Offering. It is currently anticipated by the
Bank and the Company that any Securities not subscribed for in the Subscription
and Community Offering will be offered, subject to Section 3 hereof, in a
syndicated community offering (the "Syndicated Community Offering"). The
Subscription Offering and the Syndicated Community Offering are hereinafter
referred to collectively as the "Offerings," and the conversion of the Bank from
mutual to stock form, the acquisition of the capital stock of the Bank by the
Company and the Offerings are hereinafter referred to collectively as the
"Conversion." It is acknowledged that the number of Securities to be sold in the
Conversion may be increased or decreased as described in the Prospectus (as
hereinafter defined). If the number of Securities is increased or decreased in
accordance with the Plan, the term "Securities" shall mean such greater or
lesser number, where applicable. In the event that a holding company form of
organization is not utilized, all pertinent terms of this Agreement will apply
to the conversion of the Bank from the mutual to stock form of organization and
the sale of the Bank's common stock.
In connection with the Conversion and pursuant to the terms of the Plan as
described in the Prospectus, the Company has established the Foundation.
Immediately following the consummation of the Conversion, subject to the
approval of the establishment of the Foundation by the depositors of the Bank
and compliance with certain conditions as may be imposed by regulatory
authorities, the Company will contribute newly issued shares of Common Stock in
an amount equal to 8% of the Securities sold in the Offering, or between 285,600
and 386,400 shares of Common Stock (subject to increase in certain circumstances
to 444,360 shares).
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-67255), including a
related prospectus, for the registration of the Securities and the Foundation
Shares under the Securities Act of 1933, as amended (the "Securities Act"), has
filed such amendments thereto, if any, and such amended prospectuses as may have
been required to the date hereof by the Commission in order to declare such
registration statement effective, and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as may
hereafter be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectuses constituting a part thereof (including in each case all documents
incorporated or deemed to be incorporated by reference therein and the
information, if any, deemed to be a part thereof pursuant to the rules and
regulations of the Commission under the Securities Act, as from time to time
amended or supplemented pursuant to the Securities Act or otherwise (the
"Securities Act Regulations")), are hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively, except that if any revised
prospectus shall be used by the Company in connection with the Subscription and
Community Offering or the Syndicated Community Offering which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the Securities Act Regulations),
the term "Prospectus" shall refer to such revised prospectus from and after the
time it is first provided to the Agent for such use.
<PAGE>
-3-
Concurrently with the execution of this Agreement, the Company is
delivering to the Agent copies of the Prospectus of the Company to be used in
the Subscription and Community Offering. Such prospectus contains information
with respect to the Bank, the Company and the Common Stock.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company and the Bank jointly and severally represent and warrant
to the Agent as of the date hereof as follows:
(i) The Registration Statement has been declared effective by
the Commission, no stop order has been issued with respect thereto and no
proceedings therefor have been initiated or, to the knowledge of the
Company and the Bank, threatened by the Commission. At the time the
Registration Statement became effective and at the Closing Time referred to
in Section 2 hereof, the Registration Statement complied and will comply in
all material respects with the requirements of the Securities Act and the
Securities Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading. The Prospectus, at the date hereof does not and at the Closing
Time referred to in Section 2, hereof will not, include an untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the representations
and warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in reliance
upon and in conformity with information with respect to the Agent furnished
to the Company in writing by the Agent expressly for use in the
Registration Statement or Prospectus (the "Agent Information," which the
Company and the Bank acknowledge appears only in the sections captioned
"Market for the Common Stock" and the first two paragraphs of the section
"The Conversion - Marketing and Underwriting Arrangements" of the
Prospectus).
(ii) The Company has filed with the Department of the Treasury,
Office of Thrift Supervision (the "OTS") the Company's application for
approval of its acquisition of the Bank (the "Holding Company Application")
on Form H-(e)1-S promulgated under the savings and loan holding company
provisions of the Home Owners' Loan Act, as amended ("HOLA") and the
regulations promulgated thereunder. The Company has received written
notice from the OTS of its approval of the acquisition of the Bank, such
approval remains in full force and effect and no order has been issued by
the OTS suspending or revoking such approval and no proceedings therefor
have been initiated or, to the knowledge of the Company or the Bank,
threatened by the OTS. At the date of such approval and at the Closing
Time referred to in Section 2, the Holding Company Application complied and
will comply in all material respects with the applicable provisions of HOLA
and the regulations promulgated thereunder.
(iii) Pursuant to the rules and regulations of the Massachusetts
Division of Banks (the "Division") governing the conversion of
Massachusetts chartered mutual savings banks to stock form (the "Conversion
Regulations"), the Bank has filed with the Division an application for
conversion, and has filed such amendments thereto and
<PAGE>
-4-
supplementary materials as may have been required to the date hereof (such
application, as amended to date, if applicable, and as from time to time
amended or supplemented hereafter, is hereinafter referred to as the
"Conversion Application"), including copies of the Bank's Information
Statement, dated ______________, 1999, relating to the Conversion (the
"Information Statement"), and the Prospectus. The Division has, by letter
dated __________, 1999, approved the Conversion Application, such approval
remains in full force and effect and no order has been issued by the
Division suspending or revoking such approval and no proceedings therefor
have been initiated or, to the knowledge of the Company or the Bank,
threatened by the Division. At the date of such approval and at the Closing
Time referred to in Section 2, the Conversion Application complied and will
comply in all material respects with the applicable provisions of the
Conversion Regulations.
(iv) At the time of their use, the Information Statement and
any other proxy solicitation materials will comply in all material respects
with the applicable provisions of the Conversion Regulations and will not
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Company and
the Bank will promptly file the Prospectus and any supplemental sales
literature with the Commission, the Division and the FDIC. The Prospectus
and all supplemental sales literature, as of the date the Registration
Statement became effective and at the Closing Time referred to in Section
2, complied and will comply in all material respects with the applicable
requirements of the Conversion Regulations and, at or prior to the time of
their first use, will have received all required authorizations of the
Division and the FDIC for use in final form.
(v) Neither the SEC, the Division nor the FDIC has, by order
or otherwise, prevented or suspended the use of the Prospectus or any
supplemental sales literature authorized by the Company or the Bank for use
in connection with the Offerings.
(vi) At the Closing Time referred to in Section 2, the Company
and the Bank will have completed the conditions precedent to the Conversion
and the establishment of the Foundation in accordance with the Plan, the
applicable Conversion Regulations and all other applicable laws,
regulations, decisions and orders, including all material terms,
conditions, requirements and provisions precedent to the Conversion imposed
upon the Company or the Bank by the OTS, the Division, the Federal Deposit
Insurance Corporation (the "FDIC"), or any other regulatory authority,
other than those which the regulatory authority permits to be completed
after the Conversion.
(vii) Keller & Co., Inc. ("Keller"), which prepared the
valuation of the Bank as part of the Conversion, has advised the Company
and the Bank in writing that it satisfies all requirements for an appraiser
set forth in the Conversion Regulations and any interpretations or
guidelines issued by the Division and the FDIC with respect thereto.
Keller, which prepared the opinion filed as Exhibit 99.1 of the Conversion
Application as required by the Conversion Regulations, satisfies all
requirements for an "independent executive compensation expert" within the
meaning of the Conversion Regulations.
<PAGE>
-5-
(viii) The accountants who certified the consolidated financial
statements and supporting schedules of the Bank included in the
Registration Statement have advised the Company and the Bank in writing
that they are independent public accountants within the meaning of the Code
of Ethics of the American Institute of Certified Public Accountants (the
"AICPA"), and such accountants are, with respect to the Company, the Bank
and each subsidiary of the Bank, independent certified public accountants
as required by the Securities Act and the Securities Act Regulations.
(ix) The only subsidiaries of the Bank are Walshingham
Enterprises, Inc., Woronoco Security Corp. and Court Street Security
Corporation.
(x) The consolidated financial statements and the related
notes thereto included in the Registration Statement and the Prospectus
present fairly the financial position of the Company, the Bank and its
consolidated subsidiaries at the dates indicated and the results of
operations, retained earnings and cash flows for the periods specified, and
comply as to form in all material respects with the applicable accounting
requirements of the Securities Act Regulations and the Conversion
Regulations; except as otherwise stated in the Registration Statement, said
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis; and the
supporting schedules and tables included in the Registration Statement
present fairly the information required to be stated therein.
(xi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein (A) there has been no material adverse change in the
financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and (B) except
for transactions specifically referred to or contemplated in the
Prospectus, there have been no transactions entered into by the Company,
the Bank or any of its subsidiaries other than those in the ordinary course
of business, which are material with respect to the Company, the Bank and
its subsidiaries considered as one enterprise.
(xii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware with corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and
to enter into and perform its obligations under this Agreement; and the
Company is duly qualified as a foreign corporation to transact business and
is in good standing in the Commonwealth of Massachusetts and in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material adverse effect on
the financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise.
(xiii) Upon consummation of the Conversion and the contribution
of the Foundation Shares as described in the Prospectus, the authorized,
issued and outstanding capital stock of the Company will be as set forth in
the Prospectus under "Capitalization" (except for subsequent issuances, if
any, pursuant to reservations, agreements or employee
<PAGE>
-6-
benefit plans referred to in the Prospectus); no shares of Common Stock
have been or will be issued and outstanding prior to the Closing Time
referred to in Section 2; at the time of Conversion, the Securities will
have been duly authorized for issuance and, when issued and delivered by
the Company pursuant to the Plan against payment of the consideration
calculated as set forth in the Plan and stated on the cover page of the
Prospectus, will be duly and validly issued and fully paid and non-
assessable; the terms and provisions of the Common Stock and the capital
stock of the Company conform to all statements relating thereto contained
in the Prospectus; the certificates representing the shares of Common Stock
conform to the requirements of applicable law and regulations; and the
issuance of the Securities is not subject to preemptive or other similar
rights.
(xiv) The Bank, as of the date hereof, is a Massachusetts
chartered savings bank in mutual form and upon consummation of the
Conversion will be a Massachusetts chartered savings bank in stock form, in
both instances with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; the Company, the Bank and its subsidiaries have obtained all
licenses, permits and other governmental authorizations currently required
for the conduct of their respective businesses or required for the conduct
of their respective businesses as contemplated by the Holding Company
Application and the Conversion Application, except where the failure to
obtain such licenses, permits or other governmental authorizations would
not have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, the Bank and its
subsidiaries considered as one enterprise; all such licenses, permits and
other governmental authorizations are in full force and effect and the
Company, the Bank and its subsidiaries are in all material respects in
compliance therewith; none of the Company, the Bank nor any of the Bank's
subsidiaries has received notice of any proceeding or action relating to
the revocation or modification of any such license, permit or other
governmental authorization which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a
material adverse effect on the financial condition, results of operations
or business affairs of the Company, the Bank and its subsidiaries
considered as one enterprise; and the Bank is in good standing under the
laws of the Commonwealth of Massachusetts and is qualified as a foreign
corporation in any jurisdiction in which the failure to so qualify would
have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, the Bank and its
subsidiaries considered as one enterprise.
(xv) The deposit accounts of the Bank are insured by the FDIC
and the Depositors Insurance Fund ("DIF") of the Mutual Savings Central
Fund up to the applicable limits and upon consummation of the Conversion,
the liquidation account for the benefit of eligible account holders and
supplemental eligible account holders will be duly established in
accordance with the requirements of the Conversion Regulations. The Bank is
a "qualified thrift lender" within the meaning of 12 U.S.C. Section
1467a(m).
(xvi) Upon consummation of the Conversion, the authorized
capital stock of the Bank will be 16,000,000 shares of common stock, par
value $1.00 per share (the "Bank Common Stock") and 2,000,000 shares of
preferred stock, par value $1.00 per share (the "Bank Preferred Stock"),
and the issued and outstanding capital stock of the Bank will be
[______________] shares of Bank Common Stock and no shares of the Bank
Preferred
<PAGE>
-7-
Stock, and no shares of Bank Common Stock or Bank Preferred Stock have been
or will be issued prior to the Closing time referred to in Section 2; and
as of Closing Time referred to in Section 2, all of the issued and
outstanding capital stock of the Bank will be duly authorized, validly
issued and fully paid and nonassessable and have been issued in compliance
with all federal and state securities laws. The shares of Bank Common Stock
to be issued to the Company will have been duly authorized for issuance
and, when issued and delivered by the Bank pursuant to the Plan against
payment of the consideration calculated as set forth in the Plan and as
described in the Prospectus, will be duly and validly issued and fully paid
and nonassessable, and all such Bank Common Stock will be owned
beneficially and of record by the Company free and clear of any security
interest, mortgage, pledge, lien, encumbrance or legal or equitable claim;
the terms and provisions of the Bank Common Stock and the Bank Preferred
Stock conform to all statements relating thereto contained in the
Prospectus, and the certificates representing the shares of the Bank Common
Stock will conform with the requirements of applicable laws and
regulations; and the issuance of the Bank Common Stock is not subject to
preemptive or similar rights.
(xvii) The Foundation has been duly incorporated and is validly
existing as a non stock corporation in good standing under the laws of the
State of Delaware with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; the Foundation will not be a savings and loan holding company
withing the meaning of 12 C.F.R. Section 574.2(q) as a result of the
issuance of shares of Common Stock to it in accordance with the terms of
the Plan and in the amounts as described in the Prospectus; no approvals
are required to establish the Foundation and to contribute the shares of
Common Stock thereto as described in the Prospectus other than those
imposed by the Division and the FDIC; except as specifically disclosed in
the Prospectus and the Information Statement, there are no agreements
and/or understandings, written or oral, between the Company and/or the Bank
and the Foundation with respect to the control, directly or indirectly,
over the voting and the acquisition or disposition of the Foundation
Shares; at the time of the Conversion, the Foundation Shares will have been
duly authorized for issuance and, when issued and contributed by the
Company pursuant to the Plan, will be duly and validly issued and fully
paid and non-assessable; and the issuance of the Foundation Shares is not
subject to preemptive or similar rights.
(xviii) Each direct and indirect subsidiary of the Bank has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and Prospectus, and
is duly qualified to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material adverse effect on
the financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise; the
activities of each such subsidiary are permitted to subsidiaries of a
federally chartered savings bank by the rules, regulations, resolutions and
practices of the OTS; all of the issued and outstanding capital stock of
each such subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable and is owned by the Bank, directly, free and clear
of any security interest, mortgage, pledge, lien, encumbrance or legal or
equitable claim.
<PAGE>
-8-
(xix) The Company and the Bank have taken all corporate action
necessary for them to execute, deliver and perform this Agreement, and this
Agreement has been duly executed and delivered by, and is the valid and
binding agreement of, the Company and the Bank, enforceable in accordance
with its terms, except as may be limited by bankruptcy, insolvency or other
laws affecting the enforceability of the rights of creditors generally and
judicial limitations on the right of specific performance and except as the
enforceability of indemnification and contribution provisions may be
limited by applicable securities laws.
(xx) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and
prior to the Closing Time, except as otherwise may be indicated or
contemplated therein, none of the Company, the Bank or any subsidiary of
the Bank will have (A) issued any securities or incurred any liability or
obligation, direct or contingent, or borrowed money, except borrowings in
the ordinary course of business from the same or similar sources and in
similar amounts as indicated in the Prospectus, or (B) entered into any
transaction or series of transactions which is material in light of the
business of the Company, the Bank and its subsidiaries, taken as a whole,
excluding the origination, purchase and sale of loans or the purchase or
sale of investment securities or mortgaged-backed securities in the
ordinary course of business.
(xxi) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and delivery
of this Agreement or the issuance of the Securities and the Foundation
Shares that has not been obtained and a copy of which has been delivered to
the Agent, except as may be required under the securities laws of various
jurisdictions.
(xxii) None of the Company, the Bank nor any of the Bank's
subsidiaries is in violation of its certificate of incorporation,
organization certificate, articles of incorporation or charter, as the case
may be, or bylaws (and the Bank will not be in violation of its charter or
bylaws in stock form upon consummation of the Conversion); and none of the
Company, the Bank nor any of the Bank's subsidiaries is in default (nor has
any event occurred which, with notice or lapse of time or both, would
constitute a default) in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Company, the Bank or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company, the Bank or any of its subsidiaries is subject, except for such
defaults that would not, individually or in the aggregate, have a material
adverse effect on the financial condition, results of operations or
business of the Company, the Bank and its subsidiaries considered as one
enterprise; and there are no contracts or documents of the Company, the
Bank or any of the Bank's subsidiaries which are required to be filed as
exhibits to the Registration Statement or the Conversion Application which
have not been so filed.
(xxiii) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein have
been duly authorized by all necessary corporate action and do not and will
not conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon
<PAGE>
-9-
any property or assets of the Company, the Bank or any of its subsidiaries
pursuant to, any contract, indenture, mortgage, loan agreement, note, lease
or other instrument to which the Company, the Bank or any of its
subsidiaries is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any of its
subsidiaries is subject, except for such defaults that would not,
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise; nor
will such action result in any violation of the provisions of certificate
of incorporation, organization certificate, articles of incorporation or
charter or by-laws of the Company, the Bank or any of its subsidiaries, or
any applicable law, administrative regulation or administrative or court
decree.
(xxiv) No labor dispute with the employees of the Company, the
Bank or any of its subsidiaries exists or, to the knowledge of the Company
or the Bank, is imminent or threatened; and the Company and the Bank are
not aware of any existing or threatened labor disturbance by the employees
of any of its principal suppliers or contractors which might be expected to
result in any material adverse change in the financial condition, results
of operations or business affairs of the Company, the Bank and its
subsidiaries considered as one enterprise.
(xxv) Each of the Company, the Bank and its subsidiaries have
good and marketable title to all properties and assets for which ownership
is material to the business of the Company, the Bank or its subsidiaries
and to those properties and assets described in the Prospectus as owned by
them, free and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Prospectus or are not material in
relation to the business of the Company, the Bank or its subsidiaries
considered as one enterprise; and all of the leases and subleases material
to the business of the Company, the Bank or its subsidiaries under which
the Company, the Bank or its subsidiaries hold properties, including those
described in the Prospectus, are valid and binding agreements of the
Company, the Bank and its subsidiaries, enforceable in accordance with
their terms.
(xxvi) None of the Company, the Bank nor its subsidiaries are
in violation of any directive from the Division, FDIC or OTS to make any
material change in the method of conducting their respective businesses;
the Bank and its subsidiaries have conducted and are conducting their
business so as to comply in all material respects with all applicable
statutes, regulations and administrative and court decrees (including,
without limitation, all regulations, decisions, directives and orders of
the Division, OTS and FDIC).
(xxvii) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending, or,
to the knowledge of the Company or the Bank, threatened, against or
affecting the Company, the Bank or any of its subsidiaries which is
required to be disclosed in the Registration Statement (other than as
disclosed therein), or which might result in any material adverse change in
the financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise, or
which might materially and adversely affect the properties or assets
thereof or which might materially and adversely affect the consummation of
the Conversion; all pending legal or governmental proceedings to which the
Company or
<PAGE>
-10-
the Bank is a party or of which any of their respective property or assets
is the subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business, are
considered in the aggregate not material; and there are no contracts or
documents of the Company or any of its subsidiaries which are required to
be filed as exhibits to the Registration Statement or the Conversion
Application which have not been so filed.
(xxviii) The Bank has obtained an opinion of its counsel,
Muldoon, Murphy & Faucette, with respect to the legality of the Securities
to be issued and the federal income tax consequences of the Conversion
(including franchise tax, sales or use tax, license fee on foreign
corporations, stock transfer tax, real property transfer gain tax and real
estate transfer tax), copies of which are filed as exhibits to the
Registration Statement. The federal income tax consequences of the
Foundation and the Commonwealth of Massachusetts income tax consequences
will be passed upon by Wolf & Company, P.C. ("Wolf"), all material aspects
of the aforesaid opinions are accurately summarized in the Prospectus; the
facts and representations upon which such opinions are based are truthful,
accurate and complete in all material respects; and neither the Bank nor
the Company has taken or will take any action inconsistent therewith.
(xxix) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(xxx) All of the loans represented as assets on the most
recent consolidated financial statements or consolidated selected financial
information of the Bank included in the Prospectus meet or are exempt from
all requirements of federal, state or local law pertaining to lending,
including without limitation truth in lending (including the requirements
of Regulations Z and 12 C.F.R. Part 226 and Section 563.99), real estate
settlement procedures, consumer credit protection, equal credit opportunity
and all disclosure laws applicable to such loans, except for violations
which, if asserted, would not result in a material adverse effect on the
financial condition, results of operations or business of the Company, the
Bank and its subsidiaries considered as one enterprise.
(xxxi) To the knowledge of the Company and the Bank, with the
exception of the intended loan to the Bank's ESOP by the Company to enable
the ESOP to purchase shares of Common Stock in an amount of up to 8% of the
Common Stock issued in the Conversion, none of the Company, the Bank or
employees of the Bank has made any payment of funds of the Company or the
Bank as a loan for the purchase of the Common Stock or made any other
payment of funds prohibited by law, and no funds have been set aside to be
used for any payment prohibited by law.
<PAGE>
-11-
(xxxii) The Company, the Bank and its subsidiaries are in
compliance in all material respects with the applicable financial record
keeping and reporting requirements of the Currency and Foreign Transaction
Reporting Act of 1970, as amended, and the rules and regulations
thereunder.
(xxxiii) None of the Company, the Bank nor its subsidiaries nor
any properties owned or operated by the Company, the Bank or its
subsidiaries is in violation of or liable under any Environmental Law (as
defined below), except for such violations or liabilities that,
individually or in the aggregate, would not have a material adverse effect
on the financial condition, results of operations or business affairs of
the Company, the Bank and the subsidiaries considered as one enterprise.
There are no actions, suits or proceedings, or demands, claims, notices or
investigations (including, without limitation, notices, demand letters or
requests for information from any environmental agency) instituted or
pending, or to the knowledge of the Company or the Bank threatened,
relating to the liability of any property owned or operated by the Company,
the Bank or the Subsidiaries under any Environmental Law. For purposes of
this subsection, the term "Environmental Law" means any federal, state,
local or foreign law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, order, judgment, decree,
injunction or agreement with any regulatory authority relating to (i) the
protection, preservation or restoration of the environment (including,
without limitation, air, water, vapor, surface water, groundwater, drinking
water supply, surface soil, subsurface soil, plant and animal life or any
other natural resource), and/or (ii) the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, whether by type or by quantity, including any material
containing any such substance as a component.
(xxxiv) The Company, the Bank and its subsidiaries have filed
all federal income and state and local franchise tax returns required to be
filed and have made timely payments of all taxes shown as due and payable
in respect of such returns, and no deficiency has been asserted with
respect thereto by any taxing authority.
(xxxv) The Company has received approval, subject to regulatory
approval to consummate the Offerings and issuance, to have the Securities
quoted on the American Stock Exchange ("AMEX") effective as of the Closing
Time referred to in Section 2 hereof.
(xxxvi) The Company has filed a registration statement for the
Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and such registration statement has been
declared effective concurrent with the effectiveness of the Registration
Statement.
(b) Any certificate signed by any officer of the Company or
the Bank and delivered to either of the Agent or counsel for the Agent
shall be deemed a representation and warranty by the Company or the Bank to
each Agent as to the matters covered thereby .
<PAGE>
-12-
SECTION 2. APPOINTMENT OF SANDLER O'NEILL; SALE AND DELIVERY OF THE
SECURITIES; CLOSING.
On the basis of the representations and warranties herein contained
and subject to the terms and conditions herein set forth, the Company hereby
appoints Sandler O'Neill as its Agent to consult with and advise the Company,
and to assist the Company with the solicitation of subscriptions and purchase
orders for Securities, in connection with the Company's sale of Common Stock in
the Subscription and Community Offering and the Syndicated Community Offering.
On the basis of the representations and warranties herein contained, and subject
to the terms and conditions herein set forth, Sandler O'Neill accepts such
appointment and agrees to use its best efforts to assist the Company with the
solicitation of subscriptions and purchase orders for Securities in accordance
with this Agreement; provided, however, that the Agent shall not be obligated to
take any action which is inconsistent with any applicable laws, regulations,
decisions or orders. The services to be rendered by Sandler O'Neill pursuant to
this appointment include the following: (i) consulting as to the securities
marketing implications of any aspect of the Plan of Conversion or related
corporate documents; (ii) reviewing with the Board of Directors the independent
appraiser's appraisal of the common stock; (iii) reviewing all offering
documents, including the Prospectus, stock order form and related offering
materials (it being understood that preparation and filing of such documents is
the sole responsibility of the Company and the Bank and their counsel); (iv)
assisting in the design and implementation of a marketing strategy for the
Offerings; (v) assisting the Company and the Bank in obtaining all requisite
regulatory approvals; (vi) assisting Bank management in scheduling and preparing
for meetings with potential investors and broker-dealers; and (vii) providing
such other general advice and assistance as may be requested to promote the
successful completion of the Offerings.
The appointment of the Agent hereunder shall terminate upon the
earlier to occur of (a) forty-five (45) days after the last day of the
Subscription and Community Offering, unless the Company and the Agent agree in
writing to extend such period and the OTS agrees to extend the period of time in
which the Shares may be sold, or (b) the receipt and acceptance of subscriptions
and purchase orders for all of the Securities, or (c) the completion of the
Syndicated Community Offering.
If any of the Securities remain available after the expiration of the
Subscription and Community Offering, at the request of the Company and the Bank,
Sandler O'Neill will seek to form a syndicate of registered broker or dealers
("Selected Dealers") to assist in the solicitation of purchase orders of such
Securities on a best efforts basis, subject to the terms and conditions set
forth in a selected dealers' agreement (the "Selected Dealers' Agreement"),
substantially in the form set forth in Exhibit A to this Agreement. Sandler
O'Neill will endeavor to limit the aggregate fees to be paid by the Company and
the Bank under any such Selected Dealers' Agreement to an amount competitive
with gross underwriting discounts charged at such time for underwritings of
comparable amounts of stock sold at a comparable price per share in a similar
market environment; provided, however, that the aggregate fees payable to Sander
O'Neill and Selected Dealers shall not exceed 5% of the aggregate Actual
Purchase Price (as defined in the Prospectus) of the Securities sold by such
Selected Dealers. Sander O'Neill will endeavor to distribute the Securities
among the Selected Dealers in a fashion which best meets the distribution
objective of the Company and the requirements of the Plan, which may result in
limiting the allocation of stock to certain Selected
<PAGE>
-13-
Dealers. It is understood that in no event shall Sandler O'Neill be obligated to
act as a Selected Dealer or to take or purchase any Securities.
In the event the Company is unable to sell at least the total minimum
of the Securities, as set forth on the cover page of the Prospectus, within the
period herein provided, this Agreement shall terminate and the Company shall
refund to any persons who have subscribed for any of the Securities the full
amount which it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the others hereunder, except for the obligations of the Company and the Bank as
set forth in Sections 4, 6(a) and 7 hereof and the obligations of the Agent as
provided in Sections 6(b) and 7 hereof. Appropriate arrangements for placing the
funds received from subscriptions for Securities or other offers to purchase
Securities in special interest-bearing accounts with the Bank until all
Securities are sold and paid for were made prior to the commencement of the
Subscription Offering, with provision for refund to the purchasers as set forth
above, or for delivery to the Company if all Securities are sold.
If at least the total minimum of Securities, as set forth on the cover
page of the Prospectus, are sold, the Company agrees to issue or have issued the
Securities sold and to release for delivery certificates for such Securities at
the Closing Time referred to in Section 2, against payment therefor by release
of funds from the special interest-bearing accounts referred to above. The
closing shall be held at the legal office of Muldoon, Murphy & Faucette, at
10:00 a.m., local time, or at such other place and time as shall be agreed upon
by the parties hereto, on a business day to be agreed upon by the parties
hereto. The Company shall notify the Agent by telephone, confirmed in writing,
when funds shall have been received for all the Securities. Certificates for
Securities shall be delivered directly to the purchasers thereof in accordance
with their directions. Notwithstanding the foregoing, certificates for
Securities purchased through Selected Dealers shall be made available to the
Agent for inspection at least 48 hours prior to the Closing Time at such office
as the Agent shall designate. The hour and date upon which the Company shall
release for delivery all of the Securities, in accordance with the terms hereof,
is herein called the "Closing Time."
The Company will pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Securities.
In addition to reimbursement of the expenses specified in Section 4
hereof, the Agent will receive the following compensation for its services
hereunder:
(a) One and one-quarter percent (1.25%) of the aggregate Actual
Purchase Price (as defined in the Prospectus) of the Securities sold in the
Subscription and Community Offering, excluding in each case shares
purchased by (i) any employee benefit plan of the Company or the Bank
established for the benefit of their respective directors, officers and
employees, and (ii) any director, officer or employee of the Company or the
Bank or members of their immediate families (which term shall mean parents,
grandparents, spouse, siblings, children and grandchildren); and
(b) with respect to any Securities sold by an NASD member firm (other
than Sandler O'Neill) under the Selected Dealers' Agreement in the
Syndicated Community Offering, (i) the compensation payable to Selected
Dealers under any Selected Dealers'
<PAGE>
-14-
Agreement, and (ii) a management fee to Sandler O'Neill of one and one-
quarter percent (1.25%). Any fees payable to Sandler O'Neill for Securities
sold by Sandler O'Neill under any such agreement shall be limited to an
aggregate of one and one-quarter percent (1.25%) of the Actual Purchase
Price of such Securities.
If this Agreement is terminated by the Agent in accordance with the
provisions of Section 9(a) hereof or the Conversion is terminated by the
Company, no fee shall be payable by the Company to Sandler O'Neill; however, the
Company shall reimburse the Agent for all of its reasonable out-of-pocket
expenses incurred prior to termination, including the reasonable fees and
disbursements of counsel for the Agent in accordance with the provisions of
Section 4 hereof.
All fees payable to the Agent hereunder shall be payable in
immediately available funds at Closing Time, or upon the termination of this
Agreement, as the case may be. In recognition of the long lead times involved
in the conversion process, the Bank agrees to make advance payments to the Agent
in the aggregate amount of $50,000, $25,000 of which has been previously paid
and the remaining $25,000 of which shall be payable upon execution hereof, which
shall be credited against any fees or reimbursement of expenses payable
hereunder.
SECTION 3. COVENANTS OF THE COMPANY. The Company and the Bank covenant
with the Agent as follows:
(a) The Company and the Bank will prepare and file such amendments or
supplements to the Registration Statement, the Prospectus, the Conversion
Application and the Information Statement as may hereafter be required by
the Securities Act Regulations or the Conversion Regulations or as may
hereafter be requested by the Agent. Following completion of the
Subscription and Community Offering, in the event of a Syndicated Community
Offering, the Company and the Bank will (i) promptly prepare and file with
the Commission a post-effective amendment to the Registration Statement
relating to the results of the Subscription and Community Offering, any
additional information with respect to the proposed plan of distribution
and any revised pricing information or (ii) if no such post-effective
amendment is required, will file with, or mail for filing to, the
Commission a prospectus or prospectus supplement containing information
relating to the results of the Subscription and Community Offering and
pricing information pursuant to Rule 424 of the Securities Act Regulations,
in either case in a form acceptable to the Agent. The Company and the Bank
will notify the Agent immediately, and confirm the notice in writing, (i)
of the effectiveness of any post-effective amendment of the Registration
Statement, the filing of any supplement to the Prospectus and the filing of
any amendment to the Conversion Application, (ii) of the receipt of any
comments from the Division, the FDIC or the Commission with respect to the
transactions contemplated by this Agreement or the Plan, (iii) of any
request by the Commission, the Division, or the FDIC for any amendment to
the Registration Statement or the Conversion Application or any amendment
or supplement to the Prospectus or for additional information, (iv) of the
issuance by the FDIC or the Division of any order suspending the Offerings
or the use of the Prospectus or the initiation of any proceedings for that
purpose, (v) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose, and (vi) of the receipt of any notice with
respect to the suspension of any qualification of the Securities for
offering or sale in any jurisdiction. The
<PAGE>
-15-
Company and the Bank will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) The Company and the Bank will give the Agent notice of its
intention to file or prepare any amendment to the Conversion Application or
Registration Statement (including any post-effective amendment) or any
amendment or supplement to the Prospectus (including any revised prospectus
which the Company proposes for use in connection with the Syndicated
Community Offering of the Securities which differs from the prospectus on
file at the Commission at the time the Registration Statement becomes
effective, whether or not such revised prospectus is required to be filed
pursuant to Rule 424(b) of the Securities Act Regulations), will furnish
the Agent with copies of any such amendment or supplement a reasonable
amount of time prior to such proposed filing or use, as the case may be,
and will not file any such amendment or supplement or use any such
prospectus to which the Agent or counsel for the Agent may object.
(c) The Company and the Bank will deliver to the Agent as many signed
copies and as many conformed copies of the Conversion Application and the
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein)
as the Agent may reasonably request, and from time to time such number of
copies of the Prospectus as the Agent may reasonably request.
(d) During the period when the Prospectus is required to be
delivered, the Company and the Bank will comply, at their own expense, with
all requirements imposed upon them by the FDIC, the Division, by the
applicable Conversion Regulations, as from time to time in force, and by
the Securities Act, the Securities Act Regulations, the Exchange Act, and
the rules and regulations of the Commission promulgated thereunder,
including, without limitation, Regulation M under the Exchange Act, so far
as necessary to permit the continuance of sales or dealing in shares of
Common Stock during such period in accordance with the provisions hereof
and the Prospectus.
(e) If any event or circumstance shall occur as a result of which it
is necessary, in the opinion of counsel for the Agent, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, the Company and the Bank will forthwith amend or supplement the
Prospectus (in form and substance satisfactory to counsel for the Agent) so
that, as so amended or supplemented, the Prospectus will not include an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time it is delivered to a purchaser, not
misleading, and the Company and the Bank will furnish to the Agent a
reasonable number of copies of such amendment or supplement. For the
purpose of this subsection, the Company and the Bank will each furnish such
information with respect to itself as the Agent may from time to time
reasonably request.
(f) The Company and the Bank will take all necessary action, in
cooperation with the Agent, to qualify the Securities for offering and sale
under the applicable securities laws of such states of the United States
and other jurisdictions as the Conversion Regulations may
<PAGE>
-16-
require and as the Agent and the Company have agreed; provided, however,
that the Company and the Bank shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified. In each jurisdiction in which
the Securities have been so qualified, the Company and the Bank will file
such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not
less than one year from the effective date of the Registration Statement.
(g) The Company authorizes Sandler O'Neill and any Selected Dealers
to act as agent of the Company in distributing the Prospectus to persons
entitled to receive subscription rights and other persons to be offered
Securities having record addresses in the states or jurisdictions set forth
in a survey of the securities or "blue sky" laws of the various
jurisdictions in which the Offerings will be made (the "Blue Sky Survey").
(h) The Company will make generally available to its security holders
as soon as practicable, but not later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the 1933 Act Regulations) covering a twelve month
period beginning not later than the first day of the Company's fiscal
quarter next following the "effective date" (as defined in said Rule 158)
of the Registration Statement.
(i) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to its stockholders as
soon as practicable after the end of each such fiscal year an annual report
(including consolidated statements of financial condition and consolidated
statements of income, stockholders' equity and cash flows, certified by
independent public accountants) and, as soon as practicable after the end
of each of the first three quarters of each fiscal year (beginning with the
fiscal quarter ending after the effective date of the Registration
Statement), consolidated summary financial information of the Company, the
Bank and its subsidiaries for such quarter in reasonable detail. In
addition, such annual report and quarterly consolidated summary financial
information shall be made public through the issuance of appropriate press
releases at the same time or prior to the time of the furnishing thereof to
stockholders of the Company.
(j) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to the Agent (i) as
soon as publicly available, a copy of each report or other document of the
Company furnished generally to stockholders of the Company or furnished to
or filed with the Commission under the Exchange Act or any national
securities exchange or system on which any class of securities of the
Company is listed, and (ii) from time to time, such other information
concerning the Company as the Agent may reasonably request.
(k) The Company and the Bank will conduct the Conversion including
the formation and operation of the Foundation in all material respects in
accordance with the Plan, the Conversion Regulations and all other
applicable regulations, decisions and orders,
<PAGE>
-17-
including all applicable terms, requirements and conditions precedent to
the Conversion imposed upon the Company or the Bank by the FDIC or the
Division.
(l) The Company and the Bank will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds."
(m) The Company will file with the Commission a report on the use of
proceeds as required pursuant to Rule 463 of the Securities Act
Regulations.
(n) The Company will maintain the effectiveness of the Exchange Act
Registration Statement for not less than three years. The Company will
use its best efforts to effect the listing of the Common Stock on AMEX.
(o) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by the Agent in order for the Agent
to ensure compliance with the National Association of Securities Dealers,
Inc.'s "Interpretation Relating to Free-Riding and Withholding."
(p) Other than in connection with any employee benefit plan or
arrangement described in the Prospectus, the Company will not, without the
prior written consent of the Agent, sell or issue, contract to sell or
otherwise dispose of, any shares of Common Stock other than the Securities
for a period of 180 days following the Closing Time.
(q) During the period beginning on the date hereof and ending on the
later of the third anniversary of the Closing Time or the date on which the
Agent receives full payment in satisfaction of any claim for
indemnification or contribution to which it may be entitled pursuant to
Sections 6 or 7, respectively, neither the Company nor the Bank shall,
without the prior written consent of the Agent, which consent shall not be
unreasonably withheld, take or permit to be taken any action that could
result in the Bank Common Stock becoming subject to any security interest,
mortgage, pledge, lien or encumbrance; provided, however, that this
covenant shall be null and void if the Board of Governors of the Federal
Reserve System, by regulation, policy statement or interpretive release, or
by written order or written advice addressed to the Bank or the Agent
specifically addressing the provisions of Section 6(a) hereof, permits
indemnification of the Agent by the Bank as contemplated by such
provisions.
(r) The Company and the Bank will comply with the conditions imposed
by or agreed to with the OTS in connection with its approval of the Holding
Company Application and with the FDIC and the Division in connection with
their approval or non-objection of, or non-objection to, the Conversion
Application including those conditions relating to the establishment and
the operation of the Foundation; the Company and the Bank shall use their
best efforts to ensure that the Foundation submits within the time frames
required by applicable law a request to the Internal Revenue Service to be
recognized as a tax-exempt organization under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended (the "Code"); the Company and the
Bank will take no action which will result in the possible loss of the
Foundation's tax exempt status; and neither the Company nor the Bank will
contribute
<PAGE>
-18-
any additional assets to the Foundation until such time that such
additional contributions will be deductible for federal and state income
tax purposes.
(s) During the period ending on the first anniversary of the Closing
Time, the Bank will comply with all applicable law and regulation necessary
for the Bank to continue to be a "qualified thrift lender" within the
meaning of 12 U.S.C. Section 1467a(m).
(t) The Company shall not deliver the Securities until the Company
and the Bank have satisfied each condition set forth in Section 5 hereof,
unless such condition is waived by the Agent.
(u) The Company or the Bank will furnish to Sandler O'Neill as early
as practicable prior to the Closing Date, but no later than two (2) full
business days prior thereto, a copy of the latest available unaudited
interim consolidated financial statements of the Bank and the Subsidiaries
which have been read by Wolf as stated in their letters to be furnished
pursuant to subsections (e) and (f) of Section 5 hereof.
SECTION 4. PAYMENT OF EXPENSES. The Company and the Bank jointly
and severally agree to pay all expenses incident to the performance of their
obligations under this Agreement, including but not limited to (i) the cost of
obtaining all securities and bank regulatory approvals, (ii) the printing and
filing of the Registration Statement as originally filed and of each amendment
thereto, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the purchasers in the Offerings, (iv) the fees and
disbursements of the Company's and the Bank's counsel, accountants appraiser and
other advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees and
the fees and disbursements of counsel in connection therewith and in connection
with the preparation of the Blue Sky Survey, (vi) the printing and delivery to
the Agent of copies of the Registration Statement as originally filed and of
each amendment thereto and the printing and delivery of the Prospectus and any
amendments or supplements thereto to the purchasers in the Offerings and the
Agent, (vii) the printing and delivery to the Agent of copies of a Blue Sky
Survey, and (viii) the fees and expenses incurred in connection with the listing
of the Securities on AMEX. In the event the Agent incurs any such fees and
expenses on behalf of the Bank or the Company, the Bank will reimburse the Agent
for such fees and expenses whether or not the Conversion is consummated;
provided, however, that the Agent shall not incur any substantial expenses on
behalf of the Bank or the Company pursuant to this Section without the prior
approval of the Bank.
The Company and the Bank jointly and severally agree to pay certain
expenses incident to the performance of the Agent's obligations under this
Agreement, regardless of whether the Conversion is consummated, including (i)
the filing fees paid or incurred by the Agent in connection with all filings
with the National Association of Securities Dealers, Inc., and (ii) all
reasonable out of pocket expenses incurred by the Agent relating to the
Offerings, including, without limitation, advertising, promotional, syndication
and travel expenses and fees and expenses of the Agent's counsel. All fees and
expenses to which the Agent is entitled to reimbursement under this paragraph of
this Section 4 shall be due and payable upon receipt by the Company or the Bank
of a written accounting therefor setting forth in reasonable detail the expenses
incurred by the Agent.
<PAGE>
-19-
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS. The Company, the Bank
and the Agent agree that the issuance and the sale of Securities and all
obligations of the Agent hereunder are subject to the accuracy of the
representations and warranties of the Company and the Bank herein contained as
of the date hereof and the Closing Time, to the accuracy of the statements of
officers and directors of the Company and the Bank made pursuant to the
provisions hereof, to the performance by the Company and the Bank of their
obligations hereunder, and to the following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the Securities Act or proceedings
therefor initiated or threatened by the Commission, no order suspending the
Offerings or authorization for final use of the Prospectus shall have been
issued or proceedings therefor initiated or threatened by the Division or
the FDIC and no order suspending the sale of the Securities in any
jurisdiction shall have been issued.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time, of Muldoon,
Murphy & Faucette, counsel for the Company and the Bank, in form and
substance satisfactory to counsel for the Agent, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware.
(ii) The Company has full corporate power and authority to
own, lease and operate its properties and to conduct its business
as described in the Registration Statement and Prospectus and to
enter into and perform its obligations under this Agreement.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in the Commonwealth
of Massachusetts and in each other jurisdiction in which such
qualification is required whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure to so qualify would not have a material adverse effect
upon the financial condition, results of operations or business
affairs of the Company, the Bank and its subsidiaries considered
as one enterprise.
(iv) Upon consummation of the Conversion, and the issuance
of the Foundation Shares to the Foundation immediately upon
completion thereof, the authorized, issued and outstanding
capital stock of the Company will be as set forth in the
Prospectus under "Capitalization" and no shares of Common Stock
have been or will be issued and outstanding prior to the Closing
Time.
<PAGE>
-20-
(v) The Securities and the Foundation Shares have been duly
and validly authorized for issuance and sale and, when issued and
delivered by the Company pursuant to the Plan against payment of
the consideration calculated as set forth in the Plan, or
contributed by the Company pursuant to the Plan in the case of
the Foundation Shares, will be duly and validly issued and fully
paid and non-assessable.
(vi) The issuance of the Securities and the Foundation
Shares is not subject to preemptive or other similar rights
arising by operation of law or, to the best of their knowledge
and information, otherwise.
(vii) The Bank has been at all times since __________ and
prior to the Closing Time duly organized, and is validly existing
and in good standing under the laws of the Commonwealth of
Massachusetts as a Massachusetts chartered savings bank in mutual
form, and, at Closing Time, has become duly organized, validly
existing and in good standing under the laws of the Commonwealth
of Massachusetts as a Massachusetts chartered savings bank in
stock form, in both instances with full corporate power and
authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and the
Prospectus; and the Bank is duly qualified as a foreign
corporation in each jurisdiction in which the failure to so
qualify would have a material adverse effect upon the financial
condition, results of operations or business affairs of the Bank.
(viii) The Bank is a member in good standing of the Federal
Home Loan Bank of Boston and the deposit accounts of the Bank are
insured by the FDIC and the DIF up to the applicable limits.
(ix) Each direct and indirect subsidiary of the Bank has
been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Registration Statement and is duly qualified as
a foreign corporation to transact business and is in good
standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect upon the financial
condition, results of operations or business of the Company, the
Bank and its subsidiaries, taken as a whole; the activities of
each such subsidiary are permitted to subsidiaries of a savings
association holding company and of a federally chartered savings
bank by the rules, regulations, resolutions and practices of the
OTS; all of the issued and outstanding capital stock of each such
subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Bank, directly or
through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity.
(x) The Foundation has been duly incorporated and is
validly existing as a non-stock corporation in good standing
under the laws of the
<PAGE>
-21-
State of Delaware with corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus; the Foundation is not a savings and
loan holding company within the meaning of 12 C.F.R. Section
574.2(q) as a result of the issuance of shares of Common Stock to
it in accordance with the terms of the Plan and in the amounts as
described in the Prospectus; no approvals are required to
establish the Foundation and to contribute the shares of Common
Stock thereto as described in the Prospectus other than those set
forth in any written notice or order of approval or non-objection
of the Conversion, the Conversion Applicaiton or the Holding
Company Application, copies of which were provided to the Agent
prior to the Closing Time.
(xi) Upon consummation of the Conversion, all of the issued
and outstanding capital stock of the Bank when issued and
delivered pursuant to the Plan against payment of consideration
calculated as set forth in the Plan and set forth in the
Prospectus, will be duly authorized and validly issued and fully
paid and nonassessable, and all such capital stock will be owned
beneficially and of record by the Company free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity.
(xii) The OTS has duly approved the Holding Company
Application, the Division has duly approved the Conversion
Application, the FDIC has issued its non-objection to the Plan
and no action is pending, or to the best of such counsel's
knowledge, threatened respecting the Holding Company Application
or the Conversion Application or the acquisition by the Company
of all of the Bank's issued and outstanding capital stock; the
Holding Company Application and the Conversion Application comply
with the applicable requirements of the OTS, the Division and the
FDIC, respectively, includes all documents required to be filed
as exhibits thereto, and is, to the best of such counsel's
knowledge and information, truthful, accurate and complete; and
the Company is duly authorized to become a savings association
holding company and is duly authorized to own all of the issued
and outstanding capital stock of the Bank to be issued pursuant
to the Plan.
(xiii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including
the establishment of the Foundation and the contribution thereto
of the Foundation Shares, (A) have been duly and validly
authorized by all necessary action on the part of each of the
Company and the Bank, and this Agreement constitutes the legal,
valid and binding agreement of each of the Company and the Bank,
enforceable in accordance with its terms, except as rights to
indemnity and contribution hereunder may be limited under
applicable law (it being understood that such counsel may avail
itself of customary exceptions concerning the effect of
bankruptcy, insolvency or similar laws and the availability of
equitable remedies); (B) will not result in any violation of the
provisions of the charter or by-laws of the Company, the
<PAGE>
-22-
Bank or any of its subsidiaries; and, (C) will not conflict with
or constitute a breach of, or default under, and no event has
occurred which, with notice or lapse of time or both, would
constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance, that, individually
or in the aggregate, would have a material adverse effect on the
financial condition, results of operations or business affairs of
the Company, the Bank and its subsidiaries considered as one
enterprise, upon any property or assets of the Company, the Bank
or its subsidiaries is a party or by which any of them may be
bound, or to which any of the property or assets of the Company,
the Bank or its subsidiaries is subject.
(xiv) The Prospectus has been duly authorized by the
Division and the FDIC for final use pursuant to the Conversion
Regulations and no action is pending, or to the best of such
counsel's knowledge, is threatened, by the Division or the FDIC
to revoke such authorization.
(xv) The Registration Statement is effective under the
Securities Act and no stop order suspending the effectiveness of
the Registration Statement has been issued under the Securities
Act or, to the best of such counsel's knowledge, proceedings
therefor initiated or threatened by the Commission.
(xvi) No further approval, authorization, consent or other
order of any public board or body is required in connection with
the execution and delivery of this Agreement, the issuance of the
Securities and the consummation of the Conversion, except as may
be required under the securities or Blue Sky laws of various
jurisdictions as to which no opinion need be rendered.
(xvii) At the time the Registration Statement became
effective, the Registration Statement (other than the financial
statements and statistical data included therein, as to which no
opinion need be rendered) complied as to form in all material
respects with the requirements of the Securities Act and the
Securities Act Regulations and the Conversion Regulations.
(xviii) The Common Stock conforms to the description thereof
contained in the Prospectus, and the form of certificate used to
evidence the Common Stock is in due and proper form and complies
with all applicable statutory requirements.
(xix) There are no legal or governmental proceedings pending
or threatened against or affecting the Company, the Bank or its
subsidiaries which are required, individually or in the
aggregate, to be disclosed in the Registration Statement and
Prospectus, other than those disclosed therein, and all pending
legal or governmental proceedings to which the Company or the
Bank or any of its subsidiaries is a party or to which any of
their property is subject which are not described in the
Registration Statement, including
<PAGE>
-23-
ordinary routine litigation incidental to the business, are,
considered in the aggregate, not material.
(xx) The information in the Prospectus under "Risk Factors
- Establishment of the Charitable Foundation - Possible
nondeductibility of the Contribution," "-Potential Anti-Takeover
Effect," and "Potential Challenges," "Dividend Policy," "Business
of the Bank - Legal Proceedings", "Federal and State Taxation,"
"-Regulation and Supervision," "The Conversion -Establishment of
the Charitable Foundation," "-Regulatory Conditions Imposed on
the Foundation" and "- Tax Considerations," "Restrictions on
Acquisition of the Company and the Bank," "Description of Capital
Stock of the Company" and "Description of Capital Stock of the
Bank," to the extent that it constitutes matters of law,
summaries of legal matters, documents or proceedings, or legal
conclusions, has been reviewed by them and is complete and
accurate in all material respects.
(xxi) To the best of such counsel's knowledge, there are no
contracts, indentures, mortgages, loan agreements, notes, leases
or other instruments required to be described or referred to in
the Registration Statement or to be filed as exhibits thereto
other than those described or referred to therein or filed as
exhibits thereto, the descriptions thereof or references thereto
are correct, and no default exists, and no event has occurred
which, with notice or lapse of time or both, would constitute a
default, in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or
other instrument so described, referred to or filed.
(xxii) The Plan has been duly authorized by the Board of
Directors of the Company and the Board of Directors of the Bank
and, the Division's approval of the Plan and the FDIC's non-
objection to the Plan remains in full force and effect; the
Bank's charter has been amended, effective upon consummation of
the Conversion and the filing of such amended charter with the
Division, to authorize the issuance of permanent capital stock;
to the best of such counsel's knowledge, the Company and the Bank
have conducted the Conversion and the establishment and funding
of the Foundation in all material respects in accordance with
applicable requirements of the Conversion Regulations, the Plan
and all other applicable regulations, decisions and orders
thereunder, including all material applicable terms, conditions,
requirements and conditions precedent to the Conversion imposed
upon the Company or the Bank by the FDIC or the Division and, no
order has been issued by the FDIC or the Division to suspend the
Conversion or the Offerings and no action for such purpose has
been instituted or threatened by the FDIC or the Division; and,
to the best of such counsel's knowledge, no person has sought to
obtain review of the final action of the FDIC or the Division in
approving the Conversion Application (which includes the Plan
<PAGE>
-24-
which provides for the establishment of the Foundation) or the
Holding Company Application.
(xxiii) To the best of such counsel's knowledge, the Company
and the Bank and its subsidiaries have obtained all licenses,
permits and other governmental authorizations currently required
for the conduct of their respective businesses as described in
the Registration Statement and Prospectus, and all such licenses,
permits and other governmental authorizations are in full force
and effect, and the Company and the Bank and its subsidiaries are
in all material respects complying therewith.
(xxiv) None of the Company, the Bank nor any of its
subsidiaries is in violation of its certificate of incorporation,
organization certificate, articles of incorporation or charter,
as the case may be, or bylaws (and the Bank will not be in
violation of its charter in stock form upon consummation of the
Conversion) or, to the best of such counsel's knowledge, in
default (nor has any event occurred which, with notice or lapse
of time or both, would constitute a default) in the performance
or observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement,
note, lease or other instrument to which the Company, the Bank or
any of its subsidiaries is a party or by which the Company, the
Bank or any of its subsidiaries or any of their property may be
bound.
(xxv) The Company is not required to be registered as an
investment company under the Investment Company Act of 1940.
(2) The favorable opinion, dated as of Closing Time, of Silver,
Freedman & Taff, L.L.P., counsel for the Agent, with respect to the
matters set forth in Section 5(b)(1)(i), (iv), (v), (vi) (solely as to
preemptive rights arising by operation of law), (xii), (xvi) and
(xvii) and such other matters as the Agent may reasonably require.
(3) In giving their opinions required by subsections (b)(l) and
(b)(2), respectively, of this Section, Muldoon, Murphy & Faucette and
Silver, Freedman & Taff, L.L.P. shall each additionally state that
nothing has come to their attention that would lead them to believe
that the Registration Statement (except for financial statements and
schedules and other financial or statistical data included therein, as
to which counsel need make no statement), at the time it became
effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus
(except for financial statements and schedules and other financial or
statistical data included therein, as to which counsel need make no
statement), at the time the Registration Statement became effective or
at Closing Time, included an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. In giving their opinions, Muldoon, Murphy
& Faucette and Silver, Freedman & Taff, L.L.P. may rely as to matters
of fact on
<PAGE>
-25-
certificates of officers and directors of the Company and the Bank and
certificates of public officials, and as to certain matters of
Delaware law upon the opinion of Morris, Nichols, Arsht & Tunnell,
which opinions shall be in form and substance satisfactory to counsel
for the Agent, and Silver, Freedman & Taff, L.L.P. may also rely on
the opinion of Muldoon, Murphy & Faucette.
(c) At Closing Time referred to in Section 2, the Company and the Bank
shall have completed in all material respects the conditions precedent to
the Conversion in accordance with the Plan, the applicable Conversion
Regulations and all other applicable laws, regulations, decisions and
orders, including all terms, conditions, requirements and provisions
precedent to the Conversion imposed upon the Company or the Bank by the
FDIC, the Division or any other regulatory authority other than those which
the Division or the FDIC permits to be completed after the Conversion.
(d) At Closing Time, there shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in
the financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the Agent
shall have received a certificate of the Chief Executive Officer of the
Company and of the Bank, the President of the Company and the Bank and the
chief financial or chief accounting officer of the Company and of the Bank,
dated as of Closing Time, to the effect that (i) there has been no such
material adverse change, (ii) there shall have been no material transaction
entered into by the Company or the Bank from the latest date as of which
the financial condition of the Company or the Bank as set forth in the
Registration Statement and the Prospectus other than transactions referred
to or contemplated therein and transactions in the ordinary course of
business, (iii) neither the Company nor the Bank shall have received from
the FDIC or the Division any direction (oral or written) to make any
material change in the method of conducting its business with which it has
not complied (which direction, if any, shall have been disclosed to the
Agent) or which materially and adversely would affect the business,
financial condition or results of operations of the Company, the Bank or
its subsidiaries, (iv) the representations and warranties in Section 1
hereof are true and correct with the same force and effect as though
expressly made at and as of the Closing Time, (v) the Company and the Bank
have complied with all agreements and satisfied all conditions on their
part to be performed or satisfied at or prior to Closing Time, (vi) no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been initiated or
threatened by the Commission and (vii) no order suspending the Syndicated
Community Offering or the authorization for final use of the Prospectus has
been issued and no proceedings for that purpose have been initiated or
threatened by the OTS, the Division or the FDIC and no person has sought to
obtain regulatory or judicial review of the action of the FDIC or the
Division in approving the Plan in accordance with the Conversion
Regulations nor has any person sought to obtain regulatory or judicial
review of the action of the OTS in approving the Holding Company
Application.
(e) At the time of the execution of this Agreement, the Agent shall
have received from Wolf a letter dated such date, in form and substance
satisfactory to the Agent, to the effect that (i) they are independent
public accountants with respect to the Company, the Bank
<PAGE>
-26-
and its subsidiaries within the meaning of the Code of Ethics of the
American Institute of Certified Public Accountants, the Securities Act and
the Securities Act Regulations and the Conversion Regulations; (ii) it is
their opinion that the consolidated financial statements and supporting
schedules included in the Registration Statement and covered by their
opinions therein comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the Securities
Act Regulations; (iii) based upon limited procedures as agreed upon by the
Agent and Wolf set forth in detail in such letter, nothing has come to
their attention which causes them to believe that (A) the unaudited
financial statements and supporting schedules of the Bank and its
subsidiaries included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting requirements
of the Securities Act, the Securities Act Regulations and the Conversion
Regulations or are not presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements included in the Registration Statement
and the Prospectus, (B) the unaudited amounts of net interest income and
net income set forth under "Selected Consolidated Financial and Other data
of the Bank" in the Registration Statement and Prospectus do not agree with
the amounts set forth in unaudited consolidated financial statements as of
and for the dates and periods presented under such captions or such amounts
were not determined on a basis substantially consistent with that used in
determining the corresponding amounts in the audited financial statements
included in the Registration Statement, (C) at a specified date not more
than five days prior to the date of this Agreement, there has been any
increase in the consolidated long term or short term debt of the Bank and
its subsidiaries or any decrease in consolidated total assets, the
allowance for loan losses, total deposits or net worth of the Bank and its
subsidiaries in each case as compared with the amounts shown in the
December 31, 1997 balance sheet included in the Registration Statement or,
(D) during the period from August 31, 1998 to a specified date not more
than five days prior to the date of this Agreement, there were any
decreases, as compared with the corresponding period in the preceding year,
in total interest income, net interest income, net interest income after
provision for loan losses, income before income tax expense or net income
of the Bank and its subsidiaries except in all instances for increases or
decreases which the Registration Statement and the Prospectus disclose have
occurred or may occur; and (iv) in addition to the examination referred to
in their opinions and the limited procedures referred to in clause (iii)
above, they have carried out certain specified procedures, not constituting
an audit, with respect to certain amounts, percentages and financial
information which are included in the Registration Statement and Prospectus
and which are specified by the Agent, and have found such amounts,
percentages and financial information to be in agreement with the relevant
accounting, financial and other records of the Company, the Bank and its
subsidiaries identified in such letter.
(f) At Closing Time, the Agent shall have received from Wolf a letter,
dated as of Closing Time, to the effect that they reaffirm the statements
made in the letter furnished pursuant to subsection (d) of this Section,
except that the specified date referred to shall be a date not more than
five days prior to Closing Time.
(g) At Closing Time, the Securities shall have been approved for
listing on AMEX upon notice of issuance.
<PAGE>
-27-
(h) At Closing Time, the Agent shall have received a letter from
Keller, dated as of the Closing Time, confirming its appraisal.
(i) At Closing Time, counsel for the Agent shall have been furnished
with such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities and the
Foundation Shares as herein contemplated and related proceedings, or in
order to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance and sale
of the Securities and Foundation Shares as herein contemplated shall be
satisfactory in form and substance to the Agent and counsel for the Agent.
(j) At any time prior to Closing Time, (i) there shall not have
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effect of which, in the judgment of the Agent,
are so material and adverse as to make it impracticable to market the
Securities or to enforce contracts, including subscriptions or orders, for
the sale of the Securities, and (ii) trading generally on either the
American Stock Exchange or the New York Stock Exchange or the Nasdaq Stock
Market shall not have been suspended, and minimum or maximum prices for
trading shall not have been fixed, or maximum ranges for prices for
securities have been required, by either of said Exchanges or by order of
the Commission or any other governmental authority, and a banking
moratorium shall not have been declared by either Federal or New York
authorities.
SECTION 6. INDEMNIFICATION.
(a) The Company and the Bank, jointly and severally, agree to
indemnify and hold harmless the Agent, each person, if any, who controls the
Agent, within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, and its respective partners, directors, officers, employees
and agents as follows:
(i) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, related to or arising out of the
Conversion (including establishment of the Foundation and the contribution
of the Foundation Shares thereto by the Company) or any action taken by the
Agent where acting as agent of the Company or the Bank or otherwise as
described in Section 2 hereof.
(ii) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, based upon or arising out of any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement (or any amendment thereto), or the omission
or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact contained in the Information Statement or Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the
<PAGE>
-28-
statements therein, in the light of the circumstances under which they were
made, not misleading;
(iii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or
of any claim whatsoever described in clauses (i) or (ii) above, if such
settlement is effected with the written consent of the Company or the Bank,
which consent shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as
incurred (including, subject to Section 6(c) hereof, the fees and
disbursements of counsel chosen by the Agent), reasonably incurred in
investigating, preparing for or defending against any litigation, or any
investigation, proceeding or inquiry by any governmental agency or body,
commenced or threatened, or any claim pending or threatened whatsoever
described in clauses (i) or (ii) above, to the extent that any such expense
is not paid under (i), (ii) or (iii) above;
provided, however, that the indemnification provided for in this paragraph (a)
shall not apply to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or alleged untrue statement of a material
fact contained in the Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading which was made in reliance upon and in conformity with
written information relating to the Agent furnished to the Company or the Bank
by the Agent expressly for use in the Prospectus (or any amendments or
supplements thereto), which information the Company and the Bank acknowledge is
included only in the sections captioned "The Conversion - Marketing and
Underwriting Arrangements" of the Prospectus (the "Agent Information").
Notwithstanding the foregoing, the indemnification provided for in this
paragraph (a) shall not apply to the Bank to the extent that such
indemnification by the Bank would constitute a covered transaction under Section
23A of the Federal Reserve Act.
(b) The Agent agrees to indemnify and hold harmless the Company, the
Bank, their directors and trustees, each of their officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, of a material fact made in the Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with the Agent
Information.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
which it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of any such
action. In no event shall the indemnifying parties be liable for fees and
expenses of more than one
<PAGE>
-29-
counsel (in addition to no more than one local counsel in each separate
jurisdiction in which any action or proceeding is commenced) separate from their
own counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances.
(d) The Company and the Bank also agree that the Agent shall not have
any liability (whether direct or indirect, in contract or tort or otherwise) to
the Bank, the Company, its security holders or the Bank's or the Company's
creditors relating to or arising out of the engagement of the Agent pursuant to,
or the performance by the Agent of the services contemplated by, this Agreement,
except to the extent that any loss, claim, damage or liability is found in a
final judgment by a court of competent jurisdiction to have resulted primarily
from the Agent's bad faith, willful misconduct or gross negligence.
(e) In addition to, and without limiting, the provisions of Section
(6)(a)(iv) hereof, in the event that any Agent, any person, if any, who controls
the Agent within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act or any of its partners, directors, officers, employees or
agents is requested or required to appear as a witness or otherwise gives
testimony in any action, proceeding, investigation or inquiry brought by or on
behalf of or against the Company, the Bank, the Agent or any of its respective
affiliates or any participant in the transactions contemplated hereby in which
the Agent or such person or agent is not named as a defendant, the Company and
the Bank jointly and severally agree to reimburse the Agent for all reasonable
and necessary out-of-pocket expenses incurred by it in connection with preparing
or appearing as a witness or otherwise giving testimony and to compensate the
Agent in an amount to be mutually agreed upon.
SECTION 7. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 6 hereof is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company, the Bank
and the Agent shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company or the Bank and the Agent, as incurred, in such
proportions (i) that the Agent is responsible for that portion represented by
the percentage that the maximum aggregate marketing fees appearing on the cover
page of the Prospectus bears to the maximum aggregate gross proceeds appearing
thereon and the Company and the Bank are jointly and severally responsible for
the balance or (ii) if, but only if, the allocation provided for in clause (i)
is for any reason held unenforceable, in such proportion as is appropriate to
reflect not only the relative benefits to the Company and the Bank on the one
hand and the Agent on the other, as reflected in clause (i), but also the
relative fault of the Company and the Bank on the one hand and the Agent on the
other, as well as any other relevant equitable considerations; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls the Agent within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act shall have the same rights to contribution as the
Agent, and each director of the Company, each trustee of the Bank, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company or the Bank within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Company and the Bank.
<PAGE>
-30-
Notwithstanding anything to the contrary set forth herein, to the extent
permitted by applicable law, in no event shall the Agent be required to
contribute an aggregate amount in excess of the aggregate marketing fees to
which the Agent is entitled and actually paid pursuant to this Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of the Company or the Bank
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any Agent or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agent may terminate this Agreement, by notice to the Company,
at any time at or prior to Closing Time (i) if there has been, since the date of
this Agreement or since the respective dates as of which information is given in
the Registration Statement, any material adverse change in the financial
condition, results of operations or business affairs of the Company or the Bank,
or the Company, the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effect of which, in the judgment of the Agent, are
so material and adverse as to make it impracticable to market the Securities or
to enforce contracts, including subscriptions or orders, for the sale of the
Securities, (iii) if trading generally on the Nasdaq Stock Market, the American
Stock Exchange or the New York Stock Exchange has been suspended, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of said Exchanges or by order of the
Commission or any other governmental authority, or if a banking moratorium has
been declared by either Federal or New York authorities, (iv) if any condition
specified in Section 5 shall not have been fulfilled when and as required to be
fulfilled; (v) if there shall have been such material adverse change in the
condition or prospects of the Company or the Bank or the prospective market for
the Company's securities as in the Agent's good faith opinion would make it
inadvisable to proceed with the offering, sale or delivery of the Securities;
(vi) if, in the Agent's good faith opinion, the price for the Securities
established by Keller is not reasonable or equitable under then prevailing
market conditions, or (vii) if the Conversion is not consummated on or prior to
[____________________].
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof relating to the reimbursement of expenses and
except that the provisions of Sections 6 and 7 hereof shall survive any
termination of this Agreement.
SECTION 10. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the Agent
shall be directed to the Agent at Two World Trade Center, 104th Floor, New York,
New York 10048, attention of Catherine Lawton, Principal; notices to the Company
and the Bank shall be directed to either of them at 31 Court Street, Westfield,
Massachusetts 01085, attention of Cornelius D. Mahoney, President and Chief
Executive Officer.
<PAGE>
-31-
SECTION 11. PARTIES. This Agreement shall inure to the benefit of and
be binding upon the Agent, the Company and the Bank and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Agent, the Company and the Bank and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein or
therein contained. This Agreement and all conditions and provisions hereof and
thereof are intended to be for the sole and exclusive benefit of the Agent, the
Company and the Bank and their respective successors, and said controlling
persons and officers and directors and their heirs and legal representatives,
and for the benefit of no other person, firm or corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT. This Agreement represents
the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements heretofore made, except for the engagement letters dated
September 8, 1998 and September 16, 1998, by and between the Agent and the
Company and the Bank, relating to the Agent's providing conversion agent
services to the Company and the Bank in connection with the Conversion. No
waiver, amendment or other modification of this Agreement shall be effective
unless in writing and signed by the parties hereto.
SECTION 13. GOVERNING LAW AND TIME. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said State without regard to the
conflicts of laws provisions thereof. Unless otherwise noted, specified times
of day refer to Eastern time.
SECTION 14. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
SECTION 15. HEADINGS. Sections headings are not to be considered part
of this Agreement, are for convenience and reference only, and are not to be
deemed to be full or accurate descriptions of the contents of any paragraph or
subparagraph.
<PAGE>
-32-
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Agent, the Company and the Bank in accordance with its terms.
Very truly yours,
WORONOCO BANCORP, INC.
By: ______________________________________
Cornelius D. Mahoney
President and Chief Executive Officer
WORONOCO SAVINGS BANK
By: ______________________________________
Cornelius D. Mahoney
President and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: ____________________________
Catherine Lawton
Principal
<PAGE>
EXHIBIT A
Selected Dealers Agreement
<PAGE>
WORONOCO BANCORP, INC.
5,554,500 Shares
(Maximum Offered in Conversion)
Common Stock
(Par Value $0.01 Per Share)
SELECTED DEALER'S AGREEMENT
________, 1999
We have agreed to assist Woronoco Bancorp, Inc. (the "Company") in
connection with the offer and sale of shares (the "Shares") of Common Stock, par
value $0.01 per share, of the Company, to be issued in connection with the
conversion of Woronoco Savings Bank, a Massachusetts chartered savings bank (the
"Bank") from mutual to stock form. The Company, in connection with its plan to
effect such conversion, offered ___________ Shares for subscription by the
Company's and the Bank's employee stock ownership plan and certain of the Bank's
depositors, in a subscription offering, and certain members of the general
public in a concurrent direct community offering. The Shares which were not
subscribed for pursuant to such subscription and direct community offerings are
being offered to the public in a syndicated community offering (the "Syndicated
Community Offering") in accordance with the rules of the Office of Thrift
Supervision ("OTS"). The Shares, the bases on which the number of Shares to be
issued may change, and certain of the terms on which they are being offered are
more fully described in the enclosed Prospectus (the "Prospectus").
We are offering to Selected Dealers (of which you are one) the opportunity
to participate in the solicitation of offers to buy the Shares in the Syndicated
Community Offering and we will pay you a fee in the amount of ________ percent
(________%) of the dollar amount of the Shares sold on behalf of the Company by
you. The number of Shares sold by you shall be determined based on the
authorized designation of your firm on the order form or forms for such Shares
accompanying the funds transmitted for payment therefor (whether in the form of
a check payable to the Bank or a withdrawal from an existing account at the
Bank) to the special account established by the Company for the purpose of
holding such funds. It is understood, of course, that payment of your fee will
be made only out of compensation received by us for the Shares sold on behalf of
the Company by you, as evidenced in accordance with the preceding sentence. The
Bank has requested us to invite you to become a "Sponsoring Dealer," that is, a
Selected Dealer who solicits offers which result in the sale on behalf of the
Bank of at least _________ Shares. You may become a Sponsoring Dealer (subject
to your fulfillment of the requirement in the preceding sentence) by checking
the box on the confirmation at the end of this letter. If you become a
Sponsoring Dealer, you shall be entitled to an additional fee in the amount of
__________ percent (________%) of the dollar amount of the Shares sold on behalf
of the Company by you as evidenced in the manner set forth above.
Each order form for the purchase of Shares must set forth the identity,
---- --------
address and tax identification number of each person ordering Shares regardless
- ------- --- -------------- ------
of whether the Shares will be registered in street name or in the purchaser's
name. Such order form should clearly identify your firm.
<PAGE>
-2-
As soon as practicable after all the Shares are sold, we will remit to you,
out of our compensation as provided above, the fees to which you are entitled
hereunder, including your Sponsoring Dealer fee.
This offer is made subject to the terms and conditions herein set forth and
is made only to Selected Dealers which are (i) members in good standing of the
National Association of Securities Dealers, Inc. ("NASD") which agree to comply
with all applicable rules of the NASD, including, without limitation, the NASD's
Interpretation With Respect to Free-Riding and Withholding and Section 24 of
Article III of the NASD's Rules of Fair Practice, or (ii) foreign dealers not
eligible for membership in the NASD which agree (A) not to sell any Shares
within the United States, its territories or possessions or to persons who are
citizens thereof or resident therein and (B) in making other sales to comply
with the above-mentioned NASD Interpretation, Sections 8, 24 and 36 of the
above-mentioned Article III as if they were NASD members and Section 25 of such
Article III as it applies to non-member brokers or dealers in a foreign country.
Orders for Shares will be strictly subject to confirmation and we, acting
on behalf of the Company, reserve the right in our absolute discretion to reject
any order in whole or in part, to accept or reject orders in the order of their
receipt or otherwise, and to allot. Neither you nor any other person is
authorized by the Company, the Bank or by us to give any information or make
any representations other than those contained in the Prospectus in connection
with the sale of any of the Shares. No Selected Dealer is authorized to act as
agent for us when soliciting offers to buy the Shares from the public or
otherwise. No Selected Dealer shall engage in any stabilizing (as defined in
Regulation M promulgated under the Securities Exchange Act of 1934, as amended)
with respect to the Company's Common Stock during the offering.
We and each Selected Dealer assisting in selling Shares pursuant hereto
agree to comply with the applicable requirements of the Securities Exchange Act
of 1934, as amended, and applicable rules and regulations issued by the Federal
Reserve Board and the OTS. In addition, we and each Selected Dealer confirm that
the Securities and Exchange Commission interprets Rule 15c2-8 promulgated under
the Securities Exchange Act of 1934 as requiring that a prospectus be supplied
to each person who is expected to receive a confirmation of sale 48 hours prior
to delivery of such person's order form.
We and each Selected Dealer further agree to the extent that our customers
desire to pay for Shares with funds held by or to be deposited with us, in
accordance with the interpretation of the Securities and Exchange Commission of
Rule 15c2-4 promulgated under the Securities Exchange Act of 1934, as amended
either (a) upon receipt of an executed order form or direction to execute an
order form on behalf of a customer to forward the syndicated community offering
price for the Shares ordered on or before 12:00 p.m. on the business day
following receipt or execution of an order form by us to the Bank for deposit in
a segregated account or (b) to solicit indications of interest in which event
(i) we will subsequently contact any customers indicating interest to confirm
the interest and give instructions to execute and return an order form or to
receive authorization to execute and order form on their behalf, (ii) we will
mail acknowledgements of receipt of orders to each customer confirming interest
on the business day following such confirmation, (iii) we will debit accounts of
such customers on the fifth business day (the "debit date") following receipt of
the confirmation referred to in (i) and (iv) we will forward completed order
forms together with such funds to the Bank on or before 12:00 p.m. on the next
business day following the debit date for deposit in a segregated account. We
acknowledge that if the procedure in (b) is adopted, our customer's funds are
not required to be in their accounts until the debit date. We and each Selected
<PAGE>
-3-
Dealer further acknowledge that, in order to use the foregoing "sweep
arrangements," we comply with the net capital requirements for broker/dealers
under Rule 15c3-1(a)(1) of the Securities Exchange Act of 1934.
Unless earlier terminated by us, this Agreement shall terminate 45 full
business days after the date hereof, but may be extended by us for an additional
period or periods not exceeding 30 full business days in the aggregate. We may
terminate this Agreement or any provisions hereof at any time by written or
telegraphic notice to you. Of course, our obligations hereunder are subject to
the successful completion of the offering, including the sale of all of the
Shares.
You agree that at any time or times prior to the termination of this
Agreement you will, upon our request, report to us the number of Shares sold on
behalf of the Company by you under this Agreement.
We shall have full authority to take such actions as we may deem advisable
in respect to all matters pertaining to the offering. We shall be under no
liability to you except for lack of good faith and for obligations expressly
assumed by us in this Agreement.
Upon application to us, we will inform you as to the states in which we
believe the Shares have been qualified for sale under, or are exempt from the
requirements of, the respective blue sky laws of such states, but we assume no
responsibility or obligation as to your rights to sell Shares in any state.
Additional copies of the Prospectus and any supplements thereto will be
supplied in reasonable quantities upon request.
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of New York.
Please confirm your agreement hereto by signing and returning the
confirmation accompanying this letter at once to us at Sandler O'Neill &
Partners, L.P., Two World Trade Center, 104th Floor, New York, New York 10048.
The enclosed duplicate copy will evidence the agreement between us.
Very truly yours,
SANDLER O'NEILL & PARTNERS, L.P.
BY:_________________________________
<PAGE>
Sandler O'Neill & Partners, L.P.
Two World Trade Center - 104th Floor
New York, New York 10048
Re: Woronoco Bancorp, Inc.
---------------------
We hereby confirm our agreement to all the terms and conditions stated in
the foregoing letter. We acknowledge receipt of the Prospectus relating to the
Shares and we further state that in agreeing thereto we have relied upon the
Prospectus and no other statement whatsoever, written or oral. We confirm that
we are (i) a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"), which agrees to comply with all applicable rules of the
NASD, including, without limitation, the NASD's Interpretation With Respect to
Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of
Fair Practice, or (ii) a foreign dealer not eligible for membership in the NASD
which agrees (A) not to sell any Shares within the United States, its
territories or possessions or to persons who are citizens thereof or resident
therein and (B) in making other sales to comply with the above-mentioned NASD
Interpretation, Sections 8, 24, and 26 of the above-mentioned Article III as if
they were NASD members and Section 25 of such Article III as it applies to a
non-member broker or dealer in a foreign country.
[_] We wish to become a "Sponsoring Dealer."
_____________________________________________
(Please print or type name of firm)
_____________________________________________
(Authorized Representative)
Dated: __________________________
<PAGE>
Exhibit 5.0
December 30, 1998
Board of Directors
Woronoco Bancorp, Inc.
31 Court Street
Westfield, Massachusetts 01086-0978
Re: The issuance of up to 5,998,860 shares of
Woronoco Bancorp, Inc. Common Stock
Lady and Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with the conversion of the Woronoco Savings Bank (the "Bank"), a
Massachusetts savings bank, from the mutual to the stock form of ownership (the
"Conversion"), and the related subscription offering, direct community offering
and syndicated community offering (the "Offerings") by Woronoco Bancorp, Inc.,
(the "Company"), a Delaware corporation and the proposed holding company for the
Bank, of up to 4,830,000 shares of its common stock, par value $.01 per share
("Common Stock") (5,554,500 shares if the estimated valuation range is increased
up to 15% to reflect changes in market and financial conditions following
commencement of the Offerings) and the issuance of 386,400 shares of Common
Stock to Woronoco Savings Charitable Foundation (the "Foundation"), a privately-
owned charitable foundation formed by the Company, (444,360 shares if the
estimated valuation range is increased up to 15% to reflect changes in market
and financial conditions following commencement of the Offerings) pursuant to a
gift instrument.
We understand that the Company will contribute funds to a wholly-owned
subsidiary of the Company (the "Subsidiary") which Subsidiary will lend to the
trust for the Bank's Employee Stock Ownership Plan (the "ESOP") the funds the
ESOP trust will use to purchase shares of Common Stock for which the ESOP trust
subscribes pursuant to the Offerings and, for purposes of rendering the opinion
set forth in paragraph 2 below, we assume that: (a) the Board of Directors of
the Company (the "Board") has duly authorized the capital contribution to the
Subsidiary for purposes of making a loan to the ESOP trust (the "Loan"); (b) the
Board of Directors of the Subsidiary has duly authorized the Loan to the ESOP
trust; (c) the ESOP serves a valid corporate purpose for the Company; (d) the
Loan will be made at an interest rate and on other terms that are fair to the
Subsidiary; (e) the terms of the Loan will be set forth in customary
<PAGE>
Board of Directors
Woronoco Bancorp, Inc.
December 30, 1998
Page 2
and appropriate documents including, without limitation, a promissory note
representing the indebtedness of the ESOP trust to the Subsidiary as a result of
the Loan; and (f) the closing for the Loan and for the sale of Common Stock to
the ESOP trust will be held after the closing for the sale of the other shares
of Common Stock sold in the Offerings and the receipt by the Company of the
proceeds thereof and the contribution by the Company to the Subsidiary of the
funds sufficient to make the Loan.
In connection with your request for our opinion, you have provided to us
and we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State on October 27, 1998 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as initially filed with the Securities and Exchange Commission on
November 13, 1998 and as amended (the "Registration Statement"); a consent of
the sole incorporator of the Company; the Plan of Conversion, as amended; the
gift instrument whereby shares will be granted to the Foundation; the ESOP trust
agreement and the ESOP Loan agreement; resolutions of the Board concerning the
organization of the Company, the Offerings and designation of a pricing
committee of the Board (the "Pricing Committee"), and the form of stock
certificate approved by the Board to represent shares of Common Stock. We have
also been furnished a certificate of the Delaware Secretary of State certifying
the Company's good standing as a Delaware corporation. Capitalized terms used
but not defined herein shall have the meaning given them in the Certificate of
Incorporation.
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law upon which opinion we
believe we are justified in relying. We have examined the opinion of Morris,
Nichols, Arsht & Tunnell which opinion is in form satisfactory to us.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common Stock to be sold in the Offerings, the Common
Stock to be issued in the Offerings (including the shares to be issued to the
ESOP trust) and the shares to be granted to a charitable foundation to be
established by the Company in connection with the Conversion will be duly
authorized and, when such shares are sold and paid for or granted (in the case
of the Foundation) in accordance with the terms set forth in the prospectus
which is included in the Registration Statement and such resolution of the
Pricing Committee or, in the case of the
<PAGE>
Board of Directors
Woronoco Bancorp, Inc.
December 30, 1998
Page 3
Foundation, in accordance with the gift instrument and certificates representing
such shares in the form provided to us are duly and properly issued, will be
validly issued, fully paid and nonassessable.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe
and apply the provisions of those Articles, subsection C.4 of
Article FOURTH, to the extent that subsection obligates any
person to provide to the Board the information such subsection
authorizes the Board to demand, and the provision of Subsection
C.7 of Article EIGHTH empowering the Board to determine the Fair
Market Value of property offered or paid for the Company's stock
by an Interested Stockholder, in each case to the extent, if any,
that a court applying Delaware law were to impose equitable
limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider the effect
of any offer to acquire the Company on constituencies other than
stockholders in evaluating any such offer.
We assume no obligation to advise you of any events that occur subsequent
to the date of this opinion.
Very truly yours,
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
<PAGE>
Exhibit 5.1
December 30, 1998
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the conversion of Woronoco Savings Bank, a Massachusetts
chartered savings bank (the "Bank"), from the mutual form of ownership to stock
form of ownership (the "Conversion"), the subscription and community offering
(the "Offering"), in connection with the Conversion, by Woronoco Bancorp, Inc.,
a Delaware corporation (the "Company"), of up to 5,554,500 shares of its common
stock, par value $.01 per share (the "Common Stock").
In connection with your request for our opinion, you have provided to
us, and we have reviewed, the Company's certificate of incorporation (the
"Certificate of Incorporation"), its bylaws, the Registration Statement filed
with the Securities and Exchange Commission in connection with the Offering (the
"Registration Statement"), including the prospectus constituting a part thereof
(the "Prospectus"), a consent of the sole incorporator of the Company,
resolutions of the Board of Directors of the Company (the "Board") concerning,
inter alia, the organization of the
- ----- ----
<PAGE>
Muldoon, Murphy & Faucette
December 30, 1998
Page 2
Company, the Offering and the designation of a Pricing Committee of the Board
(the "Pricing Committee") and the form of stock certificate approved by the
Board to represent shares of Common Stock. We have also obtained a certificate
of the Delaware Secretary of State as to the Company's good standing as Delaware
corporation. Capitalized terms used but not defined herein shall have the
meanings given them in the Certificate of Incorporation.
We understand that a wholly-owned subsidiary of the Company (the
"Subsidiary") will loan to the Bank's Employee Stock Ownership Plan (the "ESOP")
the funds the ESOP will use to purchase the shares of Common Stock for which the
ESOP has subscribed as part of the Offering. The Subsidiary will receive the
funds necessary to make such loan by way of a capital contribution by the
Company to the Subsidiary (the "Capital Contribution"). In this regard, we have
assumed, for purposes of rendering the opinion set forth in paragraph 2 below,
that: (a) the board of directors of the Subsidiary has duly authorized the loan
to the ESOP (the "Loan"); (b) the Loan serves a valid corporate purpose of the
Subsidiary and the Capital Contribution serves a valid corporate purpose of the
Company; (c) the Loan will be made at an interest rate and on other terms that
are fair to the Subsidiary; (d) the terms of the Loan will be set forth in
customary and appropriate documents including, without limitation, a promissory
note representing the indebtedness of the ESOP to the Subsidiary as a result of
the Loan; and (e) the Capital Contribution, the closing for the Loan and for the
sale of Common Stock to the ESOP will be held after the closing for the sale of
the other shares of Common Stock sold in the Offering and the receipt by the
Company of the proceeds thereof.
<PAGE>
Muldoon, Murphy & Faucette
December 30, 1998
Page 3
We call your attention to the fact that the opinions expressed herein
are limited in all respects to matters of Delaware corporate law. We express no
opinion concerning the requirements of any other law, rule or regulation, state
or federal, applicable to the Bank, the Company, the Offering, the Conversion,
or the Foundation, including, without limitation, those applicable to federally
insured savings banks or their holding companies.
Based upon and subject to the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in
good standing as a corporation under the laws of the State of Delaware, with the
corporate power and authority to own its property and conduct its business as
now conducted as described in the Prospectus.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold in the Offering, the
Common Stock to be issued in the Offering (including the shares to be issued to
the ESOP) will be duly authorized and, when such shares are sold and paid for in
accordance with the terms set forth in the Prospectus and such resolution of the
Pricing Committee, and certificates representing such shares in the form
provided to us are duly and properly issued, will be validly issued, fully paid
and non-assessable, with no personal liability for the payment of the Company's
debts arising solely by virtue of the ownership thereof; such issuance and sale
will not be in violation of or subject to any preemptive rights provided for by
Delaware law or by the Certificate of Incorporation.
<PAGE>
Muldoon, Murphy & Faucette
December 30, 1998
Page 4
The following provisions of the Certificate of Incorporation may not
be given effect by a court applying Delaware law, but in our opinion the failure
to give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and non-assessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply the provisions
of those Articles, subsection C.4 of Article FOURTH, to the extent that
provision obligates any person to provide to the Board the information such
subsection authorizes the Board to demand, and the provision of Section C.7 of
Article EIGHTH empowering the Board to determine the Fair Market Value of
property offered or paid for the Company's stock by an Interested Stockholder,
to the extent, if any,
<PAGE>
Muldoon, Murphy & Faucette
December 30, 1998
Page 5
that a court applying Delaware law were to impose equitable limitations upon the
authority of the Board under such provisions.
(b) Article NINTH of the Certificate of Incorporation, which purports
to permit the Board to consider the effect of any offer to acquire the Company
on constituencies other than stockholders in evaluating any such offer.
Very truly yours,
/s/ Morris, Nichols, Arsht & Tunnell
<PAGE>
EXHIBIT 8.0
December 29, 1998
Board of Directors
Woronoco Bancorp, Inc.
31 Court Street
Westfield, Massachusetts 01086-0978
Board of Trustees
Woronoco Savings Bank
31 Court Street
Westfield, Massachusetts 01086-0978
Re: Federal Tax Consequences of the Conversion of Woronoco Savings Bank
from a State-chartered Mutual Savings Bank to a State-chartered
Capital Stock Institution and the Offer and Sale of Common Stock of
Woronoco Bancorp, Inc. (the "Conversion")
To the Members of the Board of Trustees:
You have requested an opinion regarding the federal income tax consequences
of the proposed conversion of Woronoco Savings Bank (the "Bank") from a state-
chartered mutual savings bank to a state-chartered capital stock institution and
the acquisition of the Bank's capital stock by Woronoco Bancorp, Inc., a
Delaware corporation (the "Holding Company"), pursuant to the plan of conversion
adopted by the Board of Trustees on August 26, 1998 and subsequently amended on
October 14, 1998 (the "Plan of Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as set
forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE>
Board of Directors
December 29, 1998
Page 2
We have made such inquiries and have examined such documents and records as
we have deemed appropriate for the purpose of this opinion. In rendering this
opinion, we have received certain standard factual representations of the
Holding Company and the Bank concerning the Holding Company and the Bank as well
as the transaction ("Representations"). These Representations are required to be
furnished prior to the execution of this letter and again prior to the closing
of the Conversion. We will rely upon the accuracy of the Representations of the
Holding Company and the Bank and the statements of facts contained in the
examined documents, particularly the Plan of Conversion. We have also assumed
the authenticity of all signatures, the legal capacity of all natural persons
and the conformity to the originals of all documents submitted to us as copies.
Each capitalized term used herein, unless otherwise defined, has the meaning set
forth in the Plan of Conversion. We have assumed that the Conversion will be
consummated strictly in accordance with the terms of the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed description of
the Conversion. These documents as well as the Representations to be provided by
the Holding Company and the Bank are incorporated in this letter as part of the
statement of the facts.
Woronoco Savings Bank, with its headquarters in Westfield, Massachusetts,
is a state-chartered mutual savings bank. As a savings bank, the Bank has never
been authorized to issue stock. Instead, the proprietary interest in the
reserves and undivided profits of the Bank belong to the deposit account holders
of the Bank, hereinafter sometimes referred to as "shareholders." A shareholder
of the Bank has a right to share, pro rata, with respect to the withdrawal value
of his respective deposit account in any liquidation proceeds distributed in the
event the Bank is ever liquidated. In addition, a shareholder of the Bank is
entitled to interest on his account balance as fixed and paid by the Bank.
In order to provide organizational and economic strength to the Bank, the
Board of Trustees has adopted the Plan of Conversion whereby the Bank will
convert itself into a Massachusetts-chartered capital stock savings bank (the
"Converted Bank"), the stock of which will be held entirely by the Holding
Company. Assuming that the Holding Company form of organization is utilized, the
Holding Company will acquire the stock of the Bank by purchase, in exchange for
the Conversion proceeds that are not permitted to be retained by the Holding
Company. The Holding Company will apply to the Office of Thrift Supervision
("OTS") to retain up to 50% of the proceeds received from the Conversion. The
aggregate sales price of the Common Stock issued in the Conversion will be based
on an independent appraiser's valuation of the estimated pro forma market value
of the Common Stock of the Converted Bank. The Conversion and sale of the Common
Stock will be subject to applicable regulatory approval and the approval by the
affirmative vote of two-thirds of the Corporators.
<PAGE>
Board of Directors
December 29, 1998
Page 3
The Bank shall establish at the time of Conversion a liquidation account in
an amount equal to its net worth as of the latest practicable date prior to
Conversion. The liquidation account will be maintained by the Bank for the
benefit of the Eligible Account Holders and Supplemental Eligible Account
Holders who continue to maintain their deposit accounts at the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder shall, with
respect to his Savings Account, hold a related inchoate interest in a portion of
the liquidation account balance, in relation to his deposit account balance on
the Eligibility Record Date and/or Supplemental Eligibility Record Date or to
such balance as it may be subsequently reduced, as provided in the Plan of
Conversion.
In the unlikely event of a complete liquidation of the Bank (and only in
such event), following all liquidation payments to creditors (including those to
Account Holders to the extent of their deposit accounts) each Eligible Account
Holder and Supplemental Eligible Account Holder shall be entitled to receive a
liquidating distribution from the liquidation account, in the amount of the then
adjusted subaccount balance for his deposit accounts then held, before any
liquidation distribution may be made to any holders of the Bank's capital stock.
No merger, consolidation, purchase of bulk assets with assumption of Savings
Accounts and other liabilities, or similar transaction with a Federal Deposit
Insurance Corporation (FDIC) institution, in which the Bank is not the surviving
institution, shall be deemed to be a complete liquidation for this purpose. In
such transactions, the liquidation account shall be assumed by the surviving
institution.
As part of the Conversion, the Company and the Bank intend to establish a
charitable foundation (the "Foundation") that will qualify as an exempt
organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended (the "Code") and to donate to the Foundation up to 8.0% of the number of
shares of Common Stock sold in the Conversion. The establishment and funding of
the Foundation as part of the Conversion is subject to the approval of the
Voting Shareholders of the Bank at the Special Meeting of Shareholders. In the
event that the Foundation does not receive the prerequisite approval, the Bank
may determine to complete the Conversion without the Foundation.
You have provided the following representations:
(a) The fair market value of the withdrawable deposit accounts plus
interests in the liquidation account of the Converted Bank to be
constructively received under the Plan of Conversion will, in each
instance, be equal to the fair market value of the withdrawable
deposit accounts (plus the related interest in the residual equity of
the Bank) deemed to be surrendered in exchange therefor.
<PAGE>
Board of Directors
December 29, 1998
Page 4
(b) If an individual's total deposits in the Bank equal or exceed $50 as
of the Eligibility Record Date or the Supplemental Eligibility Record
Date, then no amount of that individual's total deposits will be
excluded from participating in the liquidation account. The fair
market value of the deposit accounts of the Bank which have a balance
of less than $50 on the Eligibility Record Date or the Supplemental
Eligibility Record Date will be less than 1% of the total fair market
value of all deposit accounts of the Bank.
(c) Immediately following the Conversion, the Eligible Account Holders and
the Supplemental Eligible Account Holders of the Bank will own all of
the outstanding interests in the liquidation account and will own such
interest solely by reason of their ownership of deposits in the Bank
immediately before the Conversion.
(d) After the Conversion, the Converted Bank will continue the business of
the Bank in the same manner as prior to the Conversion. The Converted
Bank has no plan or intention and the Holding Company has no plan or
intention to cause the Converted Bank to sell its assets other than in
the ordinary course of business.
(e) The Holding Company has no plan or intention to sell, liquidate or
otherwise dispose of the stock of the Converted Bank other than in the
ordinary course of business.
(f) The Holding Company and the Converted Bank have no current plan or
intention to redeem or otherwise acquire any of the Common Stock
issued in the Conversion transaction.
(g) Immediately after the Conversion, the assets and liabilities of the
Converted Bank will be identical to the assets and liabilities of the
Bank immediately prior to the Conversion, plus the net proceeds from
the sale of the Converted Bank's common stock to the Holding Company
and any liability associated with indebtedness incurred by the
Employee Plans in the acquisition of Common Stock by the Employee
Plans.
(h) The Bank is a corporation chartered by Massachusetts as a mutual
savings bank.
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Bank in the Conversion will be issued or
acquired at a discount. However, shares may be given to certain
employees as compensation
<PAGE>
Board of Directors
December 29, 1998
Page 5
by means of the Tax-Qualified Employee Stock Benefit Plans.
Compensation to be paid to such Trustees and depositor-employees will
be commensurate with amounts paid to third parties bargaining at arm's
length for similar services.
(j) The fair market value of the assets of the Bank, which will be
transferred to the Converted Bank in the Conversion, will equal or
exceed the sum of the liabilities of the Bank which will be assumed by
the Converted Bank and any liabilities to which the transferred assets
are subject.
(k) The Bank is not insolvent and is not under the jurisdiction of a
bankruptcy or similar court, a receivership, foreclosure, or similar
proceeding in a Federal or State court.
(l) Upon the completion of the Conversion, the Holding Company will own
and hold 100% of the issued and outstanding capital stock of the
Converted Bank and no other shares of capital stock of the Converted
Bank will be issued and/or outstanding. At the time of the Conversion,
the Converted Bank does not have any plan or intention to issue
additional shares of its stock following the transaction. Further, no
shares of preferred stock of the Converted Bank will be issued and/or
outstanding.
(m) Upon the completion of the Conversion, there will be no rights,
warrants, contracts, agreements, commitments or understandings with
respect to the capital stock of the Converted Bank, nor will there be
any securities outstanding which are convertible into the capital
stock of the Converted Bank.
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of (a)
nontransferable subscription rights, or (b) an interest in the
liquidation account of the Converted Bank.
(o) The Bank has utilized the reserve method of accounting for bad debts
in filing its federal income tax return for the past 3 tax years. For
the current tax year, and for the 1996 and the 1997 tax years, the
Bank calculated its addition to the tax reserve for bad debts under
the experience method. For the 1995 tax year, the Bank calculated the
addition to the tax reserve for bad debts using the percentage of
taxable income method. Following the Conversion, the Converted Bank
will maintain a tax reserve for bad debts to the extent allowable
under the Internal Revenue Code.
<PAGE>
Board of Directors
December 29, 1998
Page 6
(p) In preparing its federal income tax return for 1995 and for taxable
years prior to 1995, the Bank analyzed its assets by reference to
whether 60% of its total assets consists of the items listed below and
has satisfied this test in each of the preceding 3 tax years. Under
the test, at least 60% of the amount of the total assets at the close
of the year consisted of the following items: (i) cash, (ii)
obligations of the US, of a State or political subdivision of a State,
obligations of a corporation which is an instrumentality of the US or
of a State (but excluding tax-exempt obligations), (iii) certificates
of deposit in, or obligations of a corporation organized under a State
law which specifically authorizes such corporation to insure the
deposits or share accounts, (iv) loans secured by a deposit or share
of a member, (v) loans secured by an interest in real property which
is residential real property or used primarily for church purposes,
loans made for the improvement of residential or church property, (vi)
loans secured by an interest in educational, health, or welfare
institutions or facilities, including structures designed to be used
for residential purposes, (vii) property acquired through the
liquidation of defaulted loans described in (v) or (vi) above, (viii)
loans made for the repayment of expenses of college or university
education or vocational training, (ix) property used by the Bank in
the conduct of the business of acquiring the savings of the public and
investing in loans, and (x) any regular or residual interest in a
REMIC, but only in the proportion of the assets of the REMIC which
consists of property described in (i) through (ix) above.
(q) Depositors will pay the expenses of the Conversion solely applicable
to them, if any. The Holding Company and the Bank will each pay
expenses of the transaction attributable to them and will not pay any
expenses solely attributable to the depositors or to the Holding
Company shareholders.
(r) The exercise price of the subscription rights received by the Bank's
Eligible Account Holders, Supplemental Eligible Account Holders, and
other holders of subscription rights to purchase Holding Company
Common Stock will be equal to the fair market value of the stock of
the Holding Company at the time of the completion of the Conversion as
determined by an independent appraisal.
(s) The liquidation account will be maintained by the Bank for the benefit
of the Eligible Account Holders and the Supplemental Eligible Account
Holders who continue to maintain their Deposit Accounts at the Bank.
<PAGE>
Board of Directors
December 29, 1998
Page 7
(t) There is no plan or intention for the Converted Bank to be liquidated
or merged with another corporation following this proposed
transaction.
(u) The liabilities of the Bank assumed by the Converted Bank plus the
liabilities, if any, to which the transferred assets are subject were
incurred by the Bank in the ordinary course of its business and. are
associated with the assets transferred.
(v) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to future tax
years. The Bank has neither generated nor carried forward a net
operating loss for federal tax purposes in the past ten tax years.
LIMITATIONS ON OPINION
----------------------
Our opinions expressed herein are based solely upon current provisions of
the Code, including applicable regulations thereunder and current judicial and
administrative authority. Any future amendments to the Code or applicable
regulations, or new judicial decisions or administrative interpretations, any of
which could be retroactive in effect, could cause us to modify our opinion. No
opinion is expressed herein with regard to the federal, state, or city tax
consequences of the Conversion under any section of the Code except if and to
the extent specifically addressed.
FEDERAL TAX OPINION
-------------------
Based upon the Representations and the other factual information referred
to in this letter, and assuming the transaction occurs in accordance with the
Plan of Conversion, and taking into consideration the limitations noted
throughout this opinion, it is our opinion that under current federal income tax
law:
(1) Pursuant to the Conversion, the changes at the corporate level other
than changes in the form of organization will be insubstantial. Based
upon that fact and the fact that the equity interest of a shareholder
in a mutual savings bank is more nominal than real, unlike that of a
shareholder of a corporation, the Conversion of the Bank from a mutual
savings bank to a stock savings bank is a tax-free reorganization
since it is a mere change in identity, form or place of organization
within the meaning of section 368(a)(1)(F) of the Code (see Rev. Rul.
80-105, 1980-1 C.B. 78). Neither the Bank nor the Converted Bank shall
recognize gain or loss as a
<PAGE>
Board of Directors
December 29, 1998
Page 8
result of the Conversion. The Bank and the Converted Bank shall each
be "a party to a reorganization" within the meaning of section 368(b)
of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or the
Holding Company on the receipt by the Converted Bank of money from the
Holding Company in exchange for shares of the Converted Bank's capital
stock or by the Holding Company upon the receipt of money from the
sale of its Common Stock (Section 1032(a) of the Code).
(3) The basis of the assets of the Bank in the hands of the Converted Bank
shall be the same as the basis of such assets in the hands of the Bank
immediately prior to the Conversion (Section 362(b) of the Code).
(4) The holding period of the assets of the Bank in the hands of the
Converted Bank shall include the period during which the Bank held the
assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account Holders
and the Supplemental Eligible Account Holders of the Bank on the
issuance to them of withdrawable deposit accounts in the Converted
Bank plus interests in the liquidation account of the Converted Bank
in exchange for their deposit accounts in the Bank or to the other
depositors on the issuance to them of withdrawable deposit accounts
(Section 354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no
gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon the distribution to them of
the nontransferable subscription rights to purchase shares of stock in
the Holding Company (Section 356(a)). Gain realized, if any, by the
Eligible Account Holders and Supplemental Eligible Account Holders on
the distribution to them of nontransferable subscription rights to
purchase shares of Common Stock will be recognized but only in an
amount not in excess of the fair market value of such subscription
rights (Section 356(a)). Eligible Account Holders and Supplemental
Eligible Account Holders will not realize any taxable income as a
result of the exercise by them of the nontransferable subscription
rights (Rev. Rul. 56-572, 1956-2 C.B. 182).
(7) The basis of the deposit accounts in the Converted Bank to be received
by the Eligible Account Holders, Supplemental Eligible Account Holders
and other
<PAGE>
Board of Directors
December 29, 1998
Page 9
shareholders of the Bank will be the same as the basis of their
deposit accounts in the Bank surrendered in exchange therefor (Section
358(a)(1) of the Code). The basis of the interests in the liquidation
account of the Converted Bank to be received by the Eligible Account
Holders of the Bank shall be zero (Rev. Rul. 71-233, 1971-1 C.B. 113).
The basis of the Holding Company Common Stock to its stockholders will
be the purchase price thereof plus the basis, if any, of
nontransferable subscription rights (Section 1012 of the Code).
Accordingly, assuming the nontransferable subscription rights have no
value, the basis of the Common Stock to the Eligible Account Holders
and Supplemental Eligible Account Holders will be the amount paid
therefor. The holding period of the Common Stock purchased pursuant to
the exercise of subscription rights shall commence on the date on
which the right to acquire such stock was exercised (Section 1223(6)
of the Code).
Our opinion under paragraph (6) above is predicated on the Representation
that no person shall receive any payment, whether in money or property, in lieu
of the issuance of subscription rights. Our opinion under paragraphs (6) and (7)
above assumes that the subscription rights to purchase shares of Common Stock
received by Eligible Account Holders, Supplemental Eligible Account Holders and
Trustees, Officers and Employees have a fair market value of zero. We understand
that you have received a letter from Keller & Co., Inc. that the subscription
rights do not have any value. We express no view regarding the valuation of the
subscription rights.
If the subscription rights are subsequently found to have a fair market
value, income may be recognized by various recipients of the subscription rights
(in certain cases, whether or not the rights are exercised) and Holding Company
and/or the Converted Bank may be taxable on the distribution of the subscription
rights.
<PAGE>
Board of Directors
December 29, 1998
Page 10
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referenced herein. Any change in the transaction could cause us
to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the
Application for Conversion and Form S-1 Registration Statement of Woronoco
Bancorp, Inc. and the references to and summary of this opinion in such
Application for Conversion and Form S-1 Registration Statement.
Sincerely,
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this First Amendment to the Registration Statement on
Form S-1 and Prospectus of Woronoco Bancorp, Inc. (proposed holding company for
Woronoco Savings Bank) of our report dated February 27, 1998, except note 16
which is as of August 26, 1998, on the consolidated balance sheets of Woronoco
Savings Bank as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in surplus and cash flows for each of the years in
the three-year period ended December 31, 1997 and to the use of our name and the
statements with respect to us, as appearing under the headings "Experts", "State
Taxation", "Tax Aspects" and "Legal and Tax Opinions" in the Prospectus.
We also consent to the use of our State Tax opinion, dated November 13, 1998,
appearing as an exhibit to the Registation Statement.
Wolf & Company, P.C.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
December 30, 1998
<PAGE>
EXHIBIT 99.3
RESOLUTIONS OF THE BOARD OF DIRECTORS OF
WORONOCO BANCORP, INC.
WHEREAS, at a meeting of the Board of Directors of Woronoco Bancorp, Inc.,
a Delaware corporation (the "Corporation"), on October 28, 1998, the Board
considered the matter of the conversion of Woronoco Savings Bank (the "Bank")
from mutual to stock form (the "Conversion") and the issuance of the
Corporation's common stock (the "Common Stock") as a part of that Conversion;
and
WHEREAS, the Board has determined that it would be in the best interest of
the Corporation to effect said Conversion; and
NOW, THEREFORE, the Board has determined to hereby adopt the following
resolutions pursuant to Section 141 of the Delaware General Corporation Law:
Resolutions Relating to Organizational Matters
----------------------------------------------
RESOLVED, that the Certificate of Incorporation for the Corporation, as
adopted by the sole incorporator of the Corporation and as presented to the
Board at this meeting be and hereby is ratified, approved and adopted, and the
Secretary is instructed to insert a specimen copy thereof in the Minute Book;
and
FURTHER RESOLVED, that the Bylaws for the Corporation as presented to the
Board at this meeting are hereby approved and adopted as the Bylaws of the
Corporation and the Secretary is instructed to insert a specimen copy thereof in
the Minute Book; and
FURTHER RESOLVED, that the Board of Directors consists of thirteen (13)
directors as appointed by the sole incorporator; and
FURTHER RESOLVED, that the persons set forth in Attachment A are elected to
the offices set forth opposite their respective names, to serve at the pleasure
of the Board of Directors or until their successors are elected and qualified;
and
FURTHER RESOLVED, that the President and Chief Executive Officer or his
designee and the Secretary of the Corporation, presently or hereafter elected,
be and hereby are, authorized and directed for and on behalf of the Corporation
to sign and countersign, or to cause to be signed or countersigned by facsimile,
stock certificates representing the shares of the Corporation's Common Stock,
par value of $.01 per share, and the Corporation's preferred stock, par value
$.01 per share; and
FURTHER RESOLVED, that the form of stock certificate presented at this
meeting be and hereby is approved and adopted, and the Secretary is instructed
to insert a specimen thereof in the Minute Book; and
<PAGE>
FURTHER RESOLVED, that the President and Chief Executive Officer or his
designee and the Corporate Secretary shall have and may exercise all the powers
and duties incident to such office and set forth in the Corporation's Bylaws,
and that any remaining officers shall have all the powers and duties incident to
such offices and as are delegated to them from time to time or as are set forth
in a description of such offices approved by the Board and inserted in the
Minute Book; and
FURTHER RESOLVED, that the officers of the Corporation be, and they hereby
are, authorized to cause the Corporation to pay all costs and expenses in
connection with the organization and commencement of business of the Corporation
and the issuance of its capital stock; and
FURTHER RESOLVED, that an office of the Corporation be established and
maintained at 31 Court Street, Westfield, Massachusetts, and that meetings of
the Board of Directors from time to time may be held either at such office or at
such other office in the Commonwealth of Massachusetts or elsewhere, as the
Board of Directors shall from, time to time order; and
FURTHER RESOLVED, that the fiscal year of the Corporation shall begin on
the first day of January of each year; and
FURTHER RESOLVED, that for the purpose of authorizing the Corporation to do
business in any state, territory or dependency of the United States or any
foreign country in which it is necessary or expedient for the Corporation to
transact business, the proper officers of the Corporation are hereby authorized
to appoint or substitute all necessary agents or attorneys for service of
process, to designate and change the location of all necessary statutory offices
and, under the corporate seal if necessary or appropriate, to make and file all
necessary certificates, reports, powers of attorney and other instruments as may
be required by the laws of any such state, territory, dependency or country to
authorize the Corporation to transact business therein; and
FURTHER RESOLVED, that the Bank is hereby designated as a depository of the
funds of this Corporation and that an account be opened with said Bank to be
designated: Woronoco Bancorp, Inc.; and
FURTHER RESOLVED, that the banking resolutions required by said Bank in
order to open an ordinary checking account and such other accounts as the
President and Chief Executive Officer of this Corporation or his designee shall
deem appropriate be, and they hereby are, adopted as the resolutions of this
Board of Directors as if fully set forth herein; and that the President and
Chief Executive Officer of this Corporation or his designee be, and he hereby
is, authorized to designate signatories to execute checks and other documents on
behalf of this Corporation with respect to such accounts; and that the officers
of this Corporation be, and they hereby are, authorized and directed to execute
and deliver, in the name and on behalf of this Corporation and under its
corporate seal or otherwise, any and all certificates, agreements, undertakings,
authorizations, and other instruments or documents as said Bank may require and
as shall be necessary or appropriate to carry out the intent and accomplish the
purposes of this resolution; and that copies of any banking resolutions so
executed shall be inserted in the Minute Book; and
2
<PAGE>
FURTHER RESOLVED, that the authority conferred by the foregoing resolutions
shall continue until revoked by the Board of Directors of this Corporation, but
said Corporation shall be fully protected in acting on such authority and may
conclusively assume that the person(s) from time to time certified to it, under
the seal of this Corporation, are the person(s) actually occupying the aforesaid
office(s) and shall not be charged with any notice of the revocation of any such
authority or the removal of any such person(s) unless and until it shall have
actually received a certificate, under the seal of this Corporation, setting
forth such revocation or removal; and
FURTHER RESOLVED, that the proper officers of the Corporation be, and each
of them hereby is, authorized and directed, for and on behalf of the
Corporation, to take all actions and to execute all agreements, instruments and
other documents as each of such officers considers necessary or advisable to
effectuate each of the foregoing resolutions and to carry out the purposes
thereof, the taking of any such action and the execution of any agreement,
instrument or document conclusively to evidence the due authorization thereof by
the Corporation.
Resolution Relating to the Plan of Conversion
---------------------------------------------
RESOLVED, that the Plan of Conversion of the Bank, as amended, with the
Stock Charter and Bylaws of the Bank, including the formation of the Corporation
to acquire all of the capital stock of the Bank, approved and adopted by the
Board of Trustees of the Bank at a duly called meeting and considered at this
meeting of the Board of Directors of the Corporation, is hereby approved and
adopted.
Resolutions Regarding Authorization of the Registration,
--------------------------------------------------------
Issuance and Public Offering of up to
-------------------------------------
5,998,860 Shares of Common Stock
--------------------------------
RESOLVED, that the Corporation be, and it hereby is, authorized to offer,
issue and sell to the public up to 5,554,500 shares of its Common Stock, par
value $.01 per share (together with up to 444,360 shares to be issued to the
Foundation to be established by the Bank) (the "Shares"), which Shares, when
issued, shall be fully paid and nonassessable shares of Common Stock of the
Corporation, all to be upon such specific terms and conditions and pursuant to
such agreements as may be approved by the Board of Directors of the Corporation;
and
FURTHER RESOLVED, that the Corporation be, and it hereby is, authorized to
file with the Securities and Exchange Commission a registration statement (the
"Registration Statement"), including any exhibits thereto and any amendments and
supplements thereto or to the Prospectus contained therein, on any appropriate
form authorized by the Securities and Exchange Commission, providing for the
registration of the Shares under the Securities Act of 1933, as amended; and
FURTHER RESOLVED, that the Corporation be, and it hereby is, authorized to
file with the Securities and Exchange Commission a registration statement on
Form 8-A (the "Form 8-A"), including any exhibits thereto, providing for the
registration of the Corporation's classes of securities under the Securities
Exchange Act of 1934, as amended; and
3
<PAGE>
FURTHER RESOLVED, that the proper officers of the Corporation be, and each
of them hereby is, authorized, in the name and on behalf of the Corporation, to
execute and deliver a power of attorney appointing the directors and officers of
the Corporation, or any of them to act as attorneys-in-fact for the Corporation
for the purpose of executing and filing with the Securities and Exchange
Commission any such registration statement, or any amendment or supplement
thereto, or any document deemed necessary, convenient or appropriate by any such
officer in connection therewith; and
FURTHER RESOLVED, that Cornelius D. Mahoney be, and hereby is, designated
and appointed as the agent for service of the Corporation in all matters
relating to any such registration statement; and
FURTHER RESOLVED, that the Board of Directors hereby establishes a
Compensation Committee of the Board of Directors, consisting of the Board
members set forth in Attachment B.
FURTHER RESOLVED, that the Board of Directors hereby establishes a Pricing
Committee of the Board of Directors, consisting of the Board members set forth
in Attachment C.
FURTHER RESOLVED, that the Board of Directors hereby expressly authorizes
and empowers the Pricing Committee on behalf of the Corporation to determine
whether or not to proceed with the sale of the Common Stock in light of business
and economic conditions existing at the time of the proposed offerings and to
determine, pursuant to the terms of the Plan of Conversion: (i) the price at
which the Shares shall be sold to persons who have exercised their rights to
purchase shares of Common Stock pursuant to the terms of the Subscription and
Direct Community Offering described in the Registration Statement, and the price
at which shares of Common Stock shall be sold in the Syndicated Community
Offering, if any; (ii) the exact number of shares to be sold; and (iii) any
other financial terms with respect to the sale of the shares provided that such
price and number of shares shall be consistent with the subscription price range
established in the independent appraisal of the Common Stock to be sold; and
FURTHER RESOLVED, that upon the consummation of the Conversion, the
Corporation be, and it hereby is, authorized to, purchase from the Bank a number
of shares of its common stock constituting all of the issued and outstanding
common stock of said Bank, in exchange for up to 100% of the net conversion
proceeds, and the proper officers of the Corporation are hereby directed to take
all steps necessary to close such sale upon the consummation of such offering;
and
FURTHER RESOLVED, that the Board of Directors hereby establishes an Audit
Committee of the Board of Directors consisting of the Board members set forth in
Attachment D.
FURTHER RESOLVED, that the Board of Directors hereby establishes a
Nominating Committee of the Board of Directors consisting of the Board members
set forth in Attachment E.
FURTHER RESOLVED, that any officer of the Corporation be, and each of them
hereby is, authorized to execute, in the name and on behalf of the Corporation
and under its corporate seal or
4
<PAGE>
otherwise, deliver and file any agreement, instrument, certificate or any other
document, or any amendment or supplement thereto, and to take any other action
that such officer may deem necessary, convenient or appropriate in order to
carry out the intent and purpose of the preceding resolutions and to effectuate
the transactions contemplated thereby.
Resolutions Relating to the Proposed Offering and
-------------------------------------------------
Agency Agreement to be Entered Into in Connection
-------------------------------------------------
With the Proposed Offering
--------------------------
RESOLVED, that the President and Chief Executive Officer is authorized to
negotiate the form and terms of the Agency Agreement between the Corporation,
the Bank and Sandler O'Neill & Partners, L.P., substantially upon the same terms
as the letter of intent, a copy of which is attached to these resolutions, and
in connection therewith, the Board of Directors hereby authorizes the President
and Chief Executive Officer or his designee to execute in their names and on
behalf of the Corporation, acknowledge and deliver the Agency Agreement in such
form as he shall approve; and
FURTHER RESOLVED, that the President and Chief Executive Officer or his
designee or any officer of the Corporation be, and each of them hereby is,
authorized to execute, in the name and on behalf of the Corporation and under
its corporate seal or otherwise, deliver and file any agreement, instrument,
certificate or any other document, or any amendment or supplement thereto, and
to take any other action that such officer may deem necessary, convenient or
appropriate in order to carry out the intent and purpose of the preceding
resolution and to effectuate the transactions contemplated thereby.
Resolutions Regarding Authorization of
--------------------------------------
Listing of up to 5,998,860 Shares of Common Stock
-------------------------------------------------
RESOLVED, that the Corporation may execute and deliver to The American
Stock Exchange or any other stock exchange or market or any appropriate
securities information processing network, any application, including any
amendment or supplement thereto, for the listing of or quotation of the Shares,
which Shares are to be listed on any such market or exchange from time to time
upon issuance, and may appoint a listing agent or listing agents to represent
the Corporation for such purpose and to execute, in the name and on behalf of
the Corporation, any other agreement or instrument that may be necessary or
appropriate to accomplish such listing; and
FURTHER RESOLVED, that the President and Chief Executive Officer or his
designee or any officer of the Corporation be, and each of them hereby is,
authorized to make such application for listing of the Shares on behalf of the
Corporation, and in connection therewith, to execute, in the name and on behalf
of the Corporation and under its corporate seal or otherwise, deliver and file
such applications, agreements and other instruments as shall be necessary or
appropriate to accomplish such listing and that counsel for the Corporation and
any such officer be, and each of them hereby is, authorized to appear on behalf
of the Corporation before the appropriate committee or body of any such market
or exchange as may be required, with
5
<PAGE>
authority to make such changes in any such application, agreement or instrument
which may be deemed necessary or appropriate by such counsel or officer of the
Corporation to conform to any such market's or exchange's requirements for
listing of the Shares; and
FURTHER RESOLVED, that the President and Chief Executive Officer or his
designee or any officer of the Corporation be, and each of them hereby is,
authorized to execute, in the name and on behalf of the Corporation and under
its corporate seal or otherwise, deliver and file an agreement, instrument,
certificate or any other document, or any amendment or supplement thereto, and
to take any other action that such officer may deem necessary, convenient or
appropriate in order to carry out the intent and purpose of the preceding
resolutions and to effectuate the transactions contemplated thereby.
Resolution Pertaining to State Registration
-------------------------------------------
of the Common Stock
-------------------
RESOLVED, that it is desirable and in the best interest of this Corporation
that its securities be qualified or registered for sale in various states; that
the President and Chief Executive Officer or his designee and Corporate
Secretary hereby are authorized to determine the states in which appropriate
action shall be taken to qualify or register for sale all or such part of the
securities of this Corporation as said officers may deem advisable; that said
officers are hereby authorized to perform on behalf of this Corporation any and
all such acts as they may deem necessary or advisable in order to comply with
the applicable laws of any such states, and in connection therewith to execute
and file all requisite papers and documents, including, but not limited to,
applications, reports, surety bonds, irrevocable consents and appointments of
attorneys for service of process; and the execution by such officers of any such
paper or document or the doing by them of any act in connection with the
foregoing matters shall conclusively establish their authority therefor from
this Corporation and the approval and ratification by this Corporation of the
papers and documents so executed and the action so taken, and further, such
officers are authorized to pay any necessary or appropriate fees or expenses
associated with qualifying or registering the Corporation's securities in such
states.
Resolutions Pertaining to Application for Conversion
----------------------------------------------------
RESOLVED, that the Corporation hereby ratifies and approves the filing by
the Bank of an Application for Conversion and any exhibits thereto and any
amendment and supplements thereto with the Commissioner of Banks for the
Commonwealth of Massachusetts and the Federal Deposit Insurance Corporation; and
FURTHER RESOLVED, that the proper officers of the Corporation be, and each
of them hereby is, authorized, in the name and on behalf of the Corporation, to
execute and deliver a power of attorney appointing the directors and officers of
the Corporation, or any of them to act as attorneys-in-fact for the Corporation
for the purpose of executing and filing with the Commissioner of Banks for the
Commonwealth of Massachusetts and Federal Deposit Insurance Corporation any
6
<PAGE>
such application, or any amendment or supplement thereto, or any document deemed
necessary, convenient or appropriate by any such officer in connection
therewith.
Resolutions Pertaining to Savings and Loan Holding Company Applications
-----------------------------------------------------------------------
RESOLVED, that the Corporation be, and it hereby is, authorized to file
with the Office of Thrift Supervision an application for approval to become a
savings and loan holding company, including the filing of an application on the
appropriate form and any exhibits thereto and any amendments and supplements
thereto; and
FURTHER RESOLVED, that any officer of the Corporation be, and each of them
hereby is, authorized to execute, in the name and on behalf of the Corporation
and under its corporate seal or otherwise, deliver and file any agreement,
instrument, certificate or any other document, or any amendment or supplement
thereto, and to take any other action that such officer may deem necessary,
convenient or appropriate in order to carry out the intent and purpose of the
preceding resolution and to effectuate the transactions contemplated thereby.
Resolution Relating to the Issuance of Common Stock to the Charitable Foundation
- --------------------------------------------------------------------------------
RESOLVED, that the Corporation is hereby authorized to issue Common Stock
of the Corporation from authorized but unissued Common Stock in an amount up to
8% of the shares sold in the public offering in connection with the Conversion
to a charitable foundation sponsored by Woronoco Savings Bank, with such
foundation to be established by the Bank for charitable purposes; and
FURTHER RESOLVED, that the President and Chief Executive Officer of the
Corporation and his designee(s) are authorized and directed to assist the Bank
with the establishment of the foundation, including seeking the approval of the
Commissioner of Banks for the Commonwealth of Massachusetts, the Federal Deposit
Insurance Corporation or the Office of Thrift Supervision to establish the
foundation dedicated to the purposes described above, and to take such actions
as are necessary to establish the foundation; and
FURTHER RESOLVED, that the proper officers of the Corporation are hereby
authorized to effect the issuance of such shares to the foundation, including
filing with the Securities and Exchange Commission a registration statement and
any exhibits or supplements thereto, providing for the registration of such
shares and to make any necessary filings with the Commissioner of Banks for the
Commonwealth of Massachusetts, the Federal Deposit Insurance Corporation or the
Office of Thrift Supervision.
7
<PAGE>
Resolution Pertaining to Organization of
----------------------------------------
Wholly-Owned Subsidiary and
---------------------------
Loan to the Bank's
------------------
Employee Stock Ownership Plan and Related Trust
-----------------------------------------------
RESOLVED, that, in connection with the consummation of the Conversion, the
Bank intends to establish the Woronoco Savings Bank Employee Stock Ownership
Plan and related trust (the "ESOP") and, in connection therewith, the President
and Chief Executive Officer or his designee is hereby authorized and empowered
to take all actions and to execute all articles of organization, instruments,
agreements and documents as he deems necessary or advisable to effectuate the
formation of a wholly-owned subsidiary of the Corporation, formed under the laws
of the Commonwealth of Massachusetts (the "Subsidiary");
FURTHER RESOLVED, that, unless otherwise prohibited by the Federal Deposit
Insurance Corporation, the Commissioner of Banks for the Commonwealth of
Massachusetts or the Office of Thrift Supervision, the Corporation shall, based
on the determination of the management of the Corporation: (i) loan funds
directly to the ESOP; (ii) take all necessary and proper steps to enable the
Subsidiary to loan funds directly to the ESOP; or (iii) take such necessary and
proper steps to secure a loan to the ESOP by a third party lender, including,
but not limited to, issuing a guarantee of such loan, to enable the ESOP to
purchase up to 8% of the Common Stock issued in the Conversion which any such
loan will be collateralized by the Common Stock purchased and, if made by the
Corporation or Subsidiary, will be made under terms and conditions that are
reasonable and customary for loans of such type and the President and Chief
Executive Officer or his designee is hereby authorized to take all necessary
steps to effectuate such loan to the ESOP.
8
<PAGE>
CERTIFICATION
-------------
I, Corporate Secretary of Woronoco Bancorp, Inc., a corporation organized
and existing under the laws of the State of Delaware, hereby certify that the
foregoing is a true and correct copy of resolutions adopted at a meeting of the
Board of Directors of said corporation held on October 28, 1998, at which
meeting a quorum was at all times present and acting; that the passage of said
resolutions were in all respects legal; and that said resolutions are in full
force and effect.
/s/ Terry J. Bennett
Date: October 28, 1998 _____________________________
Terry J. Bennett
Corporate Secretary
[SEAL]
9
<PAGE>
ATTACHMENT A
EXECUTIVE OFFICERS
Cornelius D. Mahoney President and Chief Executive Officer
Debra L. Murphy Senior Vice President and Chief Financial Officer
Agostino J. Calheno Senior Vice President
Terry J. Bennett Corporate Secretary
10
<PAGE>
ATTACHMENT B
Compensation Committee
----------------------
Francis J. Ehrhardt
Asher Nesin
D. Jeffrey Templeton
11
<PAGE>
ATTACHMENT C
Pricing Committee
-----------------
James A. Adams
William G. Aiken
Paul S. Allen
Francis J. Ehrhardt
Joseph M. Houser, Jr.
Joseph P. Keenan
Cornelius D. Mahoney
Asher Nesin
Richard L. Pomeroy
Ann V. Schultz
Norman H. Storey
D. Jeffrey Templeton
Paul Tsatsos
12
<PAGE>
ATTACHMENT D
Audit Committee
---------------
Paul S. Allen
D. Jeffrey Templeton
Paul Tsatsos
13
<PAGE>
ATTACHMENT E
Nominating Committee
--------------------
James A. Adams
Ann V. Schultz
Norman H. Storey
14
<PAGE>
EXHIBIT 1.1
[Sandler O'Neill letterhead appears here]
September 16, 1998
Mr. Cornelius D. Mahoney
President and Chief Executive Office
Woronoco Savings Bank
31 Court Street
Westfield, Massachusetts 01086
Dear Mr. Mahoney:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill"), is pleased to act as
an independent financial advisor to Woronoco Savings Bank (the "Bank") in
connection with the Bank's proposed conversion from mutual to stock form (the
"Conversion"), including the offer and sale of certain shares of the common
stock of the proposed new holding company for the Bank (the "Holding Company")
to the Bank's eligible account holders in a Subscription Offering, to members of
the Bank's community in a Direct Community Offering and, under certain
circumstances, to the general public in a Syndicated Community Offering
(collectively, the "Offerings"). For purposes of this letter, the term "Actual
Purchase Price" shall mean the price at which the shares of the Holding
Company's common stock are sold in the Conversion. This letter is to confirm
the terms and conditions of our engagement.
ADVISORY SERVICES
- -----------------
Sandler O'Neill will act as a consultant and advisor to the Bank and the
Holding Company and will work with the Bank's management, counsel, accountants
and other advisors in connection with the Conversion and the Offerings. We
anticipate that our services will include the following, each as may be
necessary and as the Bank may reasonably request:
1. Consulting as to the securities marketing implications of any aspect
of the Plan of Conversion or related corporate documents;
2. Reviewing with the Board of Directors the independent appraiser's
appraisal of the common stock, particularly with regard to aspects of
the appraisal involving the methodology employed;
<PAGE>
Mr. Cornelius D. Mahoney
September 16, 1998
Page 2
3. Reviewing all offering documents, including the Prospectus, stock
order forms and related offering materials (it being understood that
preparation and filing of such documents will be the responsibility of
the Bank and the Holding Company and their counsel);
4. Assisting in the design and implementation of a marketing strategy for
the Offerings;
5. Assisting in obtaining all requisite regulatory approvals;
6. Assisting Bank management in scheduling and preparing for meetings
with potential investors and broker-dealers; and
7. Providing such other general advice and assistance as may be requested
to promote the successful completion of the Conversion.
SYNDICATED COMMUNITY OFFERING
- -----------------------------
If any shares of the Holding Company's common stock remain available after
the expiration of the Subscription Offering and the Direct Community Offering,
at the request of the Bank and subject to the continued satisfaction of the
conditions set forth in the second paragraph under the caption "Definitive
Agreement" below, Sandler O'Neill will seek to form a syndicate of registered
dealers to assist in the sale of such common stock in a Syndicated Community
Offering on a best efforts basis, subject to the terms and conditions set forth
in a selected dealers agreement. Sandler O'Neill will endeavor to limit the
aggregate fees to be paid by the Bank under any such selected dealers agreement
to an amount competitive with gross underwriting discounts charged at such time
for underwritings of comparable amounts of stock sold at a comparable price per
share in a similar market environment, which shall not exceed 5% of the
aggregate Actual Purchase Price of the shares sold under such agreements.
Sandler O'Neill will endeavor to distribute the common stock among dealers in a
fashion which best meets the distribution objectives of the Bank and the
requirements of the Plan of Conversion, which may result in limiting the
allocation of stock to certain selected dealers. It is understood that in no
event shall Sandler O'Neill be obligated to act as a selected dealer or to take
or purchase any shares of the Holding Company's common stock.
<PAGE>
Mr. Cornelius D. Mahoney
September 16, 1998
Page 3
FEES
- ----
If the Conversion is consummated, the Bank agrees to pay Sandler O'Neill
for its services hereunder the fees set forth below:
1. a fee of one and one-quarter percent (1.25%) of the aggregate Actual
Purchase Price of the shares of common stock sold in the Subscription
Offering and in the Direct Community Offering, excluding in each case
shares purchased by (i) any employee benefit plan of the Holding
Company or the Bank established for the benefit of their respective
directors, officers and employees, and (ii) any director, officer or
employee of the Holding Company or the Bank or members of their
immediate families; and
2. with respect to any shares of the Holding Company's common stock sold
by an NASD member firm (other than Sandler O'Neill) under any selected
dealers agreement in the Syndicated Community Offering, (a) the sales
commission payable to the selected dealer under such agreement, (b)
any sponsoring dealer's fees, and (c) a management fee to Sandler
O'Neill of one and one-
quarter percent (1.25%). Any fees payable to Sandler O'Neill for
common stock sold by Sandler O'Neill under any such agreement shall be
limited to an aggregate of one and one quarter percent (1.25%) of the
Actual Purchase Price of such shares.
If (i) Sandler O'Neill's engagement hereunder is terminated for any of the
reasons provided for under the second paragraph of the section of this letter
captioned "Definitive Agreement," or (ii) the Conversion is terminated by the
Bank, no fees shall be payable by the Bank to Sandler O'Neill hereunder;
however, the Bank shall reimburse Sandler O'Neill for its reasonable out-of-
pocket expenses incurred in connection with its engagement hereunder.
All fees payable to Sandler O'Neill hereunder shall be payable in cash at
the time of the closing of the Conversion. In recognition of the long lead
times involved in the conversion process, the Bank agrees to make advance
payments to Sandler O'Neill in the aggregate amount of $50,000, $25,000 of which
shall be payable upon execution of this letter and the remaining $25,000 of
which shall be payable upon commencement of the Subscription Offering, which
shall be credited against any fees or reimbursement of expenses payable
hereunder.
<PAGE>
Mr. Cornelius D. Mahoney
September 16, 1998
Page 4
COSTS AND EXPENSES
- ------------------
In addition to any fees that may be payable to Sandler O'Neill hereunder
and the expenses to be borne by the Bank pursuant to the following paragraph,
the Bank agrees to reimburse Sandler O'Neill, upon request made from time to
time, for its reasonable out-of-pocket expenses (to a maximum of $50,000)
incurred in connection with its engagement hereunder, regardless of whether the
Conversion is consummated, including, without limitation, legal fees,
advertising, promotional, syndication, and travel expenses; provided, however,
-------- -------
that Sandler O'Neill shall document such expenses to the reasonable satisfaction
of the Bank. The provisions of this paragraph are not intended to apply to or
in any way impair the indemnification provisions of this letter.
As is customary, the Bank will bear all other expenses incurred in
connection with the Conversion and the Offerings, including, without limitation,
(i) the cost of obtaining all securities and bank regulatory approvals,
including any required NASD filing fees; (ii) the cost of printing and
distributing the offering materials; (iii) the costs of blue sky qualification
(including fees and expenses of blue sky counsel) of the shares in the various
states; (iv) listing fees; and (v) all fees and disbursements of the Bank's and
the Holding Company's counsel, accountants, conversion agent and other advisors.
In the event Sandler O'Neill incurs any such fees and expenses on behalf of the
Bank or the Holding Company, the Bank will reimburse Sandler O'Neill for such
fees and expenses whether or not the Conversion is consummated; provided,
--------
however, that Sandler O'Neill shall not incur any substantial expenses on behalf
- -------
of the Bank or the Holding Company pursuant to this paragraph without the prior
approval of the Bank.
POST-CONVERSION GENERAL ADVISORY SERVICES
- -----------------------------------------
If the Conversion is consummated, Sandler O'Neill agrees to act as an
independent financial advisor to the Holding Company and its subsidiaries in
connection with the Holding Company's general strategic planning ("General
Advisory Services"). In connection with such General Advisory Services, we
would expect to work with the Holding Company's management, its counsel,
accountants and other advisors to assess the Holding Company's strategic
alternatives and help implement a tactical plan to enhance the value of the
Holding Company. We anticipate that our activities would include, as
appropriate, those activities outlined in Exhibit A hereto. Sandler O'Neill
shall provide such services at the Holding Company's request for a period of one
year following the completion of the Conversion. The Holding Company shall not
be required to pay any additional fees to Sandler O'Neill in connection with
such services rendered during such
<PAGE>
Mr. Cornelius D. Mahoney
September 16, 1998
Page 5
year; provided, however, that the Holding Company shall reimburse Sandler
-------- -------
O'Neill for its reasonable out-of-pocket expenses incurred in connection with
providing such services. Thereafter, if both parties wish to continue the
relationship, the parties will enter into a separate advisory services agreement
on terms and conditions to be negotiated at such time. Notwithstanding the above
the Bank and Holding Company are under no obligation to receive or request such
services.
DUE DILIGENCE REVIEW
- --------------------
Sandler O'Neill's obligation to perform the services contemplated by this
letter shall be subject to the satisfactory completion of such investigation and
inquiries relating to the Bank and the Holding Company, and their respective
directors, officers, agents and employees, as Sandler O'Neill and its counsel in
their sole discretion may deem appropriate under the circumstances. In this
regard, the Bank agrees that, at its expense, it will make available to Sandler
O'Neill all information which Sandler O'Neill requests, and will allow Sandler
O'Neill the opportunity to discuss with the Bank's and the Holding Company's
management the financial condition, business and operations of the Bank and the
Holding Company. The Bank and the Holding Company acknowledge that Sandler
O'Neill will rely upon the accuracy and completeness of all information received
from the Bank and the Holding Company and their directors, trustees, officers,
employees, agents, independent accountants and counsel.
BLUE SKY MATTERS
- ----------------
The Bank agrees that if Sandler O'Neill's counsel does not serve as counsel
with respect to blue sky matters in connection with the Offerings, the Bank will
cause the counsel performing such services to prepare a Blue Sky Memorandum
related to the Offerings including Sandler O'Neill's participation therein and
shall furnish Sandler O'Neill a copy thereof addressed to Sandler O'Neill or
upon which such counsel shall state Sandler O'Neill may rely.
CONFIDENTIALITY
- ---------------
Other than disclosure to other firms made part of any syndicate of selected
dealers or as required by law or regulation, Sandler O'Neill agrees that it will
not disclose any Confidential Information relating to the Bank obtained in
connection with its engagement hereunder (whether
<PAGE>
Mr. Cornelius D. Mahoney
September 16, 1998
Page 6
or not the Conversion is consummated). As used in this paragraph, the term
"Confidential Information" shall not include information which (i) is or becomes
generally available to the public other than as a result of a disclosure by
Sandler O'Neill, (ii) was available to Sandler O'Neill on a non-confidential
basis prior to its disclosure to Sandler O'Neill by the Bank, or (iii) becomes
available to Sandler O'Neill on a non-confidential basis from a person other
than the Bank who is not otherwise known to Sandler O'Neill to be bound not to
disclose such information pursuant to a contractual, legal or fiduciary
obligation.
INDEMNIFICATION
- ---------------
Since Sandler O'Neill will be acting on behalf of the Bank and the Holding
Company in connection with the Conversion, the Holding Company and the Bank
agree to indemnify and hold Sandler O'Neill and its affiliates and their
respective partners, directors, officers, employees, agents and controlling
persons within the meaning of Section 15 of the Securities Act of 1933 or
Section 20 of the Securities Exchange Act (Sandler O'Neill and each such person
being an "Indemnified Party") harmless from and against any and all losses,
claims, damages and liabilities, joint or several, to which such Indemnified
Party may become subject under applicable federal or state law, or otherwise,
related to or arising out of the Conversion or the engagement of Sandler O'Neill
pursuant to, or the performance by Sandler O'Neill of the services contemplated
by, this letter, and will reimburse any Indemnified Party for all expenses
(including reasonable legal fees and expenses) as they are incurred, including
expenses incurred in connection with the investigation of, preparation for or
defense of any pending or threatened claim or any action or proceeding arising
therefrom, whether or not such Indemnified Party is a party; provided, however,
-------- -------
that the Bank and the Holding Company will not be liable in any such case to the
extent that any such loss, claim, damage, liability or expense (i) arises out of
or is based upon any untrue statement of a material fact or the omission of a
material fact required to be stated therein or necessary to make not misleading
any statements contained in any proxy statement or prospectus (preliminary or
final), or any amendment or supplement thereto, or any of the applications,
notices, filings or documents related thereto made in reliance on and in
conformity with written information furnished to the Bank by Sandler O'Neill
expressly for use therein, or (ii) is primarily attributable to the gross
negligence, willful misconduct or bad faith of Sandler O'Neill. If the
foregoing indemnification is unavailable for any reason, the Bank and the
Holding Company agree to contribute to such losses, claims, damages, liabilities
and expenses in the proportion that its financial interest in the Conversion
bears to that of Sandler O'Neill.
<PAGE>
Mr. Cornelius D. Mahoney
September 16, 1998
Page 7
DEFINITIVE AGREEMENT
- --------------------
Sandler O'Neill and the Bank agree that (a) except as set forth in clause
(b), the foregoing represents the general intention of the Bank and Sandler
O'Neill with respect to the services to be provided by Sandler O'Neill in
connection with the Offerings, which will serve as a basis for Sandler O'Neill
commencing activities, and (b) the only legal and binding obligations of the
Bank, the Holding Company and Sandler O'Neill with respect to the subject matter
hereof shall be (1) the Bank's obligation to reimburse costs and expenses
pursuant to the section captioned "Costs and Expenses," (2) those set forth
under the captions "Confidentiality" and "Indemnification," and (3) as set forth
in a duly negotiated and executed definitive Agency Agreement to be entered into
prior to the commencement of the Subscription Offering relating to the services
of Sandler O'Neill in connection with the Offerings. Such Agency Agreement shall
be in form and content satisfactory to Sandler O'Neill, the Bank and the Holding
Company and their respective counsel and shall contain standard indemnification
provisions consistent herewith.
Sandler O'Neill's execution of such Agency Agreement shall also be subject
to (i) Sandler O'Neill's satisfaction with its investigation of the Bank's
business, financial condition and results of operations, (ii) preparation of
offering materials that are satisfactory to Sandler O'Neill and its counsel,
(iii) compliance with all relevant legal and regulatory requirements to the
reasonable satisfaction of Sandler O'Neill's counsel, (iv) agreement that the
price established by the independent appraiser is reasonable and (v) market
conditions at the time of the proposed offering. Sandler O'Neill may terminate
this agreement if such Agency Agreement is not entered into prior to December
31, 1999.
ELIMINATION OF HOLDING COMPANY
- ------------------------------
If the Board of Directors of the Bank, for any reason, elects not to proceed
with the formation of the Holding Company but determines to proceed with the
Conversion and substitute the common stock of the Bank for the common stock of
the Holding Company, all of the provisions of this letter relating to the common
stock of the Holding Company will be deemed to pertain to the common stock of
the Bank on the same terms and conditions that such provisions pertain to the
common stock of the Holding Company and all of the references in this letter to
the Holding Company shall be deemed to refer to the Bank or shall have no
effect, as the context of the reference requires.
<PAGE>
Mr. Cornelius D. Mahoney
September 16, 1998
Page 8
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sandler O'Neill the duplicate copy of this letter
enclosed herewith.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Mark B. Cohen
--------------------------------
Mark B. Cohen
Vice President
Accepted and agreed to as of
the date first above written:
Woronoco Savings Bank
By: /s/ Mr. Cornelius D. Mahoney
--------------------------------
Mr. Cornelius D. Mahoney
President and Chief Executive Officer
cc: Douglas P. Faucette, Esq.
Muldoon, Murphy & Faucette
<PAGE>
EXHIBIT A
GENERAL ADVISORY SERVICES
- --------------------------------------------------------------------------------
1. A review and analysis of the Holding Company's current business and
financial characteristic, including its operating strategies, balance sheet
composition, historical operating performance, branch structure and market
share, and the Holding Company's competitive position relative to selected
peer groups;
2. Creation of a base case financial model to serve as a benchmark for
analyzing alternative strategies and market environments;
3. An analysis of the impact on the franchise value of altering the Holding
Company's dividend policy, implementing a stock repurchase program, or
changing the asset mix or other operating activities;
4. An analysis of the Holding Company's acquisition resources, objectives and
capacity to compete for acquisition opportunities;
5. A summary of recent merger and acquisition trends in the financial services
industry, including tactics employed by others and typical terms and values
involved;
6. A review of other strategic alternatives which could provide long-term
benefits and enhanced value to the Holding Company;
7. A review of the Holding Company's advance defensive preparation plans,
including a comprehensive financial valuation and an analysis of stock
ownership and trading activities;
8. A review with the Board of Directors of the Holding Company of Sandler
O'Neill's findings, with periodic updates as may be requested;
9. Ongoing general advice and counsel to management and the Board of Directors
of the Holding Company with respect to strategic and tactical issues; and
10. Rendering such other financial advisory and investment banking services as
may from time to time be agreed upon by Sandler O'Neill and the Holding
Company.
<PAGE>
[LETTERHEAD OF SANDLER O'NEILL & PARTNERS, L.P. APPEARS HERE]
SANDLER O'NEILL
September 8, 1998
Mr. Cornelius D. Mahoney
President and Chief Executive Office
Woronoco Savings Bank
31 Court Street
Westfield, Massachusetts 01086
Dear Mr. Mahoney:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill"), is pleased to act as
conversion agent to Woronoco Savings Bank (the "Bank") in connection with the
Bank's proposed conversion from mutual to stock form (the "Conversion"). This
letter is to confirm the terms and conditions of our engagement.
SERVICES AND FEES
- -----------------
In our role as Conversion Agent, we anticipate that our services will
include the services outlined below, each as may be necessary and as the Bank
may reasonably request:
I. Consolidation of Accounts and Development of a Central File
II. Preparation of Order and/or Request Forms
III. Organization and Supervision of the Conversion Center
IV. Subscription Services
Each of these services is further described in Appendix A to this agreement.
<PAGE>
Mr. Cornelius D. Mahoney
September 8, 1998
Page 2 SANDLER O'NEILL
For its services hereunder, the Bank agrees to pay Sandler O'Neill a fee of
$20,000. This fee is based upon a total number of unconsolidated accounts of
approximately 47,000. No change in fees will occur as long as the variance in
the number of accounts does not exceed 5%. In the event the actual number of
accounts exceeds the number specified above by more than 5%, the fee will be
proportionately increased.
The fee set forth above is based upon the requirements of current
regulations and the Plan of Conversion as currently contemplated. Any unusual
or additional items or duplication of service required as a result of a material
change in the regulations or the Plan of Conversion or a material delay or other
similar events may result in extra charges which will be covered in a separate
agreement if and when they occur.
All fees under this agreement shall be payable in cash, as follows: (a)
$5,000 payable upon execution of this agreement by the Bank, which shall be non-
refundable; and (b) the balance upon the completion of the Conversion.
COSTS AND EXPENSES
- ------------------
In addition to any fees that may be payable to Sandler O'Neill hereunder,
the Bank agrees to reimburse Sandler O'Neill, upon request made from time to
time, for its reasonable out-of-pocket expenses incurred in connection with its
engagement hereunder regardless of whether the Conversion is consummated,
including, without limitation, travel, lodging, food, telephone, postage,
listings, forms and other similar expenses; provided, however, that Sandler
-------- -------
O'Neill shall document such expenses to the reasonable satisfaction of the Bank.
The provisions of this paragraph are not intended to apply to or in any way
impair the indemnification provisions of this agreement.
In addition, all taxes however designated, arising from or based upon this
agreement or the payments made to Sandler O'Neill pursuant hereto, including,
but not limited to, any applicable sales, use, excise and similar taxes, shall
be paid by the Bank as the same become due, and the Bank shall, upon request by
Sandler O'Neill, pay the same either to Sandler O'Neill or to the appropriate
taxing authority at any time during, or after the termination of, this
Agreement; provided, however, that the Bank shall not be responsible for the
payment of any state, federal, or local franchise or income taxes based upon the
net income of Sandler O'Neill.
<PAGE>
Mr. Cornelius D. Mahoney
September 8, 1998
Page 3 SANDLER O'NEILL
RELIANCE ON INFORMATION PROVIDED
- --------------------------------
The Bank will provide Sandler O'Neill with such information as Sandler
O'Neill may reasonably require to carry out its duties. The Bank recognizes and
confirms that Sandler O'Neill (a) will use and rely on such information in
performing the services contemplated by this agreement without having
independently verified the same, and (b) does not assume responsibility for the
accuracy or completeness of the information. The Bank will also inform Sandler
O'Neill within a reasonable period of time of any changes in the Plan which
require changes in Sandler O'Neill's services. If a substantial expense results
from any such change, the parties shall negotiate an equitable adjustment in the
fee.
LIMITATIONS
- -----------
Sandler O'Neill, as Conversion Agent hereunder, (a) shall have no duties or
obligations other than those specifically set forth herein; (b) will be regarded
as making no representations and having no responsibilities as to the validity,
sufficiency, value or genuineness of any order form or any stock certificates or
the shares represented thereby, and will not be required to and will make no
representations as to the validity, value or genuineness of the offer; (c) shall
not be liable to any person, firm or corporation including the Bank by reason of
any error of judgment or for any act done by it in good faith, or for any
mistake of law or fact in connection with agreement and the performance hereof
unless caused by or arising out of its own bad faith or gross negligence; (d)
will not be obliged to take any legal action hereunder which might in its
judgment involve any expense or liability, unless it shall have been furnished
with reasonable indemnity satisfactory to it; and (e) may rely on and shall be
protected in acting in reliance upon any certificate, instrument, opinion,
notice, letter, telex, telegram, or other document or security delivered to it
and in good faith believed by it to be genuine and to have been signed by the
proper party or parties.
<PAGE>
Mr. Cornelius D. Mahoney
September 8, 1998
Page 4 SANDLER O'NEILL
INDEMNIFICATION
- ---------------
The Bank agrees to indemnify and hold Sandler O'Neill and its affiliates
and their respective partners, directors, officers, employees, agents and
controlling persons (Sandler O'Neill and each such person being an "Indemnified
Party") harmless from and against any and all losses, claims, damages and
liabilities, joint or several, to which such Indemnified Party may become
subject under applicable federal or state law, or otherwise, related to or
arising out of the engagement of Sandler O'Neill pursuant to, and the
performance by Sandler O'Neill of the services contemplated by this letter, and
will reimburse any Indemnified Party for all expenses (including reasonable
counsel fees and expenses) as they are incurred, including expenses incurred in
connection with the investigation of, preparation for or defense of any pending
or threatened claim or any action or proceeding arising therefrom, whether or
not such Indemnified Party is a party. The Bank will not be liable under the
foregoing indemnification provision to the extent that any loss, claim, damage,
liability or expense is found in a final judgment by a court of competent
jurisdiction to have resulted primarily from Sandler O'Neill's bad faith or
gross negligence.
MISCELLANEOUS
- -------------
The following addresses shall be sufficient for written notices to each
other:
If to you: Woronoco Savings Bank
31 Court Street
Westfield, Massachusetts 01086
Attention: Cornelius D. Mahoney
If to us: Sandler O'Neill & Partners, L.P.
747 Middle Neck Road
Great Neck, New York 11024
Attention: Mark B. Cohen
The Agreement and appendix hereto constitute the entire Agreement between
the parties with respect to the subject matter hereof and can be altered only by
written consent signed by the parties. This Agreement is governed by the laws
of the State of New York.
<PAGE>
Mr. Cornelius D. Mahoney
September 8, 1998
Page 5 SANDLER O'NEILL
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sandler O'Neill the duplicate copy of this letter
enclosed herewith.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Mark B. Cohen
--------------------------------
Mark B. Cohen
Vice President
Accepted and agreed to as of
the date first above written:
Woronoco Savings Bank
By: /s/ Cornelius D. Mahoney
-------------------------------------
Cornelius D. Mahoney
President and Chief Executive Officer
cc: Douglas P. Faucette, Esq.
Muldoon, Murphy & Faucette
<PAGE>
APPENDIX A
----------
OUTLINE OF CONVERSION AGENT SERVICES
------------------------------------
I. Consolidation of Accounts
1. Consolidate files in accordance with regulatory guidelines.
2. Accounts from various files are all linked together. The resulting
central file can then be maintained on a regular basis.
3. Our EDP format will be provided to your data processing people.
II. Order Form/Request Card Preparation
III. Organization and Supervision of Conversion Center
1. Advising on and supervising the physical organization of the
Conversion Center, including materials requirements.
2. Assist in the training of all Bank personnel who will be staffing
the conversion center.
3. Establish reporting procedures.
4. On-site supervision of the Conversion Center during the offering
period.
IV. Subscription Services
1. Produce list of depositors by state (Blue Sky report).
2. Production of subscription rights and research books.
3. Stock order form processing.
4. Acknowledgement letter to confirm receipt of stock order.
5. Daily reports and analysis.
6. Proration calculation and share allocation in the event of an
oversubscription.
7. Produce charter shareholder list.
8. Interface with Transfer Agent for Stock Certificate issuance.
9. Refund and interest calculations.
10. Confirmation letter to confirm purchase of stock.
11. Notification of full/partial rejection of orders.
12. Production of 1099/Debit tape.
A-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Exhibit 99.4
[ ] LOGO: Woronoco Bancorp, Inc.
Subscription & Direct Community Offering Stock Order Form
-----------------------------------------------------------------
Bank Use Woronoco Savings Bank
____________________________ Conversion Center
IMPORTANT-PLEASE NOTE: A properly --------
completed original stock order --------- ----, -----
form must be used to subscribe for (XXX) XXX-XXXXX
Common Stock. Copies of this form ------------------------------
are not required to be accepted. EXPIRATION DATE
Please read the Stock Ownership for Stock Order Forms:
Guide and Stock Order Form ------, -------- --, 1999
Instructions as you complete this 12:00 Noon, Eastern Time
[ ] form.
- -------------------------------------------------------------------------------------------------------------
(1) NUMBER OF SHARES (2) TOTAL PAYMENT DUE The minimum number of shares that may be subscribed
SUBSCRIPTION PRICE for is 25 and the maximum number of shares that may
[____________] X $ 10.00 = [____________] be subscribed for in the Subscription Offering is
20,000 shares. See Instructions.
- -------------------------------------------------------------------------------------------------------------
[_] (3) EMPLOYEE/OFFICER/TRUSTEE/CORPORATOR INFORMATION (6) PURCHASER INFORMATION
Check here if you are an employee, officer, trustee a. [_] Check here if you are an Eligible Account
or corporator of Woronoco Savings Bank or a member Holder with a deposit account(s) totalling
of such person's immediate family living in the same $50.00 or more on July 31, 1997. List account(s)
household. below.
- ---------------------------------------------------------
(4) METHOD OF PAYMENT/CHECK [ Check Amount ] b. [_] Check here if you are a Supplemental Eligible
Enclosed is a check, bank draft or [_______________] Account Holder with a deposit account(s) totalling
money order made payable to Woronoco $50.00 or more on June 30, 1998. List account(s)
Savings Bank in the amount indicated in this box. below.
- ---------------------------------------------------------
(5) METHOD OF PAYMENT/WITHDRAWAL c. [_] Trustees, corporators, directors, officers and
The undersigned authorizes withdrawal from the employees of the Bank and the Company who are not
following account(s) at Woronoco Savings Bank. entitled to a higher priority subscription right.
Individual Retirement Accounts maintained at Woronoco
Savings Bank cannot be used. There is no early ----------------------------------------------------------------
withdrawal penalty for this form of payment. Account Title (Names on Accounts) Account Numbers(s) Bank Use
- -------------------------------------------------------- ---------------------------------- ------------------ --------
Account Numbers(s) Withdrawal Amount(s) Bank Use ---------------------------------- ------------------ --------
------------------ -------------------- -------- ---------------------------------- ------------------ --------
------------------ -------------------- -------- ---------------------------------- ------------------ --------
------------------ -------------------- -------- ----------------------------------------------------------------
- -------------------------------------------------------- PLEASE NOTE: FAILURE TO LIST ALL YOUR ACCOUNTS MAY RESULT IN THE
Total Withdrawal Amount LOSS OF PART OR ALL OF YOUR SUBSCRIPTION RIGHTS. IF ADDITIONAL
----------------------- --------------------------- SPACE IS NEEDED, PLEASE UTILIZE THE BACK OF THIS STOCK ORDER FORM.
- ----------------------------------------------------------------------------------------------------------------------------
(7) STOCK REGISTRATION/FORM OF STOCK OWNERSHIP [_][_][_]-[_][_]-[_][_][_][_]
[_] Individual [_] Joint Tenants [_] Tenants in Common
[_] Fiduciary (i.e. trust, estate, etc.) [_] Company/Corp/Partnership [_] Uniform Transfers to Minor Act
[_] IRA or other Qualified Plan - Beneficial Owners SS#
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE PRINT CLEARLY) - ADDING THE NAMES OF OTHER PERSON(S) WHO ARE NOT OWNERS
OF YOUR QUALIFYING ACCOUNT(S) WILL RESULT IN YOUR ORDER
BECOMING NULL AND VOID.
- --------------------------------------------------------------------------------------------------------------------------------
Name(s) Social Security # or Tax ID
- ----------------------------------------------------------------------- -------------------------------------------------------
Name(s) continued Social Security # or Tax ID
- ----------------------------------------------------------------------- -------------------------------------------------------
Street Address County of Residence
- ----------------------------------------------------------------------- -------------------------------------------------------
City State Zip Code
- -------------------------------------- ------------- ----------------
(9) TELEPHONE - Daytime ( ) Evening ( )
- -----------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
[_] (10) NASD AFFILIATION - Check here if you are a member of the National [_] (11) ASSOCIATES - ACTING IN CONCERT
Association of Securities Dealers, Inc. ("NASD"), as person associated Check here, and complete the reverse
with an NASD member, a member of the immediate family of any such person side of this form, if you or any
to whose support such person contributes, directly or indirectly, or the associates (as defined on the reverse
holder of an account in which an NASD member or person associated with an side of this form) or persons acting
NASD member has a beneficial interest. To comply with conditions under in concert with you have submitted
which an exemption from the NASD's Interpretation With Respect to Free-Riding other orders for shares in the
and Withholding is available, you agree, if you have checked the NASD Subscription and/or Direct Community
Affiliation box, (i) not to sell, transfer or hypothecate the stock for a Offerings.
period of three months following issuance, and (ii) to report this subscription
in writing to the applicable NASD member within one day of payment therefor.
- ------------------------------------------------------------------------------------------------------------------------------------
(12) ACKNOWLEDGMENT - To be effective, this Stock Order Form and accompanying Certification BANK USE ONLY
Form must be properly completed and physically received by Woronoco Savings Bank no later ==================
than _____ ___, Eastern time, on ________, ___________ ____, 1999, unless extended; otherwise
this Stock Order Form and all subscription rights will be void. The undersigned agrees that ==================
after receipt by Woronoco Savings Bank, this Stock Order Form may not be modified, withdrawn
or canceled without the Bank's consent and if authorization to withdraw from deposit ------------------
accounts at the Bank has been given as payment for shares; the amount authorized for withdrawal BANK USE ONLY
shall not otherwise be available for withdrawal by the undersigned. Under penalty of perjury, ==================
I hereby certify that the Social Security or Tax ID Number and the information provided on this
Stock Order Form is true, correct and complete, that I am not subject to back-up withholding,
and that I am purchasing solely for my own account and that there is no agreement or understanding
regarding the sale or transfer of such shares, or my right to subscribe for shares herewith. It is
understood that this Stock Order Form will be accepted in accordance with, and subject to, the terms
and conditions of the Plan of Conversion of the Bank described in the accompanying Prospectus.
The undersigned hereby acknowledges receipt of the Prospectus at least 48 hours prior to delivery
of this Stock Order Form to the Bank.
APPLICABLE REGULATIONS PROHIBIT ANY PERSON FROM TRANSFERRING, OR ENTERING INTO ANY AGREEMENT,
DIRECTLY OR INDIRECTLY, TO TRANSFER THE LEGAL OR BENEFICIAL OWNERSHIP OF SUBSCRIPTION RIGHTS
OR THE UNDERLYING SECURITIES TO THE ACCOUNT OF ANOTHER. WORONOCO SAVINGS BANK AND WORONOCO
BANCORP, INC. WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT THEY BECOME
AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE
SUCH TRANSFER.
------------------------------- -------------------------------
SIGNATURE DATE SIGNATURE DATE
------------------------------- -------------------------------
THE CERTIFICATION FORM ON THE REVERSE SIDE MUST BE SIGNED
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ITEM (6) A, B, C - (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------- ------------------------------------------------------
Account Title Account Number(s) Bank Use Account Title Account Number(s) Bank Use
(Names on Accounts) (Names on Accounts)
- ----------------------------------------------------- ------------------------------------------------------
- ----------------------------------------------------- ------------------------------------------------------
- ----------------------------------------------------- ------------------------------------------------------
- ----------------------------------------------------- ------------------------------------------------------
- ----------------------------------------------------- ------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
ITEM (11) - (CONTINUED) "Associate" is defined as: (i) any corporation or organization (other
List below all other orders submitted by you or than the Company, the Bank or a majority-owned subsidiary of the Bank)
Associates (as defined) or by persons acting in of which such person is a officer or partner or is, directly or
concert with you. 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 a trustee or in a similar fiduciary capacity; provided, however, such
term shall not include Woronoco Bancorp, Inc.'s or Woronoco Savings
Bank's employee benefit plans in which such person has a substantial
- ----------------------------------------------------- beneficial interest or serves as a trustee or in a similar fiduciary
Names(s) listed on other Number of Shares Ordered capacity; and (iii) ANY RELATIVE OR SPOUSE OF SUCH PERSON, OR ANY
Stock Order Forms RELATIVE OF SUCH SPOUSE, WHO EITHER HAS THE SAME HOME AS SUCH PERSON or
- ----------------------------------------------------- who is a trustee, director or officer of the Bank or the Holding Company
or any subsidiaries thereof. Trustees, directors or officers of the Bank
- ----------------------------------------------------- of the Holding Company are not treated as associates solely because of
their Board memberships.
- ----------------------------------------------------- </TABLE>
- ----------------------------------------------------------------------------
YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
CERTIFICATION FORM
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR
THE DEPOSIT INSURANCE FUND AND IS NOT INSURED OR GUARANTEED BY WORONOCO SAVINGS
BANK, WORONOCO BANCORP, INC., THE FEDERAL GOVERNMENT OR BY ANY GOVERNMENT
AGENCY. THE ENTIRE AMOUNT OF AN INVESTOR'S PRINCIPAL IS SUBJECT TO LOSS.
I further certify that, before purchasing the Common Stock, par value $0.01 per
share, of Woronoco Bancorp, Inc. (the "Company"), the proposed holding company
for Woronoco Savings Bank, I received a Prospectus of the Company
dated_______, 1999 relating to such offer of Common Stock.
The Prospectus that I received contains disclosure concerning the nature of the
Common Stock being offered by the Company and describes in the "Risk Factors"
section beginning on page ___ the risks involved in the investment in this
Common Stock, including but not limited to the:
1. Increasing Interest Rates May Hurt Our Profits
2. After the Conversion, Our Net Income-to-Equity Ratio Will Be Low,
Compared to Other Companies and Our Compensation Expenses Will Increase.
This Could Negatively Influence the Price of Our Common Stock
3. A Significant Portion of Our Pre-Tax Income is Dependent Upon the Stock
Market
4. If Our Computer Systems Do Not Work Properly With Year 2000 Data, Our
Business Operations Will Be Disrupted
5. Our Loan Portfolio Possesses Increased Risk Due to the Substantial
Number of Consumer, Multi-family and Commercial Real Estate and
Commercial Business Loans
6. The Establishment of the Woronoco Savings Charitable Foundation Will
Have a Negative Impact on Earnings
7. There Is a Risk That the Contribution to the Charitable Foundation Will
Not Be Tax Deductible and Thus Its Negative Effect on Our Earnings Could
Be Significantly Greater Than We Expect
8. Our Agreement to Make Payments After A Change in Control In Various
Employee Contracts and Plans May Discourage Takeover Attempts
9. Anti-Takeover Provisions In Our Governing Instruments and Voting Control
of Management May Discourage Takeover Attempts
10. If the Number of Shares of Common Stock to Be Sold in the Offering Is
Increased, the Future Net Income Attributable to Each Share of Common
Stock Would Be Decreased
11. Your Subscription Rights May Be Taxable
THIS CERTIFICATE MUST BE SIGNED IN ORDER TO PURCHASE STOCK
- ------------------------------ ------------------------------
SIGNATURE DATE SIGNATURE DATE
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
NAME (PLEASE PRINT) NAME (PLEASE PRINT)
- ------------------------------ ------------------------------
- ------------------------------------------------------------------------------
<PAGE>
[LOGO] WORONOCO BANCORP, INC.
===============================================================================
STOCK OWNERSHIP GUIDE
INDIVIDUAL
Include the first name, middle initial and last name of the shareholder. Avoid
the use of two initials. Please omit words that do not affect ownership
rights, such as "Mrs.","Mr.","Dr.","special account","single person",etc.
- --------------------------------------------------------------------------------
JOINT TENANTS
Joint tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
- --------------------------------------------------------------------------------
TENANTS IN COMMON
Tenants in common may also be specified to identify two or more owners. When
stock is held by tenants in common, upon the death of one co-tenant, ownership
of the stock will be held by the surviving co-tenant(s) and by the heirs of the
deceased co-tenant. All parties must agree to the transfer or sale of shares
held by tenants in common.
- --------------------------------------------------------------------------------
UNIFORM TRANSFERS TO MINORS ACT ("UTMA")
Stock may be held in the name of a custodian for a minor under the Uniform
Transfers to Minors Act of each state. There may be only one custodian and one
minor designated on a stock certificate. The standard abbreviation for
Custodian is "CUST", while the Uniform Transfers to Minors Act is "UTMA".
Standard U.S. Postal Service state abbreviations should be used to describe the
appropriate state. For example, stock held by John Doe as custodian for Susan
Doe under the Massachusetts Uniform Transfers to Minors Act will be abbreviated
John Doe, CUST Susan Doe UTMA MA (use minor's social security number).
- --------------------------------------------------------------------------------
FIDUCIARIES
Information provided with respect to stock to be held in a fiduciary capacity
must contain the following:
. The name(s) of the fiduciary. If an individual, list the first name, middle
initial and last name. If a corporation, list the full corporate title
(name). If an individual and a corporation, list the corporation's title
before the individual.
. The fiduciary capacity, such as administrator, executor, personal
representative, conservator, trustee, committee, etc.
. A description of the document governing the fiduciary relationship, such as
a trust agreement or court order. Documentation establishing a fiduciary
relationship may be required to register your stock in a fiduciary capacity.
. The date of the document governing the relationship, except that the date of
a trust created by a will need not be included in the description.
. The name of the maker, donor or testator and the name of the beneficiary.
An example of fiduciary ownership of stock in the case of a trust is:
John Doe, Trustee Under Agreement Dated 10-1-87 for Susan Doe.
===============================================================================
===============================================================================
STOCK ORDER FORM INSTRUCTIONS
ITEMS 1 AND 2 - NUMBER OF SHARES AND TOTAL PAYMENT DUE
Fill in the number of shares that you wish to purchase and the total payment
due. The amount due is determined by multiplying the number of shares by the
subscription price of $10.00 per share. The minimum purchase in the
Subscription Offering is 25 shares. As more fully described in the Plan of
Conversion outlined in the Prospectus, the maximum purchase by each Eligible
Account Holder or Supplemental Eligible Account Holder in the Subscription
Offering is $200,000 (20,000 shares), and the maximum purchase in the Community
Offering by any person, together with associates or persons acting in concert,
is $200,000 (20,000 shares). However, no person, together with associates and
persons acting in concert with such person, may purchase in the aggregate more
than 1.0% of the shares offered. Based on the offering of 4,830,000 shares,
1.0% amounts to 48,300 shares.
- -------------------------------------------------------------------------------
ITEM 3 - EMPLOYEE/OFFICER/TRUSTEE/CORPORATOR INFORMATION
Please check this box to indicate whether you are an employee, officer, trustee
or corporator of Woronoco Savings Bank or a member of such person's immediate
family living in the same household.
- -------------------------------------------------------------------------------
ITEM 4 - METHOD OF PAYMENT BY CHECK
Payment for shares may be made in cash (only if delivered by you in person to a
full-service banking office of Woronoco Savings Bank) or by check, bank draft
or money order payable to Woronoco Savings Bank. Your funds will earn interest
at the Bank's passbook rate of interest until the Conversion is completed. DO
NOT MAIL CASH TO PURCHASE STOCK! Please indicate the total check(s) amount in
this box if your method of payment is by check, bank draft or money order.
- -------------------------------------------------------------------------------
ITEM 5 - METHOD OF PAYMENT BY WITHDRAWAL
If you pay for your stock by a withdrawl from a deposit account at Woronoco
Savings Bank, indicate the account number(s) and the amount of your withdrawal
authorization for each account. The total amount withdrawn should equal the
amount of your stock purchase. There will be no penalty assessed for early
withdrawals from certificate accounts used for stock purchases. THIS FORM OF
PAYMENT MAY NOT BE USED IF YOUR ACCOUNT IS AN INDIVIDUAL RETIREMENT ACCOUNT OR
QUALIFIED PLAN.
- -------------------------------------------------------------------------------
ITEM 6 - PURCHASER INFORMATION
A. Please check this box if you are an Eligible Account Holder with a deposit
account(s) totalling $50.00 or more on July 31, 1997.
B. Please check this box if you are a Supplemental Eligible Account Holder with
a deposit account(s) totalling $50.00 or more on June 30, 1998.
C. Please check this box if you are a trustee, corporator, director, officer or
employee of the Bank or the Company who are not entitled to a higher priority
subscription right.
Please list all names and all account numbers on accounts you had at these dates
in order to insure proper identification of your purchase rights.
PLEASE NOTE: FAILURE TO LIST ALL YOUR ACCOUNTS MAY RESULT IN THE LOSS OF PART OR
ALL OF YOUR SUBSCRIPTION RIGHTS.
- --------------------------------------------------------------------------------
ITEMS 7, 8, AND 9 - STOCK REGISTRATION/FORM OF STOCK OWNERSHIP, NAMES AND
TELEPHONE NUMBER
The stock transfer industry has developed a uniform system of shareholder
registrations that will be used in the issuance of your Woronoco Bancorp, Inc.
Common Stock. Please complete items 7, 8, and 9 as fully and accurately as
possible, and be certain to supply your social security or Tax I.D. number(s)
and your daytime and evening telephone number(s). We may need to call you if we
cannot execute your order as given. If you have any questions regarding the
registration of your stock, please consult your legal advisor. Stock ownership
must be registered in one of the ways described above under "Stock Ownership
Guide". ADDING THE NAMES OF OTHER PERSONS WHO ARE NOT OWNERS OF YOUR QUALIFYING
ACCOUNT(S) WILL RESULT IN YOUR ORDER BECOMING VOID.
- --------------------------------------------------------------------------------
ITEM 10 - NASD AFFILIATION
Please check this box if you are a member of the NASD or if this item otherwise
applies to you.
- --------------------------------------------------------------------------------
ITEM 11 - ASSOCIATES ACTING IN CONCERT
Please check this box if you or any associate (as defined on the reverse side of
the Stock Order Form) or person acting in concert with you has submitted another
order for shares and complete the reverse side of the Stock Order Form.
- --------------------------------------------------------------------------------
ITEM 12 - ACKNOWLEDGEMENT
Please sign and date the Stock Order Form and Certification Form where
indicated. Before you sign, review the Stock Order Form, including the
acknowledgement, and the Certificate Form. Normally, one signature is required.
An additional signature is required only when payment is to be made by withdrawl
from a deposit account that requires multiple signatures to withdraw funds.
- --------------------------------------------------------------------------------
You may mail your completed Stock Order Form and Certification Form in the
envelope that has been provided, or you may deliver your Stock Order Form and
Certification Form to any branch office of Woronoco Savings Bank. Your Stock
Order Form and Certification Form, properly completed, and payment in full (or
withdrawal authorization) at the subscription price must be physically received
by Woronoco Savings Bank no later than 12:00 noon, Eastern time, on________,
_____ __, 1999 or it will become void. If you have any remaining questions, or
if you would like assistance in completing your Stock Order Form and
Certification Form, you may call our Conversion Center at (XXX) XXX-XXXX, Monday
through Friday from 10:00 a.m. to 4:000 p.m. The Conversion Center will be
closed for Bank holidays.
================================================================================
