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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-67255
Interests in
WORONOCO SAVINGS BANK
401(k) Plan
and
Offering of 72,647 Shares of
WORONOCO BANCORP, INC.
Common Stock
________________________
In connection with the conversion of Woronoco Savings from the mutual to
stock form of ownership 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 of Woronoco Bancorp 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 January 13, 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 you with 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 8 OF THE PROSPECTUS.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JANUARY 13, 1999.
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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.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING....................................................................................... 1
Securities Offered............................................................................ 1
Election to Purchase the Common Stock in the Conversion....................................... 1
Value of Participation Interests.............................................................. 1
Method of Directing Transfer.................................................................. 1
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............................................................ 2
Nature of a Participant's Interest in the Common Stock........................................ 2
Voting and Tender Rights of the Common Stock.................................................. 2
DESCRIPTION OF THE PLAN............................................................................ 3
Introduction.................................................................................. 3
Eligibility and Participation................................................................. 3
Contributions Under the Plan.................................................................. 3
Limitations on Contributions.................................................................. 4
Limitation on Employee Salary Deferral........................................................ 4
Investment of Contributions................................................................... 5
Benefits Under the Plan....................................................................... 7
Withdrawals and Distributions From the Plan................................................... 7
Administration of the Plan.................................................................... 8
Reports to Plan Participants.................................................................. 8
Amendment and Termination..................................................................... 8
Merger, Consolidation or Transfer............................................................. 8
Federal Income Tax Consequences............................................................... 9
ERISA and Other Qualification................................................................. 10
Restrictions on Resale........................................................................ 10
SEC Reporting and Short-Swing Profit Liability................................................ 11
LEGAL OPINIONS..................................................................................... 11
WORONOCO 401(k) PLAN FINANCIALS.................................................................... 12
INVESTMENT ELECTION FORM........................................................................... 13
</TABLE>
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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 of the 401(k) Plan may acquire up to 72,647 shares
of common stock for the common stock fund known as the Woronoco Bancorp 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. You
may contact Woronoco Savings at the following address: Woronoco Savings, 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 depositor whose account totalled $50.00 or more on July 31,
1997. A supplemental 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
your 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 "Investment Election 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 Investment Election Form. If you do not wish to make
such an election at this time, you do not need to take any action.
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Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the common
stock fund in connection with the conversion is February 5, 1999. You should
return the Investment Election Form to Mary Routier in the Human Resources
Department by 3:00 p.m. on this date.
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
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 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 and Participants will not
have an opportunity to direct the voting of shares allocated to their accounts.
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DESCRIPTION OF THE PLAN
I. Introduction
Effective July 1, 1994, Woronoco Savings adopted the Woronoco Savings Bank
401(k) Plan in SBERA Trust. 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." As a plan subject to ERISA, federal law provides you
with various rights and protections as a plan participant. However, your
benefits under the plan are not guaranteed by the Pension Benefit Guaranty
Corporation.
Woronoco Savings may amend the 401(k) Plan from time to time in the future
to ensure continued compliance with all applicable 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. Most recently, Woronoco
Savings amended the 401(k) Plan to include a common stock fund as an investment
choice. The Common Stock fund will consist primarily of common stock of
Woronoco Bancorp and cash.
APPLICABLE FEDERAL TAX LAW IMPOSES SUBSTANTIAL RESTRICTIONS ON YOUR ABILITY
TO WITHDRAW AMOUNTS HELD UNDER THE 401(k) 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 THE TIME YOU REACH AGE 59-1/2,
REGARDLESS OF WHETHER THE WITHDRAWAL OCCURS DURING YOUR EMPLOYMENT WITH WORONOCO
SAVINGS OR AFTER TERMINATION OF YOUR EMPLOYMENT WITH WORONOCO SAVINGS.
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
earn 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 to annually
defer receipt of up to 15% of the compensation that Woronoco Savings would
otherwise pay to you. For purposes of calculating your deferrals, the 401(k)
Plan considers compensation to include your total pay reportable on IRS Form W-2
for purposes of income-tax withholding. However, by law, the 401(k) Plan may
not consider more than $160,000 of compensation for purposes of determining
deferrals for 1999. You may modify the rate of your future contributions to the
plan, by filing a new deferral agreement with the plan administrator at least 15
days prior to the effective date of the modification. Modifications of your
rate of deferral take effect only on the first day of a month.
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Woronoco Savings Contributions. Woronoco Savings has discretion whether or
not to make matching contributions for you under the 401(k) Plan. For 1998,
Woronoco Savings made matching contributions to the 401(k) Plan equal to 3% of
each participants deferred compensation for the plan year.
IV. Limitations on Contributions
Limitation on Employee Salary Deferral. Although the 401(k) Plan allows
you to defer receipt of up to 15% of your compensation each year, federal law
limits your total deferrals under the 401(k) Plan, and any similar plans to
$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 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,
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together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 22 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 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.
As of January 13, 1999, the 401(k) Plan offers the following choices for
your accounts under the plan:
Money Market Account: The money market account seeks to maximize current
income while preserving capital and liquidity. The money market account
maintains a consistent net cash value of $1.00 per share. The money market
account attempts 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 emphasize 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 attempts 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 seeks to consistently
provide excess returns over the Standard & Poor's 500 Index through a domestic
common stock portfolio. The enhanced index account controls risk by maintaining
portfolio characteristics and industry weights similar to those of the Standard
and Poor's 500 Index. Fidelity Management Trust Company manages the enhanced
index account.
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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 for investors willing to assume above-average risk in exchange for
above-average capital potential. The Small Cap equity 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.
In addition to these investment choices, the 401(k) Plan, as amended,
provides a common stock fund as an additional investment alternative. The
common stock fund will invest primarily in the common stock of Woronoco Bancorp.
As with the other investments choices, you may direct the trustee of the 401(k)
Plan to invest all or a portion of their 401(k) Plan account balance in the
common stock fund.
You may elect (in increments of 1%), to have both past and future
contributions and additions to your 401(k) Plan 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 in advance. The trustee will invest any
amounts credited to your 401(k) Plan accounts for which you have not given
investment directions in the SBERA Money Market Account.
A. Previous Funds.
For 1995, 1996, and 1997, the investment funds (other than the common
stock) returned annual percentages on investments:
<TABLE>
<CAPTION>
1997 1996 1995
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<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
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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 in the
SBERA money market account fund.
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 will depend 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.
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.
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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 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).
8
<PAGE>
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 ADVISOR 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. If Woronoco Savings receives 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 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 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 receive 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 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 subsequent sale
or other taxable disposition of the common stock, to the extent of the amount of
net unrealized appreciation at the time
9
<PAGE>
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 URGED TO CONSULT A TAX ADVISOR CONCERNING 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
10
<PAGE>
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 the 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 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.
11
<PAGE>
WORONOCO SAVINGS BANK
401(K) PLAN FINANCIALS
(AS REPORTED ON THE PLAN'S FORM 5500)
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------
1997 1996
------------ ------------
Assets:
<S> <C> <C>
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>
INVESTMENT ELECTION FORM
------------------------
PARTICIPANT ELECTION TO INVEST IN
WORONOCO BANCORP, INC. STOCK
("EMPLOYER STOCK FUND")
Savings Bank Employees Retirement Association
401(k) Plan As Adopted By
Woronoco Savings Bank
If you would like to participate in the Offering using amounts currently in your
account in the Bank's 401(k) Plan, please complete this form and return it to
Mary Routier in the Human Resources Department by no later than 3:00 PM on
February 5, 1999.
Participant's Name (please print):______________________________________________
Address:________________________________________________________________________
Street City State Zip Code
Social Security Number: _____________ SBERA Certificate Number:________________
1. Background Information
Woronoco Bancorp, Inc. will be issuing shares of common stock (the "Common
Stock"), to certain depositors and the public (the "Offering") in connection
with the conversion of Woronoco Savings Bank from a mutual savings bank to a
stock savings bank.
Participants in the Woronoco Savings Bank 401(k) Plan (the "Plan") are
being given an opportunity to direct the trustee of the Plan (the "Trustee") to
purchase Common Stock in the Offering with amounts currently in their 401(k)
Plan account. (Employees who would like to directly purchase shares of Common
Stock in the Offering with funds other than amounts currently in their Plan
account may do so by completing the Order Form that accompanies the Prospectus.)
In connection therewith, a new investment fund under the Plan-the "Employer
Stock Fund"-comprised primarily of Common Stock is being established.
Participants are also being given the opportunity, after the Offering, to direct
future pay deferrals under the Plan to the Employer Stock Fund. Because it is
actually the Plan that purchases the Common Stock, Participants would acquire a
"participation interest" (expressed as units of the Employer Stock Fund) in the
shares and would not own the shares directly.
Prior to making a decision to direct the Trustee to purchase Common Stock,
we strongly urge you to carefully review the Prospectus and the Prospectus
Supplement that accompany this Investment Election Form. Your decision to
direct the transfer of amounts credited to your account balances to the Employer
Stock Fund in order to purchase shares of Common Stock in connection with the
Offering is irrevocable. Notwithstanding this irrevocability, Participants may
transfer out some or all of their units in the Employer Stock Fund, if any, and
into one or more of the Plan's other investment funds at such times as are
provided for under the Plan's rules for such transfers.
Investing in any stock entails some risks and we encourage you to discuss
your investment decision with your investment advisor. Neither the Trustee nor
the Plan Administrator is authorized to make any representations about this
investment. You should not rely on any information other than information
contained in the Prospectus and the Prospectus Supplement in making your
investment decision.
Any shares purchased by the Plan based on your election will be subject to
the conditions and restrictions otherwise applicable to Common Stock purchased
directly by you in the Offering. These restrictions are described in the
Prospectus and the Prospectus Supplement.
<PAGE>
2. Investment Elections
If you would like to participate in the Offering with amounts currently in
your 401(k) Plan, please complete the box below, indicating what percentage of
each of your current funds you would like to transfer into the Employer Stock
Fund. In calculating the number of shares of Common Stock that the Trustee will
purchase in the Offering based on your election, the Trustee will use your
401(k) Plan account balances as of February 9, 1999. Thus, for example, if your
SBERA Equity Account balance as of February 9, 1999 totals $ 5,000 and you elect
in the box below to transfer 20% from your SBERA Equity Account balance to the
Employer Stock Fund, the Trustee of the Plan will use $ 1,000 (20% of $ 5,000)
from your SBERA Equity Account to purchase 100 shares of Common Stock at a
purchase price of $10 per share.
In the event that the Trustee is unable to use the total amount that you
elect in the box below to have transferred into the Employer Stock Fund to
purchase Common Stock due to an oversubscription in the Offering, the amount
that is not invested in the Employer Stock Fund will be reallocated among your
other 401(k) Plan fund investments in the same manner that your current elective
pay deferrals are being allocated.
Indicate the whole percentage to be transferred from one or more of the
following funds into the Employer Stock Fund:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Percentage From Fund
---------- ---------
<S> <C>
- ------------------------------------------------------------------------------
% SBERA Money Market
- ------------------------------------------------------------------------------
% SBERA Equity Account
- ------------------------------------------------------------------------------
% SBERA Bond Account
- ------------------------------------------------------------------------------
% SBERA Asset Account
- ------------------------------------------------------------------------------
% Vanguard Index 500
- ------------------------------------------------------------------------------
% Fidelity Enhanced Index
- ------------------------------------------------------------------------------
% Putnam Small Cap Equity
- ------------------------------------------------------------------------------
% Putnam International Equity
- ------------------------------------------------------------------------------
</TABLE>
Note: If you do not complete this box, you will not participate in the Offering
by using your 401(k) Plan funds.
<PAGE>
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. Participant Signature and Acknowledgment - Required
By signing this Election Form, I authorize and direct the Plan
Administrator and Trustee to carry out my instructions. I acknowledge that I
have been provided with and have read a copy of the Prospectus and Prospectus
Supplement relating to the issuance of Common Stock that accompany this
Investment Election Form. I am aware of the risks involved in investing in
Common Stock and understand that the Trustee and Plan Administrator are not
responsible for my choice of investment. I understand that my failure to sign
this acknowledgement will make this Investment Election Form null and void.
Participant's Signature:________________________Date Signed:____________________
* * *
This form must be completed and returned to Mary Routier in the
Human Resources Department at the Bank by no later than
3:00 PM on February 5, 1999.
<PAGE>
PROSPECTUS
[Woronoco Bancorp, Inc. Logo] WORONOCO BANCORP, INC.
(Proposed Holding Company for Woronoco Savings Bank)
31 Court Street
Westfield, Massachusetts 01085
(413) 568-9141
Woronoco Savings Bank is converting from the mutual to the stock form of
organization. In this conversion, Woronoco Savings will become a wholly owned
subsidiary of Woronoco Bancorp, Inc.
TERMS OF THE OFFERING
Woronoco Bancorp offers shares of its common stock for sale in a
subscription offering and, if all shares are not subscribed for, in a direct
community offering or syndicated community offering. To purchase shares with a
subscription right, you must submit a properly completed stock order and
certification form, with payment for the shares, to Woronoco Savings by 12:00
noon, Eastern time, on February 12, 1999, unless extended. If the Massachusetts
Division of Banks, Woronoco Savings' governing board and the Federal Deposit
Insurance Corporation do not allow the conversion, then we will not sell any
shares of stock. Also, Woronoco Savings will not convert if Woronoco Bancorp
does not sell at least a minimum number of shares. Woronoco Savings will place
all funds submitted for purchasing shares of stock in a deposit account at
Woronoco Savings until Woronoco Bancorp sells all the shares or returns the
funds.
An independent appraiser has estimated the value of the common stock
offered for sale in the conversion to be between $35,700,000 and $48,300,000.
If the appraiser increases the estimated value, then the maximum number of
shares offered for sale may increase by up to 15% to 5,554,500 shares.
<TABLE>
<CAPTION>
<S> <C> <C>
. Price Per Share $10.00
. Number of Shares
Minimum/Maximum 3,570,000 to 4,830,000
. Underwriting Commissions and Other Expenses
Minimum/Maximum $1,261,000 to $1,406,000
. Net Proceeds to Woronoco Bancorp
Minimum/Maximum $34,439,000 to $46,894,000
. Net Proceeds per Share
Minimum/Maximum $9.65 to $9.71
</TABLE>
No public market for the common stock currently exists. Woronoco Bancorp
expects to list the common stock on the American Stock Exchange, under the
symbol "WRO", at the completion of the conversion.
Please refer to "Risk Factors" beginning on page 8 of this document.
These securities possess investment risks, including the possible loss of the
principal invested.
These securities do not constitute deposits or accounts. Neither the Federal
Deposit Insurance Corporation nor any other governmental agency insures or
guarantees these securities.
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 the
accuracy or completeness of this prospectus. Any representations to the
contrary shall constitute a criminal offense.
Sandler O'Neill & Partners, L.P.
The date of this Prospectus is January 13, 1999
<PAGE>
Map of the Commonwealth 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.
2
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: As a depositor of Woronoco Savings, am I obligated to purchase stock?
A: No. You are not required to purchase stock.
---
Q: How do I purchase the stock?
A: You must complete and return the stock order form to us with your payment
so we receive your order by 12:00 noon, Eastern time, on February 12,
1999.
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares, which equals $250. Generally, no person
or persons ordering through a single account may purchase more than 20,000
shares, or $200,000. No person, related person or group of persons, may
purchase more than 1% of the amount of stock offered in the conversion, not
including any increase above the maximum number of shares offered for sale,
which based on a maximum offering of 4,380,000 shares would be 48,300
shares. We may decrease or increase this purchase limitation without
notifying you. If the offering is oversubscribed, we will allocate shares
based upon a formula.
Q: Will the stock be traded on a market?
A: We have applied for and anticipate that the stock will trade on the
American Stock Exchange. However, Woronoco Bancorp and Woronoco Savings do
not assure or guarantee that the stock will trade on the American Stock
Exchange or on any market.
3
<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 carefully read
this entire prospectus, including the consolidated financial
statements and the notes to the consolidated financial statements of
Woronoco Savings.
The Conversion
Woronoco Savings will convert from the mutual to the stock form of
organization. This will be a change in our corporate structure. We believe
that this conversion is currently in our best interests and in the best
interests of our depositors and the communities that we serve. The conversion
will allow us to:
. expand our size and operations;
. better compete with commercial banks and other financial institutions;
and
. increase our equity capital base and raise additional money when
needed.
The Companies
Woronoco Bancorp, Inc.
31 Court Street
Westfield, Massachusetts 01085
(413) 568-9141
Woronoco Bancorp will become the holding company for Woronoco Savings when
the conversion is complete. Woronoco Bancorp currently has no operations and
does not engage in any significant business.
Woronoco Savings Bank
31 Court Street
Westfield, Massachusetts 01085
(413) 568-9141
Woronoco Savings is a Massachusetts mutual savings bank. At August 31,
1998, it had assets of $366.2 million, deposits of $273.6 million and total
surplus of $33.4 million.
Woronoco Savings operates 11 banking offices in Hampden and Hampshire
Counties in western Massachusetts. It historically has operated as a community-
oriented bank primarily offering mortgage and consumer loans and a variety of
deposit products.
The Conversion's Impact on Voting Rights
Currently, Woronoco Savings' governing board, the board of corporators,
possesses all voting rights in Woronoco Savings, including the power to elect
members to the board of trustees. Generally, corporators are depositors of
Woronoco Savings and residents of our local community. After the conversion,
the board of corporators will cease to exist and the corporators will no longer
have voting rights. Woronoco Bancorp, as the only stockholder of Woronoco
Savings, will possess all voting rights in Woronoco Savings. Holders of
Woronoco Bancorp's common stock will possess all voting rights in Woronoco
Bancorp.
4
<PAGE>
The conversion will occur only if Woronoco Savings' governing board of
corporators approve the conversion at a meeting of the board called for that
purpose. Before the meeting, Woronoco Savings will send a notice and
information statement to the members of the board describing the conversion. In
addition, the Massachusetts Division of Banks must still provide its final
approval of the conversion. The Federal Deposit Insurance Corporation has
informed us that it does not intend to oppose the conversion.
The Stock Offering
Woronoco Bancorp offers for sale between 3,570,000 and 4,830,000 shares of
its common stock at $10.00 per share. Because of changes in financial market
conditions before the completion of the conversion, the offering may increase to
5,554,500 shares without any notice to you. If so, you will not have the
opportunity to change or cancel your stock order.
Sandler O'Neill & Partners, L.P. will assist us in selling the stock. For
further information concerning Sandler O'Neill's role in the offering, see "The
Conversion--Marketing and Underwriting Arrangements."
How We Determined the Offering Range and the $10.00 Price Per Share
The independent appraisal by Keller & Co., Inc., dated as of October 23,
1998, established the offering range. This appraisal was based upon our
financial condition and operations and the effect of the additional capital
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. Keller will
update the appraisal before the completion of the conversion.
Terms of the Offering
We offer the shares of common stock to those with 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 108 to 128.
Subscription Rights
The law prohibits any transfer of subscription rights and we will act to
ensure that you do not transfer your subscription rights. We will not accept
any stock orders that we believe involve the transfer of subscription rights.
5
<PAGE>
Payment for Shares
You may pay for your subscriptions:
(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.
Termination of the Offering
The subscription offering will terminate on February 12, 1999. If all of
the shares are not subscribed for in the subscription offering and we do not
obtain orders for the remaining shares by March 29, 1999, we will either:
(1) promptly return any payment you made to us, with interest, or
cancel any withdrawal authorization you gave us; or
(2) extend the offering, if allowed, and give you notice of the
extension and of your rights to cancel or change your order. If
we extend the offering and you do not respond to the notice,
then we will cancel your order and return your payment, with
interest, or cancel any withdrawal authorization you gave us.
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) 568-5733.
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 issued by Woronoco Savings in the
conversion. Woronoco Bancorp may use 17.85% of the net proceeds retained by it
to enable the employee stock ownership plan to purchase stock in the conversion.
For details of this transaction, see "Woronoco Bancorp, Inc." and "Use of
Proceeds."
The rest of the funds retained by Woronoco Bancorp will 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. In
addition, Woronoco Savings will also invest its share of the net proceeds in
investment-grade equity securities and may also repay Federal Home Loan Bank
borrowings. See page 26.
Dividends
Woronoco Bancorp has not made any decisions concerning the payment of
dividends.
6
<PAGE>
Woronoco Savings Charitable Foundation
To continue 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. Based upon the maximum amount of shares offered in the
conversion, we will issue an additional 386,400 shares to the foundation. We
anticipate that the foundation will make grants and donations to nonprofit
organizations and community groups within the communities where Woronoco Savings
currently has an office. If we do establish the foundation, then the amount of
the common stock sold will be less 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."
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 plan will purchase an
amount of stock equal to 8% of the shares sold in this offering and shares
issued to the foundation. If shares are not available for purchase by the
employee stock ownership plan in the subscription offering, then the plan will
purchase the shares in the open market. The employee stock ownership plan will
provide a retirement benefit to all employees eligible to participate in the
plan. We also intend to adopt a stock-based incentive plan for the benefit of
directors, officers and employees.
The following table presents the total value of the shares of common stock,
at the maximum of the shares offered, which would be acquired by the employee
stock ownership plan and the total value of all shares available for award and
issuance when we grant awards and exercise options under the stock-based
incentive plan. The table assumes that the value of the shares is the same as
the sales price of the shares in the offering. The table does not include a
value for the options because that value will be equal to the fair market value
of the common stock on the day that the options are granted. As a result,
financial gains can be realized under an option only if the market price of
common stock increases.
<TABLE>
<CAPTION>
Percentage of
Estimated Shares Issued
Value of in the
Shares 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, nine of our officers will receive employment agreements or
change in control agreements which could provide those individuals with cash
payments if they are terminated following a change in control of Woronoco
Bancorp or Woronoco Savings. For a further discussion of benefits to
management, see "Management of the Bank."
7
<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. If interest rates rise, then, 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 would 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 less than 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 less than 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."
We Depend Upon Financial Stocks For a Significant Portion of Our Income. If the
Value of the Stocks We Own Decreases, Then Our Income May Decrease
Historically, gains on the sale of investment securities have constituted a
significant portion of our income. Accordingly, a 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 Properly Work on January 1, 2000, Our Business
Operations Will Be Disrupted
If our computer systems and the computer systems operated by our third
party vendors do not properly work on January 1, 2000, then we could experience
a disruption to our business operations. As a result, we could experience an
adverse impact on our financial condition and results of operations. In
addition, if we do not do an adequate job preparing for the January 1, 2000 date
change, then regulators may take action. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
Our Loan Portfolio Possesses Increased Risk Due to Our Substantial Number of
Consumer, Multi-family and Commercial Real Estate and Commercial Business Loans
Our 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. Generally, we consider these types of loans to involve a higher
degree of default risk compared to first mortgage loans on single-family owner
occupied residential properties. In addition, we plan to increase our emphasis
on commercial real estate and commercial
8
<PAGE>
business lending. Because 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.
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 Hurt Our
Earnings
Woronoco Bancorp intends to contribute to the Woronoco Savings Charitable
Foundation shares of its common stock equal to 8% of the shares 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 the 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."
The Contribution to the Woronoco Savings Charitable Foundation Means that Your
Total Ownership Will Be 7.4% Less After We Make the Contribution
If you purchase shares, then your ownership and voting interests in
Woronoco Bancorp will be diluted by 7.4% when we issue an additional 8% of our
shares and contribute them to the foundation. For a further discussion regarding
the effect of the contribution to the foundation, see "Woronoco Savings
Charitable Foundation," "Pro Forma Data" and "Comparison of Valuation and Pro
Forma Information With No Foundation."
The Contribution to the Foundation May Not Be Tax Deductible Which Could Have a
Significantly Greater Effect on Our Earnings Than We Expect
We believe that our contribution to the Woronoco Savings Charitable
Foundation will be deductible for federal income tax purposes. However, we do
not have any assurance that the Internal Revenue Service will agree with us. If
our contribution is not deductible, 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, 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 if a change in control occurred. We also
intend to enter into employment and change in control agreements with certain
employees and adopt an employee severance compensation plan. We expect that
these agreements and plan will provide benefits and cash payments to employees
if there is a change in control and a subsequent termination of their
employment. These benefits would increase the cost of someone 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 may serve to
9
<PAGE>
perpetuate existing management. Examples of these provisions include a
limitation on the voting of shares held by someone who owns more than 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 Acquisition of the
Company and the Bank."
Voting Control of Officers and Directors. The 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. The total ownership or voting level by employees and directors
from these sources could be more than 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 We Increase the Number of Shares of Common Stock Sold in the Conversion, the
Future Net Income of Each Share of Common Stock Would Decrease
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 opinion 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 requires a factual
determination. For further discussion regarding tax aspects, see "The
Conversion--Tax Aspects."
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
We have derived the following selected consolidated financial and other data
of Woronoco Savings in part from our consolidated financial statements and notes
beginning on page F-1. We have derived the data presented for the eight months
ended August 31, 1998 and 1997 from unaudited financial statements. This data
reflects, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the results for such
interim periods. You should not consider the interim results at and for the
eight months ended August 31, 1998 as indicative of the results that we may
experience for the fiscal year ending December 31, 1998. 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 August 31, At December 31,
---------------- -------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
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-...... -- -- -- -- 7,461 12,125
investment
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>
11
<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>
(In thousands)
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
accounting for income taxes......... -- -- -- -- -- -- 822
------- ------- ------- ------- ------- ------- -------
Net income........................ $ 2,309 $ 2,101 $ 3,018 $ 2,474 $ 2,335 $ 2,192 $ 3,586
======= ======= ======= ======= ======= ======= =======
</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
-------- -------- -------- ------- -------- -------- ---------
<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.
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>
Regulatory Capital Ratios:
Leverage capital................................. 9.16% 9.33% 9.08% 8.94% 9.28% 8.53% 8.94%
Total risk-based capital......................... 12.82 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. This
ratio does not include realized gains on investment securities. If this
ratio included realized 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.
14
<PAGE>
RECENT DEVELOPMENTS
The following table presents consolidated financial and other data of Woronoco
Savings at and for the periods indicated. We have derived the consolidated
financial and operating data and financial ratios and other data at and for the
year ended December 31, 1997 from the consolidated financial statements and
notes beginning on page F-1. We have derived the data presented for the three
and nine months ended September 30, 1998 and 1997 from unaudited consolidated
financial statements. This data reflects, in the opinion of management, all
adjustments (consisting only of recurring adjustments) necessary to present
fairly the results for such interim periods. You should not consider the
interim results at and for the three and nine months ended September 30, 1998,
as indicative of the results that we may experience for the fiscal year ending
December 31, 1998. 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>
15
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
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>
For the Three Months 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.............. 2.71 2.87 2.79 3.03
average assets
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.
16
<PAGE>
<TABLE>
<CAPTION>
For the Three Months 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............. 0.44 0.50 0.44 0.50
Nonperforming assets and troubled debt
restructurings as a percent of total assets............ 0.41 0.49 0.41 0.49
Allowance for loan losses as a percent
of total loans....................................... 0.78 0.77 0.78 0.77
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. 0.02 0.04 0.02 0.04
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.
This ratio does not include realized gains on investment securities. If
this ratio included realized gains on investment securities, then the
efficiency ratio would be 66.95%, 58.95%, 64.46%,and 61.53% for the
three months ended September 30, 1998 and 1997 and for the nine months
ended September 30, 1998 and 1997, respectively.
17
<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 Federal Home Loan Bank 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 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 Savings' main office, which will
provide additional office space for Woronoco Savings' 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 Savings' asset growth. Assets and borrowed funds increased
again in the fourth quarter of 1998 as management determined to increase its
investments in anticipation of receiving conversion proceeds.
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 nine 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 Savings' 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
18
<PAGE>
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 three months ended September
30, 1997. Interest income on loans increased by $353,000 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 Savings'
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 $21,000, 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 Savings' 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 Savings' loan
portfolio. At September 30, 1998, Woronoco Savings' 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 Savings' noninterest expenses include a $44,000 decrease in
marketing expense and a $58,000 increase in professional services. Woronoco
Savings
19
<PAGE>
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 the 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 $420,000 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, 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 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 Savings' one- to four-family loan portfolio
decreased by $851,000 million, 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 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 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
20
<PAGE>
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 Savings' 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 Savings'
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 Savings'
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 Savings' allowance for loan losses as a percentage
of total loans, net, was 0.78%.
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, which
declined 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 Savings' 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.
21
<PAGE>
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 $141,000, 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 (the "OTS") to become a savings and loan
holding company and, upon completion of the conversion, will be regulated 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. 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
earned on the proceeds 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, deposits of
$273.6 million, total surplus of $33.4 million and had a leverage capital ratio
of 9.16% and a total risk-based capital ratio of 12.82%. The Commissioner of
the Massachusetts Division of Banks (the "Commissioner") and the Federal Deposit
Insurance Corporation (the "FDIC") subject the Bank to comprehensive
examination, supervision and regulation. See "Regulation and Supervision."
22
<PAGE>
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 ("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. The Plan provides that the Bank and the Company will create the
Woronoco Savings Charitable Foundation, and fund the foundation with shares of
common stock contributed by the Company. 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 enables the
communities in which the Bank currently 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
23
<PAGE>
Bank's community banking franchise. See "The Conversion--Establishment of the
Charitable Foundation--Structure of the Foundation."
The Board of Directors of the Foundation, which initially will be comprised of
existing Directors or officers of the Company or the Bank, will possess the
authority for the affairs of the Foundation. These Directors 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. We anticipate that the
Foundation will make grants and donations to nonprofit organizations and
community groups within the communities in which the Bank currently 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 must operate
within the limits of 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 estimated pro forma value
of the Bank. If the conversion did not include the Foundation, Keller &
Company, Inc. ("Keller") has estimated that the pro forma 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, management expects that the establishment and funding of the Foundation
will have an adverse impact on the Company's earnings for the year in which the
contribution 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 net income of $584,000 for the year ended December 31, 1997, rather
than reporting net income of $3.0 million. For further discussion of the
Foundation and its impact on purchasers in the conversion see "Risk Factors--The
Establishment of the Woronoco Savings Charitable Foundation Will Have a Negative
Impact on Earnings," "Pro Forma Data" and "The Conversion--Establishment of the
Charitable Foundation."
24
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At August 31, 1998, the Bank exceeded each of its regulatory capital
requirements. The following table 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 Extimated 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)
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
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).... $32,470 9.16% $45,063 12.28% $47,360 12.82% $49,657 13.36% $52,300 13.97%
Requirement (5)...... 14,178 4.00 14,682 4.00 14,773 4.00 14,865 4.00 14,971 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess............... $18,292 5.16% $30,381 8.28% $32,587 8.82% $34,792 9.36% $37,329 9.97%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-Based Capital:
Capital Level (4)(6). $34,531 12.82% $47,124 16.89% $49,421 17.61% $51,718 18.31% $54,361 19.11%
Requirement.......... 21,551 8.00 22,316 8.00 22,456 8.00 22,596 8.00 22,756 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess............... $12,980 4.82% $24,808 8.89% $26,965 9.61% $29,122 10.31% $31,605 11.11%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</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 have to adhere 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.
25
<PAGE>
USE OF PROCEEDS
The Board of Trustees determined that, because of the following advantageous
reasons, 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 its 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. In addition, the
increased equity capital will increase the Bank's reserves and net worth to
support future lending and operational growth and branching activities and
increase its ability to render quality 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 completion of the conversion.
The Company will purchase all of the 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 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. If the
proposed stock-based incentive plan 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
"Management of the Bank--Other Benefit Plans--Stock-Based Incentive Plan." The
Bank has not yet determined the 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, within the limits of statutory and regulatory requirements.
However, the Company may not repurchase any common stock in the first year after
conversion, unless previously approved. If approval is obtained to repurchase
common stock during the first year after conversion, then such repurchase may
not be greater than 5% of the capital stock
26
<PAGE>
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, within the limits of 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 does not have to adhere 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 any earnings that such proceeds generate. 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, no established market for the common stock exists. The Company
expects to receive approval to have its common stock listed on the American
Stock Exchange (the "AMEX") under the symbol "WRO" upon completion of the
conversion. To receive that approval, the Company must satisfy various
conditions, including selling the stock and meeting certain listing criteria.
There can be no assurance that the common stock will be able to meet the
applicable listing criteria 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.
27
<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 in connection with the Company's
stock-based incentive plan which the Company intends to adopt and
present to stockholders for their approval 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. However, for federal tax purposes, the Company can 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, after 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 Footnote 3 to
the tables under "Pro Forma Data" and "Management of the Bank - Other
Benefit Plans - Stock-Based Incentive Plan."
28
<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: (1) $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; (2) 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; (3) 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 (4) 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 if the Company
were liquidated.
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 is any effect given to the liquidation account to be established for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
or, if the Bank were liquidated, 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.
29
<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
Estimated Estimated Estimated of 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........ 2,856 3,360 3,864 4,444
8% of stock issued in Conversion)............... ---------- ---------- ---------- ----------
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........................ (1,542) (1,814) (2,087) (2,400)
stock-based incentive plan..................... ---------- ---------- ---------- ----------
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,..................... 563 666 768 886
as adjusted
Less: Pro forma ESOP adjustment (2).................... (212) (249) (286) (329)
Pro forma stock-based incentive plan............. (130) (152) (175) (202)
adjustment (3)................................... ---------- ---------- ---------- ----------
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............. (0.04) (0.04) (0.04) (0.04)
adjustment (3)................................... ---------- ---------- ---------- ----------
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.......................... (1,542) (1,814) (2,087) (2,400)
by stock-based incentive plan (3)............ ---------- ---------- ---------- ----------
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......................... (0.40) (0.40) (0.40) (0.40)
stock-based incentive plan (3)................. ---------- ---------- ---------- ----------
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............. 60.02% 64.94% 69.16% 73.31%
stockholders' equity per share
Offering price to pro forma net earnings per share (8).. 9.39x 10.93x 12.35x 13.89x
</TABLE>
(See footnotes on next page)
30
<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 earnings (loss) 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
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 when we grant options
under the stock-based incentive plan. The issuance of common stock in
connection with 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 "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.
31
<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 $10.00 Per $10.00 Per $10.00 Per
Share Share Share Share
(Minimum (Midpoint (Maximum (15% above
of of of Maximum
Estimated Estimated Estimated of 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 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)........ $ 64,202 $ 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
per share (3)(4)(5).......................... $ 16.65 $ 15.39 $ 14.45 $ 13.64
========== ========== ========== ==========
Offering price as a percentage of pro forma
stockholders' equity per share...................... 60.06% 64.98% 69.20% 73.31%
Offering price to pro forma net
earnings per share.................................. 10.20x 11.63x 13.16x 14.71x
</TABLE>
(See footnotes on next page)
32
<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
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 3.8% 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 when we grant options
under the stock-based incentive plan. The issuance of common stock in
connection with 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 "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.
33
<PAGE>
COMPARISON OF VALUATION AND
PRO FORMA INFORMATION WITH NO FOUNDATION
If the Foundation was not established as part of the Conversion, Keller
estimates 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 if 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 Minimum At the Midpoint At the Maximum
-------------------------- --------------------------- -----------------------------
With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation
----------- ---------- ---------- ---------- ---------- -----------
(Dollars in thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
Estimated offering amount.......... $ 35,700 $ 40,800 $ 42,000 $ 48,000 $ 48,300 $ 55,200
Pro forma market
capitalization.................. $ 38,556 $ 40,800 $ 45,360 $ 48,000 $ 52,164 $ 55,200
Total assets....................... $397,155 $400,868 $402,753 $407,121 $408,351 $413,374
Total liabilities.................. $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
Pro forma consolidated net
earnings........................ $ 2,530 $ 2,539 $ 2,574 $ 2,584 $ 2,616 $ 2,628
Pro forma stockholders' equity
per share....................... $ 16.66 $ 16.66 $ 15.40 $ 15.46 $ 14.46 $ 14.58
Pro forma consolidated net
earnings per share.............. $ 0.71 $ 0.67 $ 0.61 $ 0.58 $ 0.54 $ 0.52
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%
Offering price to pro forma
net earnings per share....... 9.39x 9.90x 10.93x 11.45x 12.35x 12.94x
Offering price to assets........ 9.71% 10.18% 11.26% 11.79% 12.77% 13.35%
Pro Forma Financial Ratios:
Return on assets (annualized)... 0.93% 0.95% 0.93% 0.95% 0.93% 0.95%
Return on stockholders'
equity (annualized).......... 5.77% 5.60% 5.38% 5.22% 5.04% 4.90%
Stockholders' equity
to total assets.............. 16.18% 16.95% 17.34% 18.23% 18.48% 19.47%
<CAPTION>
At the Maximum
as Adjusted
----------------------------
With No
Foundation Foundation
---------- ----------
(Dollars in thousands,
Except Per Share Amounts)
<S> <C> <C>
Estimated offering amount................... $ 55,545 $ 63,480
Pro forma market
capitalization........................... $ 59,989 $ 63,480
Total assets................................ $414,789 $420,565
Total liabilities........................... $332,903 $332,903
Pro forma stockholders'
equity................................... $ 81,879 $ 87,662
Pro forma consolidated net
earnings................................. $ 2,664 $ 2,680
Pro forma stockholders' equity
per share................................ $ 13.64 $ 13.81
Pro forma consolidated net
earnings per share....................... $ 0.48 $ 0.46
Pro Forma Pricing Ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share....................... 73.31% 72.41%
Offering price to pro forma
net earnings per share 13.89x 14.60x
Offering price to assets................. 14.46% 15.09%
Pro Forma Financial Ratios:
Return on assets (annualized)............ 0.93% 0.96%
Return on stockholders'
equity (annualized)................... 4.72% 4.59%
Stockholders' equity
to total assets....................... 19.74% 20.84%
</TABLE>
34
<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.
35
<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 gains (losses)
on securities and loan sales and 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 Regulations--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 to increase
deposits, including commercial accounts
36
<PAGE>
. 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
. Control interest rate risk by selectively 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, 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, 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."
37
<PAGE>
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) selectively 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 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 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 was 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
38
<PAGE>
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 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."
39
<PAGE>
<TABLE>
<CAPTION>
At August 31, 1998
-----------------------------------------------------------------------------------------
More than More than
1 Year 1 Year to 2 Years to
or Less 2 Years 3 Years
-------------------------- --------------------------- ---------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ----------- ---------- ------------ ---------- -----------
(Dollars in thousands)
<S> <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%
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
Other............................. 1,932 4.69 -- --
Interest rate floor............... -- -- 10,000 5.75
-------- ------- -------
Total interest-earning assets..... $169,330 $44,560 $34,361
======== ======= =======
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
FHLB advances..................... 43,579 5.42 706 8.51 204 8.51
Interest rate caps................ -- -- 10,000 6.00
-------- ------- -------
Total interest-bearing
liabilities.................. $180,323 $32,049 $14,839
======== ======= =======
Interest sensitivity gap(2)....... $(10,993) $12,511 $19,522
======== ======= =======
Cumulative interest
sensitivity gap................. $(10,993) $ 1,518 $21,040
======== ======= =======
Cumulative interest
sensitivity gap as a
percentage of
total assets.................... (3.00)% 0.41% 5.75%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets......... (3.13)% 3.41% 61.23%
Cumulative net interest-
earning assets as a
percentage of
cumulative interest-
bearing liabilities............. 93.90% 100.71% 109.26%
</TABLE>
<TABLE>
<CAPTION>
At August 31, 1998
-------------------------------------------------------------------------------------------
More than More than
3 Years to 4 Years to More than
4 Years 5 Years 5 Years
--------------------------- --------------------------- --------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
----------- ----------- ---------- ------------ ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Mortgage-backed securities........ $ 4,138 6.84% $ 4,137 6.84 % $ 14,057 6.84
Equity securities................. -- -- 19,374 1.57
FHLB stock........................ -- -- --
Loans, net........................ 21,209 7.67 21,208 7.67 19,400 7.40
Other............................. -- -- --
Interest rate floor............... -- -- --
------- ------- --------
Total interest-earning assets..... $25,347 $25,345 $ 52,831
======= ======= ========
Interest-bearing liabilities:
Savings accounts.................. $ -- $ -- $ 59,850 1.98
Money market accounts............. -- -- --
NOW accounts...................... -- -- 29,305 1.00
Certificates of deposit........... 17 2.50 16 2.50 --
FHLB advances..................... 152 8.51 151 8.51 10,000 4.99
Interest rate caps................ -- -- --
------- ------- --------
Total interest-bearing
liabilities.................. $ 169 $ 167 $ 99,155
======= ======= ========
Interest sensitivity gap(2) $25,178 $25,178 $(46,324)
======= ======= ========
Cumulative interest
sensitivity gap................. $46,218 $71,396 $ 25,072
======= ======= ========
Cumulative interest
sensitivity gap as a
percentage of
total assets.................... 12.62% 19.50% 6.85%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets......... 182.34% 281.70% 47.46%
Cumulative net interest-
earning assets as a
percentage of
cumulative interest-
bearing liabilities............. 120.33% 131.36% 107.67%
</TABLE>
<TABLE>
<CAPTION>
At August 31, 1998
----------------------
Total Fair
Amount Value
-------- --------
(Dollars in thousands)
<S> <C> <C>
Interest-earning assets(1):
Mortgage-backed securities........ $ 51,819 $ 52,796
Equity securities.................
FHLB stock........................ 19,475 18,686
Loans, net........................ 2,984 2,984
Other............................. 265,564 267,157
Interest rate floor............... 1,932 1,932
10,000 273
Total interest-earning assets..... -------- --------
$351,774 $343,828
======== ========
Interest-bearing liabilities:
Savings accounts.................. $ 66,474 $ 68,474
Money market accounts............. 24,904 24,904
NOW accounts...................... 29,305 29,305
Certificates of deposit........... 141,227 141,990
FHLB advances..................... 54,792 59,956
Interest rate caps................ 10,000 17
-------- --------
Total interest-bearing $326,702 $324,646
liabilities.................. ======== ========
Interest sensitivity gap(2) $ 25,072
========
Cumulative interest
sensitivity gap................. $ 50,144
========
Cumulative interest
sensitivity gap as a
percentage of
total assets....................
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets.........
Cumulative net interest-
earning assets as a
percentage of
cumulative interest-
bearing liabilities.............
</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.
40
<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, if interest rates changed, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, it would become more difficult for borrowers to
repay their adjustable-rate loans if interest rates increased.
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.
41
<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.......... 3.15% $ 7,821 3.17% $ 7,480 3.36%
rate spread(4)....................... ====== ======= ====== ======= ======
Net interest margin as a percentage... 3.50% 3.67%
of interest-earning assets(5)........ ====== ======
Ratio of interest earning assets to... 107.69% 108.38% 107.73%
interest-bearing liabilities......... ====== ====== ======
</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.
42
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- ---------- -------- --------- ---------- --------
(Dollars in thousands)
<S> <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%
Debt securities...................... -- -- -- 2,373 140 5.90
Mortgage-backed securities........... 44,094 2,894 6.56 43,123 2,743 6.36
Equity securities.................... 13,707 785 5.73 12,392 801 6.46
FHLB stock............................ 2,308 144 6.24 2,009 127 6.32
Other................................. 2,568 153 5.96 3,111 191 6.19
-------- ------- -------- -------
Total interest-earning assets........ 310,588 23,658 7.62 278,621 21,734 7.80
------- ------ ------- ------
Noninterest-earning assets.............. 18,050 15,938
-------- --------
Total assets......................... $328,638 $294,559
======== ========
Liabilities and surplus:
Interest-bearing liabilities:
Deposits:
Money market accounts................ $ 19,238 407 2.12 $ 16,825 441 2.62
Savings accounts(3).................. 64,285 1,759 2.74 65,042 1,684 2.59
NOW accounts......................... 24,941 253 1.01 22,831 243 1.06
Certificates of deposit.............. 139,119 7,740 5.56 127,068 7,045 5.54
-------- ------- -------- -------
Total interest-bearing
deposits........................... 247,583 10,159 4.10 231,766 9,413 4.06
FHLB advances......................... 40,099 2,341 5.84 26,941 1,609 5.97
-------- ------- -------- -------
Total interest-bearing
liabilities........................ 287,682 12,500 4.35 258,707 11,022 4.26
------- ------ ------- ------
Demand deposits....................... 7,939 6,933
-------- --------
Other noninterest-bearing
liabilities.......................... 1,799 1,744
-------- --------
Total liabilities................... 297,420 267,384
Surplus............................... 31,218 27,175
-------- --------
Total liabilities and surplus....... $328,638 $294,559
======== ========
Net interest-earning assets............ $ 22,906 $ 19,914
======== ========
Net interest income/interest
rate spread(4)....................... $11,158 3.27% $10,712 3.54%
======= ====== ======= ======
Net interest margin as a percentage
of interest-earning assets(5)........ 3.59% 3.84%
====== ======
Ratio of interest-earning assets
to interest-bearing liabilities...... 107.96% 107.70%
====== ======
<CAPTION>
For the Year Ended December 31,
----------------------------------
1995
----------------------------------
Average
Average Yield/
Balance Interest Rate
----------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets(1):
Investments:
Loans, net(2)........................ $191,903 $15,856 8.26%
Debt securities...................... 6,622 398 6.01
Mortgage-backed securities........... 39,322 2,428 6.17
Equity securities.................... 12,146 735 6.05
FHLB stock............................ 1,568 127 8.10
Other................................. 4,757 325 6.83
-------- -------
Total interest-earning assets........ 256,318 19,869 7.75
------- ------
Noninterest-earning assets.............. 14,028
--------
Total assets......................... $270,346
========
Liabilities and surplus:
Interest-bearing liabilities:
Deposits:
Money market accounts................ $ 17,754 499 2.81
Savings accounts(3).................. 67,221 1,707 2.54
NOW accounts......................... 20,920 272 1.30
Certificates of deposit.............. 115,933 6,223 5.37
-------- -------
Total interest-bearing
deposits........................... 221,828 8,701 3.92
FHLB advances......................... 16,948 1,122 6.62
-------- -------
Total interest-bearing
liabilities........................ 238,776 9,823 4.11
------- ------
Demand deposits....................... 5,703
--------
Other noninterest-bearing
liabilities.......................... 1,501
--------
Total liabilities................... 245,980
Surplus............................... 24,366
--------
Total liabilities and surplus....... $270,346
========
Net interest-earning assets............ $ 17,542
========
Net interest income/interest
rate spread(4)....................... $10,046 3.64%
======= ======
Net interest margin as a percentage
of interest-earning assets(5)........ 3.92%
======
Ratio of interest-earning assets
to interest-bearing liabilities...... 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.
43
<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, 1997
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
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
44
<PAGE>
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 $1.4 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 due to growth of $27.6 million 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 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 were $11.7
million at December 31, 1997, an increase of $1.2 million, or
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11.6%, as compared to $10.5 million at 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 9.75% 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 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 increase in interest income for
the period was a 72.4% decrease in non-accrual loans, to $280,000, for the eight
months
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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 increase its level of
allowance for loan losses as a percentage of total loans and non-performing
loans if the level of commercial real estate, multi-family, commercial,
construction and development or consumer lending as a percentage of its total
loan portfolio increases. 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--Our Loan Portfolio Possesses Increased Risk Due to Our
Substantial Number of Consumer, Multi-family and Commercial Real Estate and
Commercial Business Loans" and "Business of the Bank--Delinquent Loans,
Classified Assets and Real Estate Owned" and "--Allowance for Loan Losses."
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Noninterest Income. Noninterest income is composed of fee income for bank
services and profits from the 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 4% 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 the 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
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Bank's 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 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.
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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.
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 certificates 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.
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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. If the Bank
requires 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.
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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 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 $32.5 million, or 9.16% of
adjusted assets, which is above the required level of $14.2 million, or 4.00%,
and risk-based capital of $34.5 million, or 12.82% 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--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."
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 completed
testing of its critical vendors' computer applications and all Year 2000 issues
have been corrected. 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.
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<PAGE>
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 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 if there
were 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. If any
of the Bank's significant suppliers or other vendors do not 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 excess amount of withdrawal requests created by depositor concerns over
possible Year 2000 failures. Accordingly, the Bank has implemented a customer
awareness program that informs depositors of the Bank's efforts towards Year
2000 compliance and maintaining the safety of their deposits. Additionally, the
Bank has identified methods for obtaining additional funds in case its cash
reserves are significantly reduced.
The Bank has budgeted approximately $235,000 from its 1998 and 1999 operating
budgets in connection 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. To ensure the reliability of
the Bank's Year 2000 risk and cost estimates, the Bank follows the work program
guidelines as provided by the Federal Financial Institutions Examination
Council. These are the same guidelines used by federal examiners to
53
<PAGE>
determine the effectiveness of the Year 2000 efforts by the banks they examine.
The 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 FDIC conducts regular Y2K examinations on the Bank. 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. If 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 EPS 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.
54
<PAGE>
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements. This Statement requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This Statement supersedes FASB Statement No.
14, "Financial Reporting for Segments of a Business Enterprise." Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This Statement is effective for financial statements for periods
beginning after December 15, 1997 and is not expected to have a material impact
on the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS No. 132"), which standardizes
the disclosure requirements for pensions and other postretirement benefits.
This Statement supersedes FASB Statements No. 87, "Employers' Accounting for
Pensions," 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. At the end of the Conversion, we anticipate that the
Bank will become a wholly owned subsidiary of the Company, which 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
55
<PAGE>
capitalize the ESOP Loan Subsidiary which will loan funds to enable the ESOP to
purchase 8% of the common stock issued in connection with the Conversion,
including shares issued to the Foundation. However, a third-party lender may be
utilized to lend funds to the ESOP. See "Use of Proceeds." In the future, the
Company may acquire or organize other operating subsidiaries, including other
financial institutions and financial services companies. There are presently no
other agreements, understandings or plans for an expansion of the Company's
operations. Initially, the Company will neither own nor lease any property from
any third party, but will instead use the premises, equipment and furniture of
the Bank. The Company does not intend to employ any persons other than
individual officers of the Bank, who will not receive additional compensation by
the Company. The Company may utilize the support staff of the Bank from time to
time. Additional employees may be hired if the Company expands its business in
the future.
BUSINESS OF THE BANK
General
The Bank is a community-oriented Massachusetts 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. The Bank, to a
lesser extent, also invests those funds in 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. However, the Bank will sell
some loans in the secondary market, while generally retaining the servicing
rights. The Bank also invests in mortgage-backed securities, equity securities
and other permissible investments. 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, seven other
hospitals and a variety of wholesale and retail trade businesses.
56
<PAGE>
New England had generally lagged behind the rest of the nation in coming out
of the recession of the late 1980s and early 1990s. During that time, the market
values of many one- to four-family residences declined throughout the region.
Loan demand diminished and competition for such loans increased. However, over
the past few years, the regional economy in the Bank's primary market area,
based on economic indicators such as unemployment rates, vacancy rates and
household income trends, has stabilized and strengthened and residential and
commercial real estate values in some areas approach 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%. Also, from 1990 to 1997, median household income in
the Bank's primary market area 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 this banking office to 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.
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<PAGE>
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may originate
are limited by 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.
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.
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<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 1994 1993
------------------ --------------- ------------------ ---------------- ---------------- ---------------
Percent Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family.... $137,840 51.30% $139,811 52.84% $138,289 58.39% $127,811 62.73% $140,614 74.11% $134,378 76.67%
Multi-family........... 22,775 8.47 19,047 7.20 17,826 7.53 11,843 5.81 8,823 4.65 2,780 1.59
Commercial............. 21,088 7.85 21,757 8.22 19,697 8.32 3,032 1.49 16,500 8.70 15,214 8.68
Construction and
development.......... 4,150 1.54 2,868 1.08 1,124 0.47 18,580 9.12 1,037 0.55 1,511 0.86
-------- ------ -------- ------ -------- ------ -------- ------- -------- ------ -------- ------
Total real estate
loans............. 185,853 69.16 183,483 69.34 176,936 74.71 161,266 79.15 166,974 88.01 153,883 87.80
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
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 13,404 7.06 12,799 7.30
Automobile............ 10,019 3.73 10,287 3.89 7,969 3.36 5,507 2.70 2,701 1.42 2,118 1.21
Other ................ 4,116 1.53 4,291 1.62 4,397 1.86 4,286 2.10 3,868 2.04 4,381 2.50
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 78,279 29.13 76,805 29.03 56,028 23.65 39,098 19.19 19,973 10.52 19,298 11.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial loans....... 4,588 1.71 4,319 1.63 3,879 1.64 3,382 1.66 2,795 1.47 2,090 1.19
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans........... 268,720 100.00% 264,607 100.00% 236,843 100.00% 203,746 100.00% 189,742 100.00% 175,271 100.00%
====== ====== ====== ====== ====== ======
Less:
Unadvanced loan
funds(1)............. (1,987) (1,866) (1,395) (2,089) (1,212) (1,456)
Net deferred loan
origination costs
(fees)............... 892 934 598 370 (92) (15)
Allowance for loan
losses............... (2,061) (1,952) (1,911) (1,838) (1,657) (1,667)
-------- -------- -------- -------- -------- --------
Loans, net......... $265,564 $261,723 $234,135 $200,189 $186,781 $172,133
======== ======== ======== ======== ======== ========
</TABLE>
- ----------------------------
(1) Includes committed but unadvanced loan amounts.
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<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 under 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 when there are 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.
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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 (44,071) (34,710) (51,141) (52,256) (48,300)
other, net.................................
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>
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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 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
-----------------------------------------------------------------------------
One- to Construction Home Equity
Four- Multi- Commercial and Loans and
Family Family Real Estate Development Lines of Credit
-------- -------- ----------- ------------ ----------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
One year or less......................... $ 1,172 $ 84 $ 1,286 $ 879 $ 57
After one year:
More than one year to three years...... 615 -- 212 51 31
More than three years to five years.... 2,235 -- 455 3,220 2,791
More than five years to 10 years....... 30,017 3,554 1,655 -- 4,249
More than 10 years to 15 years......... 35,218 3,625 6,414 -- 2,378
More than 15 years..................... 68,583 15,512 11,066 -- 54,638
-------- ------- ------- ------ -------
Total amount due..................... $137,840 $22,775 $21,088 $4,150 $64,144
======== ======= ======= ====== =======
Less:
Unadvanced loan funds ........................................................................................
Net deferred loan origination costs ..........................................................................
Allowance for loan losses ....................................................................................
Loans, net......................................................................................................
</TABLE>
<TABLE>
<CAPTION>
At August 31, 1998
-----------------------------------------------------------------------------
Total
Other Loans
Automobile Consumer Commercial Receivable
-----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Amounts due:
One year or less......................... $ 651 $ 744 $ 669 $ 5,542
After one year:
More than one year to three years...... 5,743 1,894 1,086 9,632
More than three years to five years.... 3,624 220 792 13,337
More than five years to 10 years....... -- 500 1,734 41,709
More than 10 years to 15 years......... -- 77 45 47,757
More than 15 years..................... 1 681 262 150,743
------- ------ ------ --------
Total amount due..................... $10,019 $4,116 $4,588 268,720
======= ====== ======
Less:
Unadvanced loan funds...................................................................................... (1,987)
Net deferred loan origination costs........................................................................ 892
Allowance for loan losses.................................................................................. (2,061)
--------
Loans, net................................................................................................... $265,564
========
</TABLE>
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<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
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<PAGE>
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 redeem the loan immediately
due and payable if a borrower transfers ownership of the property without the
Bank's consent. Due-on-sale clauses are an important means of adjusting the
yields on the Bank's fixed-rate mortgage loan portfolio and the Bank has
generally exercised its rights under these clauses. The Bank requires fire,
casualty, title and 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. With 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 and later approved 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 pay back 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--Our Loan Portfolio Possesses Increased Risk Due to Our Substantial
Number of Consumer, Multi-Family and Commercial Real Estate and Commercial
Business Loans."
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
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<PAGE>
the property is being refinanced, provided such loan complies with 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 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
affected by adverse conditions in the real estate market or the economy. The
Bank seeks to minimize these risks through its underwriting standards. See
"Risk Factors--Our Loan Portfolio Possesses Increased Risk Due to Our
Substantial Number of Consumer, Multi-Family and Commercial Real Estate and
Commercial Business Loans."
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
65
<PAGE>
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). 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
and 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 if a borrower defaults. See "Risk Factors--Our Loan
Portfolio Possesses Increased Risk Due to Our Substantial Number of Consumer,
Multi-Family and Commercial Real Estate and Commercial Business Loans."
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
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<PAGE>
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--Our Loan Portfolio Possesses Increased Risk Due to Our
Substantial Number of Consumer, Multi-Family and Commercial Real Estate and
Commercial Business Loans." 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.
Loan Approval Procedures and Authority. The lending policies and loan
approval limits of the Bank are established by the Board of Investment and
ratified by the Board of Trustees. 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.
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<PAGE>
All loans in excess of 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.
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 before foreclosure, the Bank will offer to work out a
repayment schedule with the borrower to avoid foreclosure. If 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 determines the classification of its assets and the amount of its
valuation allowances. These determinations can be reviewed 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
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<PAGE>
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Bank believes that it has established an adequate allowance for
possible loan losses, there can be no assurance that regulators, in reviewing
the Bank's loan portfolio, will not request the Bank to materially increase at
that time its allowance for possible loan losses, thereby negatively affecting
the Bank's financial condition and earnings at that time. Although management
believes that adequate specific and general loan loss allowances have been
established, future provisions are dependent upon future events such as loan
growth and portfolio diversification and, as such, further additions to the
level of specific and general loan loss allowances may become necessary.
Management of the Bank 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.
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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>
<TABLE>
<CAPTION>
At August 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.
70
<PAGE>
<TABLE>
<CAPTION>
At August 31, At December 31,
------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
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.
71
<PAGE>
Based upon 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--Our Loan Portfolio
Possesses Increased Risk Due to Our Substantial Number of Consumer, Multi-Family
and Commercial Real Estate and Commercial Business Loans." 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
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
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.
72
<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,
------------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------------
% of % of
Allowance Percent of Allowance Percent of
in each Loans in in Each Loans in
Category Each Category Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
---------- -------------- --------------- ---------- ------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans............ $ 1,506 73.07% 69.16% $ 1,524 78.28% 70.38%
Consumer loans............... 457 22.17 29.13 325 16.69 28.40
Commercial loans............. 98 4.76 1.71 98 5.03 1.22
----------- ------------- --------------- ----------- ------------ --------------
Total allowance for
loan losses............ $ 2,061 100.00% 100.00% $ 1,947 100.00% 100.00%
=========== ============= =============== =========== ============ ==============
At December 31,
------------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------------------------
% of % of
Allowance Percent of Allowance Percent of
in each Loans in in Each Loans in
Category Each Category Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
---------- -------------- --------------- ---------- ------------- ---------------
(Dollars in thousands)
<S>.......................... <C> <C> <C> <C> <C> <C>
Real estate loans............ $ 1,506 77.15% 69.34% $ 1,547 80.95% 74.71%
Consumer loans............... 348 17.83 29.03 256 13.40 23.65
Commercial loans............. 98 5.02 1.63 108 5.65 1.64
----------- ------------- --------------- ----------- ------------ --------------
Total allowance for
loan losses............ $ 1,952 100.00% 100.00% $ 1,911 100.00% 100.00%
=========== ============= =============== =========== ============ ==============
At December 31,
------------------------------------------------------------------------------------------------
1995 1994
------------------------------------------------------------------------------------------------
% of % of
Allowance Percent of Allowance Percent of
in each Loans in in Each Loans in
Category Each Category Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
---------- -------------- --------------- ---------- ------------- ---------------
(Dollars in thousands)
<S>.......................... <C> <C> <C> <C> <C> <C>
Real estate loans............ $ 1,555 84.60% 79.15% $ 1,441 86.96% 88.01%
Consumer loans............... 145 7.89 19.19 78 4.71 10.52
Commercial loans............. 138 7.51 1.66 138 8.33 1.47
----------- ------------- --------------- ----------- ------------ --------------
Total allowance for
loan losses............ $ 1,838 100.00% 100.00% $ 1,657 100.00% 100.00%
=========== ============= =============== =========== ============ ==============
At December 31,
--------------------------------------------------
1993
--------------------------------------------------
% of
Allowance Percent of
in each Loans in
Category Each
to Total Category to
Amount Allowance Total Loans
---------- -------------- ---------------
(Dollars in thousands)
<S>.......................... <C> <C> <C>
Real estate loans............ $ 1,402 84.10% 87.80%
Consumer loans............... 127 7.62 11.01
Commercial loans............. 138 8.28 1.19
----------- ------------- ---------------
Total allowance for
loan losses............ $ 1,667 100.00% 100.00%
=========== ============= ===============
</TABLE>
73
<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 to (1) achieve positive interest rate spreads with minimal
administrative expense and (2) 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 (1) improvement in the credit risk
profile of the Bank's balance sheet by converting whole loans into mortgage-
backed securities guaranteed by Fannie Mae, (2) reduction of the required level
of risk-based capital, and (3) 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.
74
<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.
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 if 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 affected by 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.
75
<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
--------- --------- ----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
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.................... 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(1)(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.
76
<PAGE>
The following table sets forth the Bank's securities activities for the
periods indicated. This table does not include FHLB 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
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
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 $ 14,095 $18,476
======= ======= ======= ======== =======
</TABLE>
77
<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 More than Ten
Year to Five Years Years to Ten Years Years Total
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
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 stock held by the Bank.
78
<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 receive 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 as such, must
pay 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.
79
<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
Blance 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 dep 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.
80
<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 may be withdrawn 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 under 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
August 31, At or For the Year Ended 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>
81
<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."
82
<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
or Leasehold
Leased, Original Year Date of Lease/ Improvements
Licensed or Leased License at August 31,
Location Owned or Acquired Expiration 1998
- --------------------------------------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Main/Executive Office: (In thousands)
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 Street
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......................... Leased(6) 1998 2003 --
Westfield, Massachusetts 01085
------
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.
83
<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 must
comply with federal income taxation laws and regulations 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. Before 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. Before 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 it was established,
approximately 150% of the amount actually used (limited to the amount of the
reserve) would be taxed 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
84
<PAGE>
distributed (but not in excess of the amount of such reserves) will be included
in the Bank's income. The term "non-dividend distributions" is defined as
distributions in excess of the Bank's current and accumulated earnings and
profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not cause this pre-1988 reserve to be included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such distribution (but not in
excess of the amount of such reserves) would be includable in income for federal
income tax purposes, assuming a 35% federal corporate income tax rate. See
"Regulation and Supervision" and "Dividend Policy" for limits on the payment of
dividends by the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be
offset by net operating loss carry forwards. The adjustment to AMTI based on
book income will be an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and before the 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 that the AMT will apply to it.
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 Taxation. Before July, 1995, the Bank had to pay 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, carryforwards 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 must pay a tax equal to 0.33% of its gross income. A security
corporation that is not a bank holding company under the Code must pay 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
85
<PAGE>
conduct any activities deemed impermissible under the governing statutes and the
various regulations, directives, letter rulings and administrative
pronouncements issued by the Massachusetts DOR.
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
extensively regulated 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 must pay deposit insurance assessments and is examined and supervised 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 may
be sanctioned. 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 as such must pay 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.
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.
86
<PAGE>
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, within the limits of 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 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
87
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
GAAP Capital to Total Assets............ 9.11%
Total Capital to Risk-Weighted Assets... 12.82%
Tier I Leverage Ratio................... 9.16%
Tier I to Risk-Weighted Assets.......... 12.05%
</TABLE>
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 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, under 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. However, the maximum permissible investment
was 100% of Tier 1 capital, as specified by the FDIC's regulations, or the
maximum amount permitted by Massachusetts Banking Law, whichever is less. Such
grandfathering authority may be terminated upon the FDIC's determination that
such investments pose a safety and soundness risk to the Bank or if 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 under 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
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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
before 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 must adhere 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 must comply with one or more of a number of additional
restrictions, including but not limited to an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks or dismiss
directors or officers, and restrictions on interest rates paid on deposits,
compensation of executive officers and capital distributions by the parent
holding company. "Critically undercapitalized" institutions must comply with
additional sanctions including, under to a narrow exception, the appointment of
a receiver or conservator 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
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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, under 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 under 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 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: (1) insolvency; (2) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices; (3) existence
of an unsafe or unsound condition to transact business; and (4) 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.
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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 (which may be adjusted 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% (which may be adjusted
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 (which may be adjusted by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements.
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 also must follow the 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.
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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. 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 have to
adhere to the OTS' regulations and reporting requirements. In addition, the OTS
may examine and supervise the Company and 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 have 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,
provided the prior approval of the OTS is obtained, 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: (1) interstate supervisory acquisitions by savings
and loan holding companies; and (2) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions.
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
qualify as a QTL. 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: (1) specified liquid assets up to 20% of total
assets; (2) intangibles, including goodwill; and (3) 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 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.
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Massachusetts Holding Company Regulation. In addition to the federal
holding company regulations, a bank holding company organized or doing business
in Massachusetts must comply with any 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.
Thrift Rechartering
The Bank is, and the Company, as a savings and loan holding company, will
be extensively regulated and supervised. 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 may also change because of new interpretations 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 in 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 have
to observe 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. The resale restrictions of Rule 144 under the
Securities Act govern shares purchased by an affiliate of the Company. 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
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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 (1) 1%
of the outstanding shares of the Company or (2) 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 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."
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MANAGEMENT OF THE BANK
Trustees
The Directors of the Company are also Trustees of the Bank. At the
conclusion 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 1963 1999
and 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.
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
after the Conversion, and until their successors are elected and qualified or
until death, resignation, retirement or removal by the Board of Directors.
Officers are re-elected by the Board of Directors annually.
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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.
Paul Tsatsos is a self-employed certified public accountant. He has been a
Trustee with the Bank since 1995.
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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
LLP 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 approves
all loans made or acquired by the Bank, establishes rates of interest charged
for loans and paid for deposits, approves and monitors all securities investment
activities and approves and monitors 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 reviews the Bank's financial statements, supervises
the Bank's internal auditor and engages 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 reviews and
proposes 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, Vice President of the Bank,
in an ex officio capacity. This committee examines and supervises 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.
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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 certifies 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 Trustees 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
Trustees 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. To qualify for benefits under the Trustee Plan, a trustee must be 65
years old and have 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. The retirement benefit
provided to each trustee is based on an indexed formula, which 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 designed to offset annual expenses associated
with the Trustee Plan. The Bank generally expects 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.
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Honorary Trustees
The Bank also maintains three Honorary Trustees. Under 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.
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 1997 $171,572 $32,200 -- -- -- -- $121,000
President and Chief
Executive Officer
Agostino J. Calheno 1997 $ 94,800 $17,940 -- -- -- -- --
Senior Vice President-
Lending
Debra L. Murphy 1997 $ 94,800 $17,800 -- -- -- -- --
Senior Vice President
and Treasurer
James E. Gardner 1997 $ 94,400 $ 9,060 -- -- -- -- --
Vice President
</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 before 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
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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. If the Bank or the Company chooses to terminate the
Executive's employment for reasons other than for cause, or if the Executive
resigns from the Bank and the Company after a: (1) failure to re-elect the
Executive to his/her current offices; (2) material change in the Executive's
functions, duties or responsibilities; (3) relocation of the Executive's
principal place of employment by more than 25 miles; (4) reduction in the
benefits and perquisites being provided to the Executive in the Employment
Agreement; (5) liquidation or dissolution of the Bank or the Company; or (6)
breach of the Employment Agreement by the Bank or the Company, the Executive or,
if the Executive dies, 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/or 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 must adhere 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, if the
Executive dies, his/her beneficiary, would be entitled to a severance payment
equal to the greater of: (1) the payments due for the remaining terms of the
agreement; or (2) 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. Even
though both the Bank and Company Employment Agreements provide for a severance
payment if a change in control occurs, 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 if 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 under 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 in a legal judgment, arbitration or settlement. The
Employment Agreements also provide that the Bank and Company shall indemnify the
Executive to the fullest extent legally allowable. If a change in control of
the Bank or the Company occurred, 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 if 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. If a change in
control of the Company or the Bank occurred, 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.
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Employee Severance Compensation Plan
Upon completion of the Conversion, the Bank intends to establish the Woronoco
Savings Bank Employee Severance Compensation Plan ("Severance Plan") which will
provide eligible employees with a cash payment if the Bank or the Company
undergoes a change in control 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, if the Bank or the Company undergoes a change in
control, 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 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 the Bank, up to a maximum of two years'
base salary. The Bank may amend or terminate the Severance Plan at any time
before a change in control. If the provisions of the Severance Plan are
triggered, the total amount of payments that would be due, based solely upon
current salary levels 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, within 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, within the
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 generally must comply with federal and state income taxes and
distributions made before a participant attains age 59 1/2 also must comply
with 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
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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.
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 15 20 25 30 35
Earnings(1)
- -------------------- ----------- ---------- ------------ ---------- ----------
<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 before 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 before the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding the investment of funds contributed to the ESOP, within the
limits of 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 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. 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. The Bank
may, unless prohibited, 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.
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The trustee of the ESOP will pledge shares of common stock purchased by the
ESOP in connection with the Conversion as collateral for the loan and will hold
the shares in a suspense account. As the trustee repays the loan, the trustee
will release a portion of the shares from the suspense account and allocated
them to the accounts of participants in the ESOP. The trustee will release the
pledged shares annually from the suspense account in an amount proportional to
the repayment of the ESOP loan and allocate the released shares to the
participants as follows: first, if applicable, a portion of the shares released
during the plan year will be allocated to a special "matching" account under the
ESOP equal in value to the amount of matching contribution, if any, to which the
participant would be entitled under the terms of the 401(k) Plan for the plan
year. Second, the 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 before its adoption of the ESOP).
Benefits under the ESOP are not subject to tax until distributed to the
participant. Such distributions may not be made until the participant
terminates employment.
The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
within the limits of 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. If 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 (the "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 before 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 before 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 before 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. Until paid to plan
participants, creditors may make claims against the trust's assets if the Bank
becomes insolvent.
Split Dollar Life Insurance Arrangement. In 1995, the Bank established a
split-dollar life insurance arrangement for Mr. Mahoney primarily to restore
retirement benefits lost under the Pension Plan due to limitations imposed by
the Code. Under the terms of the 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
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policy's cash surrender value, the Bank will recover all of the 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.
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.
If 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. If 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 available for 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: (1) Stock
Options intended to qualify as incentive Stock Options under Section 422 of the
Code ("Incentive Stock Options"); (2) Stock Options that do not so qualify
("Non-Statutory Stock Options"); and (3) 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
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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. If the stockholders approve
the Plan, the Company intends to grant Stock Options with Limited Option Rights
under the plan at an exercise price equal to at least the fair market value of
the underlying common stock on the date of grant.
An individual will not be deemed to have received taxable income upon the
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been a disqualifying disposition. In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
common stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
The Stock-Based Incentive Plan will provide for the granting of Stock Awards
and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of the Company or Bank as described in the
plan. Within the limits of 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
under 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. Before 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
within the limits of 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 if an employee or director dies or becomes disabled, 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.
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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. If the optionee continues to perform services
as a director or consultant on behalf of the Bank, the Company or an affiliate
after retirement, unvested options would continue to vest in accordance with
their original vesting schedule until the optionee ceases to serve as a
consultant or director. If a participant dies, is disabled or retires, 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 if the optionee dies, the amount by which the fair market value of
the common stock exceeds the exercise price of the options on the date of the
employee's termination of employment.
Within the limits of any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended before the one-year period ends to provide for accelerated vesting of
previously granted Stock Options or Stock Awards if a change in control of the
Company or the Bank occurs. 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 if 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 a 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 before the contested election occurs.
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, Massachusetts law regulates the granting of loans to officers and
trustees of the Bank. 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.
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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 of the Estimated
Price Range (1) Price 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 75,000 7,500 0.21 7,500 0.16
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 $570,000 57,000 1.60% 57,000 1.18%
Officers 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 for 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 1.48% and 1.09% at the minimum and maximum of the Estimated
Price Range, respectively.
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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 BANK'S BOARD OF CORPORATORS AND THE SATISFACTION OF CERTAIN
OTHER CONDITIONS. HOWEVER, ANY APPROVALS BY THE COMMISSIONER WILL 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, by 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 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 certain conditions. The Bank's governing board must also approve the Plan at
a special meeting called for this purpose to be held on January 20, 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 before
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 complete the Conversion and transact its business
after the Conversion as is contemplated and in accordance with the Bank's
operating policies. If 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 before 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. If 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 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 the Conversion, including shares issued to
the Foundation; and (4) trustees, corporators, directors, officers and
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employees of the Bank and Company who do not otherwise qualify as an Eligible
Account Holder or Supplemental Eligible Account Holder. If the Commissioner
approves, shares will be offered in a direct community offering to the general
public (the "Direct Community Offering"). People residing in Hampden and
Hampshire Counties, Massachusetts will have a preference to purchase stock in
the Direct Community Offering (such people are referred to as "Preferred
Subscribers"). The Direct Community Offering and the Subscription Offering may
begin at the same time. 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 currently 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 further believes that the funding of the Foundation with
common stock of the
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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 currently 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. Under 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 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 within the limits of
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
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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 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 currently 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 amount that the Foundation is
required to pay the Company for such stock. A 10% limitation of the Company's
annual taxable income before the charitable contribution deduction applies to
such deduction. The Company would be able to carry forward for federal income
purposes any unused portion of the
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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 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--The Contribution to the Foundation May Not Be
Tax Deductible and Thus It Could Have a Significantly Greater Effect on Our
Earnings Than We Expect ."
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, is
taxed at a rate 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;
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 if 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.
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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 need to
comply with 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 Bank's governing board,
the board of 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 most commercial banks, 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 under the terms of 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.
Notwithstanding the positive attributes associated with the conversion, the Bank
recognizes that, as a public company, (1) management will be scrutinized by
public stockholders, something that the Bank presently does not experience and
(2) the Company will incur increased expenses as it satisfies the reporting and
other obligations of a publicly owned company.
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 may be in a position after the Conversion, 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 $32.5
million, or 9.16% 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 $47.4 million, resulting in a pro forma leverage
capital ratio of 12.82% giving effect to the Conversion. If the holding company
form of organization is not utilized and all the net proceeds, at the midpoint
of the Estimated Price Range, are retained by the Bank, the Bank's Tier I
Leverage capital would increase to $67.7 million, resulting in a pro forma Tier
I Leverage capital ratio of 17.37% 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, if favorable market conditions exist and applicable regulatory
approvals are received, 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
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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 if the institution is liquidated. However, this ownership
interest is tied to the depositor's account and has no tangible 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 the payment of those expenses incurred in connection
with the Conversion.
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 regulated by the
Commissioner and the FDIC. 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.
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.
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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 before the Conversion.
Effect on Voting Rights of Corporators. The Bank presently maintains a
governing board of 84 corporators. Generally, the board consists of depositors
of the Bank who are residents of the communities served by the Bank. Members of
the board are nominated by the Bank's nominating committee and elected by ballot
at the annual meeting of the board. Generally, the board promotes the goodwill
of the Bank and consists, therefore, of individuals who are successful in their
occupations and respected in their communities. The board also possesses all
voting rights in the Bank. Upon Conversion, the board will cease to exist and
corporators will no longer be entitled to vote at meetings of the Bank. Upon
Conversion, the Company, as the sole stockholder of the Bank, will possess all
voting rights in the Bank. The holders of the common stock of the Company will
possess all voting rights in the Company. 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 before
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.
Under 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 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
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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 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 to fill
unfilled orders in the Subscription and Direct Community Offerings if the
Estimated Price Range is increased.
No shares of common stock in the Conversion may be sold unless before such
sale 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."
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
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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.
The Commissioner and FDIC must also approve the actual number of shares issued.
If 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 before 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 7.4%. 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 Stock
Purchases."
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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 ($252,166,180) in
each case on the Eligibility Record Date. 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.
If 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
fewer 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 ($266,832,653), in each case on the Supplemental Eligibility Record
Date.
If Supplemental Eligible Account Holders exercise subscription rights for a
number of shares of common stock in excess of the total number of shares
eligible for subscription after the satisfaction of subscriptions by Eligible
Account Holders, the shares of common stock will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make his total allocation equal to
the lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated among the remaining subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective qualifying deposits bear to the
total amount of Qualifying Deposits of all remaining Supplemental Eligible
Account Holders whose subscriptions remain unfilled; provided, however, that no
fractional shares shall be issued. If the amount so allocated exceeds the
amount subscribed for by any one or more Supplemental Eligible Account Holders,
the excess shall be reallocated (one or more times as necessary) among those
Supplemental Eligible Account Holders whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
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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 fewer 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 Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders and Supplemental Eligible Account Holders, 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 after 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. A 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 applies to the shares.
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 February 12, 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 before 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 the FDIC, all funds
delivered to the Bank pursuant to the Subscription Offering will be returned
promptly to the subscribers with interest and all withdrawal authorizations will
be canceled. If an extension beyond the 45 day period following the Expiration
Date is granted, the Bank will notify subscribers of the extension of time and
of any rights of subscribers to modify or rescind their subscriptions and have
their funds returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Bank of their intention to confirm,
modify, or rescind their subscription. If an affirmative response to any
resolicitation is not received by the Company from a subscriber, such order will
be rescinded and all subscription funds will be promptly returned with interest.
Such extensions may not go beyond August 26, 2000.
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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 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, (1) training management and staff to perform tasks in connection
with the Conversion, (2) managing and setting up the Conversion Center and (3)
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 does not include 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. Sandler O'Neill shall be reimbursed for its reasonable out-of-
pocket expenses, in an amount not to exceed $50,000, including legal fees. 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 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 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.
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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 by 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 the 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 before such date or hand
delivered any later than two days before 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. By executing and returning the regulatory mandated
certification form, you will be certifying that you received this prospectus and
acknowledging that the common stock is not a deposit account and is not insured
or guaranteed by any federal or state governmental agency. You will also be
acknowledging that you received disclosure concerning the risks involved in this
Offering. The certification form could be used as support to show that you
understand the nature of this investment.
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: (1) returned as undeliverable by the United
States Postal Service; (2) not received by such time; (3) executed defectively;
or (4) 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.
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 do so may result in a reduction in the number of
shares allocated to a subscribing member.
Payment for subscriptions may be made (1) in cash if delivered in person at
any full-service banking office of the Bank; (2) by check, bank draft or money
order, provided that checks will only be accepted subject to collection; or (3)
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 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
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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 the completion of the Subscription and Direct
Community Offering, if all shares are sold, or upon the completion 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) 568-5733.
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 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
The rules and regulations of the Commissioner and the FDIC provide that 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 before the completion of the
Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IF THEY BECOME AWARE OF THE TRANSFER OF
SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
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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 if 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 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, if an extension is granted.
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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;
(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;
(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
(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, and (2) and (3) above, the overall maximum number
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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 the Bank's
board of corporators 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
corporators 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.
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.
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For a further discussion of limitations on purchases of a converting
institution's stock at the time of and after 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
While unlikely, if the Bank in its present mutual form is completely
liquidated, 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, if the Bank were completely liquidated, 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 the Conversion. At September 30,
1998, the liquidation account totalled approximately $33.4 million. The
liquidation account will not be reflected as an asset or liability on the
Company's or the Bank's financial statements after the Conversion.
Additionally, no dividends may be paid to stockholders of the Bank if the
dividends would reduce stockholders' equity in the Bank below the amount of the
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 before 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 after 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
Completion 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
matters of Massachusetts 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
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Account Holders, except as noted below. The federal and Massachusetts tax
consequences will remain unchanged if 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 LLP, 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 before 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 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. If such disagreement
existed, there can be no assurance that the IRS would not prevail in a judicial
or administrative proceeding.
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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 or
substantial disability of such trustee, corporator, director, officer or
associate, or upon the written approval of the Commissioner. 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 must comply with 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, before 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 Bank's governing board of
corporators. 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
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Charter and Bylaws and management remuneration provided for in the Conversion
may also have "anti-takeover" effects. Finally, regulatory restrictions may make
it difficult for persons or companies to acquire control of either the Company
or the Bank.
Restrictions in the Company's Certificate of Incorporation and Bylaws
General. 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 by Rule
13d-3 of the General Rules and Regulations of the Exchange Act. That definition
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 under 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 under 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.
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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 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 to approve certain "Business Combinations" with an "Interested
Stockholder," 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 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 (1) 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 before the time when the Interested Stockholder
became an Interested Stockholder or (2) 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: (1) 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; (2) 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; (3) 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; (4) 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 (5) 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.
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The Trustees and executive officers of the Bank are purchasing
approximately 1.18% of the shares of the common stock to be sold 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
stockholders approve the proposed Stock-Based Incentive Plan, 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
may control the voting of approximately 22.2% 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 (1) make a tender or exchange
offer for any equity security of the Company, (2) merge or consolidate the
Company with another corporation or entity or (3) 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.
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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 if a change in control of the Company or the Bank occurs or a
tender or exchange offer for their stock is made. See "Management of the Bank--
Other Benefit Plans--Stock-Based Incentive Plan." The Company and the Bank have
also entered into agreements with key officers and intends to establish the
Severance Compensation Plan which will provide such officers and eligible
employees with additional payments and benefits on the officer's termination in
connection with a change in control of the Company or the Bank. See "Management
of the Bank--Employment Agreements," "--Change in Control Agreements" and "--
Employee Severance Compensation Plan." The foregoing provisions and limitations
may make it more difficult for companies or persons to acquire control of the
Bank. Additionally, the provisions could deter offers to acquire the
outstanding shares of the Company which might be viewed by stockholders to be in
their best interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws are in the best interest of the Company
and its stockholders. An unsolicited non-negotiated takeover proposal can
seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the Board of Directors believes it is in the best
interests of the Company and its stockholders to encourage potential acquirors
to negotiate directly with management and that these provisions will encourage
such negotiations and discourage non-negotiated takeover attempts.
Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
Interested Stockholder) may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (1) any business combination if, before 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; (2) 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; (3) 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 (4) 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.
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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 In Our Governing Instruments and Voting
Control of Management May Discourage Takeover Attempts."
The Bank's stock Charter will contain a provision whereby the acquisition
of beneficial ownership of more than 10% of the issued and outstanding shares of
any class of equity securities of the Bank by any person (i.e., any individual,
corporation, group acting in concert, trust, partnership, joint stock company or
similar organization), either directly or through an affiliate thereof, will be
prohibited for a period of three years following the date of completion of the
Conversion. If 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 by the exercise of any dissenter or appraisal rights.
If 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. If a proposed merger, tender offer or other
attempt to gain control of the Bank occurs 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.
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Regulatory Restrictions
Massachusetts Division of Banks Conversion Regulations. Regulations issued
by the Commissioner provide that for a period of three years following the date
of the completion of the Conversion, no person shall directly or indirectly
offer to acquire or acquire the beneficial ownership of more than ten percent
(10%) of any class of any equity security of the Company without prior written
notice to the Company and the prior written approval of the Commissioner. Where
any person, directly or indirectly, acquires beneficial ownership of more than
ten percent (10%) of any class of any equity security of the Company without
prior written notice to the Company and the prior written approval of the
Commissioner, the securities beneficially owned by such person in excess of ten
percent (10%) shall not be voted by any person or counted as voting shares in
connection with any matter submitted to the stockholders for a vote, and shall
not be counted as outstanding for purposes of determining the affirmative vote
necessary to approve any matter submitted to the stockholders for a vote. The
Commissioner may take any further action to enforce these regulatory
restrictions as he deems appropriate.
Change in Bank Control Act. The acquisition of ten percent (10%) or more
of the common stock outstanding may trigger the provisions of the Change in Bank
Control Act. The FDIC has also adopted a regulation under 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 (1) the
Bank has a class of voting securities which is registered under Section 12 of
the Exchange Act, or (2) 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. If the Bank does not qualify to be a
QTL, attempts to acquire control of the Bank trigger the 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 Commissioner.
Prior approval of the Commissioner is also required before any action is
taken that causes any stock banking institution to acquire all of the capital
stock of any other stock banking institution. The Commissioner will approve
such a plan of acquisition, following approval by a majority vote of the boards
of directors of the acquiror and the acquiree and a two-thirds approval of the
stockholders of the acquiree, provided the Commissioner finds that competition
among banking institutions will not be unreasonably affected and that public
convenience and advantage will be promoted. Any such company shall engage
directly or indirectly only in such activities as are now or may hereafter be
proper activities for bank holding companies under the BHC Act.
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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.
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. See
"Dividend Policy" and "Regulation and Supervision" for limitations on the
payment of dividends 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 mutual savings bank, corporate powers and control of the
Bank are vested in (1) its governing board of corporators who elect the Trustees
of the Bank and (2) the Bank's Board of Trustees who elect the officers of the
Bank and fill vacancies on the Board of Trustees. After Conversion, the owners
of the shares of stock of the Bank, which will be the Company, will possess all
voting rights in the Bank. The Company's Board of Directors will control all
voting rights in the Bank. Consequently, the holders of the common stock of the
Company will not have direct control of the Bank.
Liquidation. If any liquidation, dissolution or winding up of the Bank
occurs, the Company, as holder of the Bank's 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. If
liquidation, dissolution or winding up of the Company occurs, 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.
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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 cannot be redeemed.
Indemnification and Limit on Liability. The Company's Certificate of
Incorporation contains provisions which limit the liability of directors,
officers and employees of the Company and indemnify such individuals. Such
provisions provide that each person who was or is made a party or is threatened
to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she is or was a director or officer of the Company shall
be indemnified and held harmless by the Company to the fullest extent authorized
by the Delaware General Corporation Law against all expense, liability and loss
reasonably incurred. Under certain circumstances, the right to indemnification
shall include the right to be paid by the Company the expenses incurred in
defending any such proceeding in advance of its final disposition. In addition,
a Director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages except for liability for any breach of the
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law, under Section 174 of the
Delaware General Corporation, or for any transaction from which the Director
derived an improper personal benefit.
Preferred Stock
None of the shares of the Company's authorized preferred stock will be
issued in the Conversion. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Company presently does not have plans to issue preferred stock.
DESCRIPTION OF STOCK OF THE BANK
General
If 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 stock of the Bank.
The stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of 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 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.
136
<PAGE>
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 after the Conversion, the holders
thereof may also have priority over the holders of common stock in the event of
liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. Upon receipt by the Bank of the full specified purchase
price therefor, the common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Registrar and
Transfer Company, Cranford, New Jersey.
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 LLP, 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 LLP will rely as
to all matters of Delaware corporate law on the opinion of Morris, Nichols,
Arsht & Tunnell. Massachusetts 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
137
<PAGE>
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, at Leverett Saltonstall Building,
Room 2004, 100 Cambridge Street, Boston, Massachusetts 02202 and at the FDIC's
offices at 15 Braintree Hill, Office Park, Braintree, Massachusetts 02184.
The Company has filed with the Office of Thrift Supervision an Application
to form a Holding Company. This Prospectus omits certain information contained
in such Application. Such Application may be inspected at the offices of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552.
In connection with the Conversion, the Company will register its common
stock with the SEC under Section 12(b) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock must comply with 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. If
the Bank amends the Plan to eliminate the 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 must comply with the same
obligations and restrictions.
A copy of the Plan of Conversion, as amended, Certificate of Incorporation
and the Bylaws of the Company and the proposed 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.
138
<PAGE>
WORONOCO SAVINGS BANK
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............................ 35
Consolidated Statements of Changes in Surplus for the
Eight Months Ended August 31, 1998 (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 or
notes thereto.
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 $34,531 12.8% $20,477 8.0% $25,596 10.0%
Tier 1 Capital to Risk
Weighted Assets 32,470 12.1 10,238 4.0 15,358 6.0
Tier 1 Capital to Average
Assets 32,470 9.2 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, L.P. 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 OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Questions and Answers about the Stock Offering............................ 3
Summary................................................................... 4
Risk Factors.............................................................. 8
Selected Consolidated Financial and Other Data of the Bank................ 11
Recent Developments....................................................... 15
Woronoco Bancorp, Inc..................................................... 22
Woronoco Savings Bank..................................................... 22
Woronoco Savings Charitable Foundation.................................... 23
Regulatory Capital Compliance............................................. 25
Use of Proceeds........................................................... 26
Dividend Policy........................................................... 27
Market for the Common Stock............................................... 27
Capitalization............................................................ 28
Pro Forma Data............................................................ 29
Comparison of Valuation and Pro Forma Information
with No Foundation....................................................... 34
Woronoco Savings Bank Consolidated Statements of Income................... 35
Management's Discussion and
Analysis of Financial Condition
and Results of Operations............................................... 36
Business of the Company................................................... 55
Business of the Bank...................................................... 56
Federal and State Taxation................................................ 84
Regulation and Supervision................................................ 86
Management of the Company................................................. 94
Management of the Bank.................................................... 95
The Conversion............................................................ 108
Restrictions on Acquisition of the
Company and the Bank................................................... 128
Description of Capital Stock of the Company............................... 135
Description of Stock of the Bank.......................................... 136
Transfer Agent and Registrar.............................................. 137
Experts................................................................... 137
Legal and Tax Opinions.................................................... 137
Additional Information.................................................... 137
Index to Consolidated
Financial Statements.................................................. F-1
</TABLE>
_____________________________
Until February 16, 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 Shares
Woronoco Bancorp, Inc.
(Proposed Holding Company for
Woronoco Savings Bank)
COMMON STOCK
(par value $0.01 per share)
----------
PROSPECTUS
----------
Sandler O'Neill & Partners, L.P.
January 13, 1999
Sandler O'Neill & Partners, L.P.
================================================================================
