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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
COMMISSION FILE NUMBER 0-23533
MYSTIC FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3401049
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 High Street, Medford, Massachusetts 02155
(Address of principal executive office-zip code)
Telephone (781) 395-2800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No .
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-K [ X ]
As of August 24, 2000, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant was
approximately $19,871,930.
As of August 24, 2000, 1,991,104 shares of Registrant's common stock
were outstanding.
Documents Incorporated by Reference:
Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders are incorporated by reference in Part III.
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MYSTIC FINANCIAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
JUNE 30, 2000
TABLE OF CONTENTS
PART I
ITEM 1. Business 1
ITEM 2. Properties 25
ITEM 3. Legal Proceedings 26
ITEM 4. Submission of Matters to a Vote of Security Holders 26
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 26
ITEM 6. Selected Financial Data 27
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 39
ITEM 8. Financial Statements and Supplementary Data 40
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 40
PART III
ITEM 10. Directors and Executive Officers of the Registrant 41
ITEM 11. Executive Compensation 41
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management 41
ITEM 13. Certain Relationships and Related Transactions 41
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 41
SIGNATURES 43
PART I
ITEM 1. BUSINESS
General
On January 8, 1998, Medford Co-operative Bank (the "Bank") completed
its conversion from mutual to stock form and became a wholly owned
subsidiary of Mystic Financial, Inc. ("Mystic" or the "Company"). On such
date, the Company sold 2,711,125 shares of its common stock, par value
$0.01 per share (the "Common Stock"), to the public, at a per share price
of $10.00. The conversion of the Bank from mutual to stock form, the
formation of the Company as the holding company for the Bank and the
issuance and sale of the Common Stock are herein referred to collectively
as the "Conversion." The Conversion raised $25.7 million in net proceeds.
Mystic used $3.2 million of retained net proceeds to fund a loan to its
Employee Stock Ownership Plan ("ESOP") to purchase 216,890 shares of the
Common Stock in open-market purchases following completion of the
Conversion.
The Company's principal business activity consists of the ownership
of the Bank. The Company also invests in short-term investment grade
marketable securities and other liquid investments. The Company has no
significant liabilities (other than those of the Bank). The Company neither
owns nor leases any property but instead uses the premises and equipment of
the Bank. At the present time, the Company does not employ any persons
other than certain officers of the Bank who do not receive any extra
compensation as officers of the Company. The Company utilizes the support
staff of the Bank from time to time, as needed. Additional employees may be
hired as deemed appropriate by the management of the Company. Unless
otherwise disclosed, the information presented in this Annual Report on
Form 10-K represents the activity of the Bank for the period prior to
January 8, 1998 and the consolidated activity of Mystic and the Bank
thereafter.
The Bank is a Massachusetts chartered stock co-operative bank founded
in 1886 with three full-service offices and one educational branch office
in Medford, Massachusetts and full-service offices in Lexington and
Arlington, Massachusetts. The Bank's deposits have been federally insured
since 1986 and are currently insured by the Bank Insurance Fund ("BIF") of
the Federal Deposit Insurance Corporation ("FDIC") and the Share Insurance
Fund of the Co-operative Central Bank. The Bank has been a member of the
Co-operative Central Bank since 1932 and a member of the Federal Home Loan
Bank ("FHLB") since 1988. The Bank is subject to comprehensive examination,
supervision and regulation by the Commissioner of Banks of the Commonwealth
of Massachusetts (the "Commissioner") and the FDIC. These regulations are
intended primarily for the protection of depositors and borrowers. The Bank
exceeded all of its regulatory capital requirements at June 30, 2000.
The business of the Bank consists of attracting deposits from the
general public and using these funds to originate various types of loans
primarily in eastern Middlesex County, Massachusetts, including mortgage
loans secured by one- to four-family residences, commercial loans secured
by general business assets and commercial real estate loans secured by
commercial property, and to invest in U.S. Government and Federal Agency
and other securities. To a lesser extent, the Bank engages in various forms
of consumer and home equity lending. The Bank's profitability depends
primarily on its net interest income, which is the difference between the
interest income it earns on its loans and investment portfolio and its cost
of funds, which consists mainly of interest paid on deposits and on
borrowings from the FHLB. Net interest income is affected by the relative
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on these balances. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income.
The Bank has one active subsidiary, Mystic Securities Corporation,
which was established for the sole purpose of acquiring and holding
securities. All securities held by Mystic Securities Corporation are
investments which are permissible for banks to hold under Massachusetts
law.
Market Area
The Bank's main office and three branch offices are located in
Medford, Middlesex County, Massachusetts. The Bank has a full-service
office in Lexington, Middlesex County, Massachusetts, which opened in
November 1998 and in Arlington, Middlesex County, Massachusetts, which
opened in May 2000. The city of Medford, containing approximately 60,000
residents, is located approximately seven miles from downtown Boston in the
northern suburbs of Boston, bounded by the towns of Malden, Everett,
Somerville, Stoneham, Winchester and Arlington. The city of Medford is
easily accessible from downtown Boston via Interstate 93 and is accessible
via other state roads connecting the communities within the Route 128
corridor surrounding Boston. As an established metropolitan suburb, Medford
consists mostly of developed single- and multi-family properties within a
network of well-maintained neighborhoods. The town of Lexington is a
community consisting mainly of single-family homes while the town of
Arlington contains a greater mix of small businesses and single- and multi-
family housing. The Bank considers its primary market area to be the
communities of Medford, Malden, Everett, Stoneham, Arlington, Winchester,
Somerville, Melrose, and Lexington, Massachusetts.
The economic base of the Bank's market area is diversified and
includes a number of financial service institutions, industrial and
manufacturing companies, hospitals and other health care facilities and
educational institutions. The major employers in the Medford area are Tufts
University, the city of Medford, Lawrence Memorial Hospital, and the Meadow
Glen Mall, with approximately 1,900, 1,400, 900 and 900 employees each,
respectively. Management believes that the housing vacancy rate in Medford
is very low. The majority of the Bank's lending and deposit activity has
historically been in Medford, although the commercial loan department has
been largely responsible for expanded business throughout eastern Middlesex
County. Middlesex County, located in eastern Massachusetts to the north and
west of the city of Boston, is part of the Boston metropolitan area. Based
on US Census and HUD estimates for 2000, the median household income for
Middlesex County is $65,000.
Management believes that the Bank's lending success has been due, in
part, to the favorable income, population and housing demographics in
Medford and in the Bank's market area. At the same time, the growth of the
market area and delineated lending area and their proximity to Boston has
resulted in a highly competitive environment among the many financial
institutions competing for deposits and loans.
Competition
The Bank experiences competition both in attracting and retaining
savings deposits and in the making of mortgage, commercial and other loans.
Direct competition for savings deposits primarily comes from larger
commercial banks and other savings institutions located in or near the
Bank's primary market area which often have significantly greater financial
and technological resources than the Bank. Additional significant
competition for savings deposits comes from credit unions, money market
funds and brokerage firms.
With regard to lending competition in the local market area, the Bank
experiences the most significant competition from the same institutions
providing deposit services, most of whom have placed an emphasis on real
estate lending as a line of business. In addition, the Bank competes with
local and regional mortgage companies, independent mortgage brokers and
credit unions in originating mortgage and non-mortgage loans. The primary
factors in competing for loans are interest rates and loan origination fees
and the range of services offered by the various financial institutions.
Competition from other financial institutions operating in the Bank's
local community includes a number of both large and small commercial banks
and savings institutions. The Bank has experienced growth in loans and
deposits in recent years primarily due to an increased emphasis on
marketing products and services. However, competition remains high in the
marketplace.
Lending Activities
The Bank originates loans through its three offices located in
Medford and its offices in Lexington and Arlington, Massachusetts. The
principal lending activities of the Bank are the origination of
conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential properties in its
designated community reinvestment area, consisting of the Massachusetts
communities of Medford, Malden, Everett, Stoneham, Arlington, Winchester,
Somerville, Lexington and Melrose, and the origination of commercial loans
secured by commercial real estate and commercial assets within eastern
Middlesex County. To a lesser extent, the Bank also originates consumer
loans including home equity and passbook loans.
In the past several years, the Bank has made a major commitment to
small business commercial lending. The Bank has expanded its commercial
lending department with the addition of senior officers with considerable
commercial lending expertise and has developed a support staff to run the
commercial loan department.
The Bank's ten largest loans, outstanding as of June 30, 2000, ranged
from $1.1 million to $2.1 million.
Loan Portfolio. The following table presents selected data relating
to the composition of the Bank's loan portfolio by type of loan on the
dates indicated.
At June 30,
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2000 1999 1998
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential mortgage loans $127,862 67.6% $107,216 69.3% $106,412 76.8%
Commercial real estate loans 41,294 21.8 33,980 22.0 24,475 17.7
Commercial loans 10,881 5.8 7,109 4.6 4,579 3.3
Consumer loans 1,526 0.8 1,546 1.0 1,787 1.3
Home equity loans 3,470 1.8 2,076 1.3 1,716 1.2
Construction loans 12,762 6.7 7,021 4.6 1,260 0.9
---------------------------------------------------------------
Total loans 197,795 104.5 158,948 102.8 140,229 101.2
Less:
Deferred loan orig. fees (costs) (12) 0.0 12 0.0 17 0.0
Unadvanced principal 7,076 3.7 2,899 1.9 383 0.3
Allowance for loan losses 1,531 0.8 1,348 0.9 1,236 0.9
---------------------------------------------------------------
Loan, net $189,200 100.0% $154,689 100.0% $138,593 100.0%
===============================================================
One- to Four-Family Residential Real Estate Lending. The primary
emphasis of the Bank's lending activity is the origination of conventional
mortgage loans on one- to four-family residential dwellings located in the
Bank's primary market area. As of June 30, 2000, loans on one- to four-
family residential properties accounted for 67.6% of the Bank's net loan
portfolio.
The Bank's mortgage loan originations are for terms of up to 30
years, amortized on a monthly basis with interest and principal due each
month. Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without penalty. Conventional
residential mortgage loans granted by the Bank customarily contain "due-on-
sale" clauses which permit the Bank to accelerate the indebtedness of the
loan upon transfer of ownership of the mortgaged property.
The Bank makes conventional mortgage loans and uses standard Federal
National Mortgage Association ("FNMA") documents, to allow for the sale of
qualifying loans in the secondary mortgage market. The Bank's lending
policies generally limit the maximum loan-to-value ratio on mortgage loans
secured by owner-occupied properties to 95% of the lesser of the appraised
value or purchase price of the property, with the condition that private
mortgage insurance is required on loans with a loan-to-value ratio in
excess of 80%.
Since the early 1980s, the Bank has offered adjustable-rate mortgage
loans with terms of up to 30 years. Adjustable-rate loans offered by the
Bank include loans which reprice every one or three years and provide for
an interest rate which is based on the interest rate paid on U.S. Treasury
securities of a corresponding term, plus a margin of up to 250 basis
points, or 2.5%. Additionally, the Bank offers an adjustable-rate loan
product with an interest rate fixed for seven years which then reprices
annually for its remaining term thereafter, and an adjustable-rate loan
which reprices every five years from its inception. The Bank currently
offers adjustable-rate loans with initial rates below those which would
prevail under the foregoing computations, based upon the Bank's
determination of market factors and competitive rates for adjustable-rate
loans in its market area. For adjustable-rate loans, borrowers are
qualified at the initial rate.
Historically, the Bank has retained all adjustable-rate mortgages it
originates. The Bank's adjustable-rate mortgages include limits on
increases or decreases of the interest rate of the loan. The interest rate
may increase or decrease by 2% per year and 5% over the life of the loan
for the Bank's one-year adjustable rate mortgages, by 3% per adjustment
period and 6% over the life of the loan for the Bank's three-year
adjustable rate mortgages, by 2% per adjustment period and 6% over the life
of the loan for the Bank's five-year adjustable-rate loans, and by 2% per
adjustment period and 5% over the life of the loan for the Bank's seven-
year adjustable-rate mortgages. The retention of adjustable-rate mortgage
loans in the Bank's loan portfolio helps reduce the Bank's exposure to
increases in interest rates. However, there are unquantifiable credit risks
resulting from potential increased costs to the borrower as a result of the
repricing of adjustable-rate mortgage loans. During periods of rising
interest rates, the risk of default on adjustable-rate mortgage loans may
increase due to the upward adjustment of interest cost to the borrower.
During the year ended June 30, 2000, the Bank originated $21.1
million in adjustable-rate mortgage loans and $16.4 million in fixed-rate
mortgage loans. Of the fixed-rate loans originated, the Bank sold $1.7
million of fixed-rate loans with terms of greater than 15 years and
retained $14.7 million of fixed-rate loans, which had terms of 15 to 30
years. Approximately 10.7% of all loan originations during fiscal 2000 were
refinances of loans already in the Bank's loan portfolio. At June 30, 2000,
the Bank's loan portfolio included $60.6 million in adjustable-rate one- to
four-family residential mortgage loans or 32.0% of the Bank's net loan
portfolio, and $67.3 million in fixed-rate one- to four-family residential
mortgage loans, or 35.6% of the Bank's net loan portfolio.
Commercial Real Estate Loans. At June 30, 2000, the Bank's commercial
real estate loan portfolio consisted of 127 loans, totaling $41.3 million,
or 21.8% of net loans. The Bank's largest loan is a commercial real estate
loan with an outstanding balance of $2.1 million at June 30, 2000 secured
by 78 residential apartment units in Medford and Malden, Massachusetts.
Commercial real estate loans are administered by the commercial loan
department as described below under "Commercial Loans."
Commercial real estate lending entails additional risks compared with
one- to four-family residential lending. Because payments on loans secured
by commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject, to a greater extent, to adverse conditions in the real estate
market or the economy. Also, commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers and
the payment experience on such loans is typically dependent on the
successful operation of a real estate project and/or the collateral value
of the commercial real estate securing the loan.
Commercial Loans. In the past several years, the Bank has made a
major commitment to small business commercial lending. The Bank has worked
to develop a niche of making commercial loans to companies which have from
$500,000 to $15.0 million in sales and is an approved lender of the Small
Business Administration. At June 30, 2000, the Bank's commercial loan
portfolio consisted of 167 loans, totaling $10.9 million, or 5.8% of net
loans.
Commercial loans are expected to comprise a growing portion of the
Bank's loan portfolio in the future. Unless otherwise structured as a
mortgage on commercial real estate, such loans generally are limited to
terms of five years or less. Substantially all such commercial loans have
variable interest rates tied to the prime rate as reported in The Wall
Street Journal. Whenever possible, the Bank collateralizes these loans with
a lien on commercial real estate, or alternatively, with a lien on business
assets and equipment and the personal guarantees from principals of the
borrower.
Commercial business loans are generally considered to involve a
higher degree of risk than residential mortgage loans because the
collateral may be in the form of intangible assets and/or inventory subject
to market obsolescence. Commercial loans may also involve relatively large
loan balances to single borrowers or groups of related borrowers, with the
repayment of such loans typically dependent on the successful operation and
income stream of the borrower. Such risks can be significantly affected by
economic conditions. In addition, commercial business lending generally
requires substantially greater oversight efforts compared to residential
real estate lending.
Consumer Loans. The Bank's consumer loans consist of share secured
loans, and other consumer loans, including automobile loans and credit card
loans. At June 30, 2000, the consumer loan portfolio totaled $1.5 million
or 0.8% of net loans. Consumer loans are generally offered for terms of up
to five years at fixed interest rates. Consumer loans generally do not
exceed $25,000 individually.
The Bank makes share-secured loans up to 90% of the amount of the
depositor's savings account balance. The interest rate on the loan is 4%
higher than the rate being paid on the account. The Bank also makes other
consumer loans, which may or may not be secured. The terms of such loans
usually depend on the collateral.
The Bank makes loans for automobiles, both new and used, directly to
the borrowers. The loans are generally limited to 90% of the purchase price
or the retail value listed by the National Automobile Dealers Book. The
terms of the loans are determined by the age and condition of the
collateral. Collision insurance policies are required on all of these
loans.
The Bank makes unsecured credit card loans generally up to $5,000 at
fixed rates of interest. At June 30, 2000, the Bank had unsecured credit
card loans totaling $418,000.
Consumer loans are generally originated at higher interest rates than
residential mortgage loans but also tend to have a higher credit risk than
residential loans due to the loan being unsecured or secured by rapidly
depreciable assets. Despite these risks, the Bank's level of consumer loan
delinquencies generally have been low. No assurance can be given, however,
that the Bank's delinquency rate on consumer loans will continue to remain
low in the future, or that the Bank will not incur future losses on these
activities.
Home Equity Loans. The Bank also originates home equity loans that
are secured by available equity based on the appraised value of owner-
occupied one- to four-family residential property. Home equity loans will
be made for up to 80% of the appraised value of the property (less the
amount of the first mortgage). Home equity loans are offered at adjustable
rates and fixed rates. The adjustable interest rate is the prime rate as
reported in The Wall Street Journal. Fixed rate home equity loans have
terms of ten years or less and adjustable rate home equity loans have terms
of 15 years or less with up to a five year final payment if the loan is not
fully amortized at the end of the 15 year term. At June 30, 2000, the Bank
had $3.5 million in home equity loans with unused credit available to
existing borrowers of $3.1 million.
Construction Loans. The Bank engages in construction lending
primarily for the construction of single-family residences and a limited
number of construction loans for commercial properties. At present all are
construction loans for the construction/renovation of single-family housing
developments. All construction loans are secured by first liens on the
property. Loan proceeds are disbursed as construction progresses and
inspections warrant. Loans involving construction financing present a
greater risk than loans for the purchase of existing homes, since
collateral values and construction costs can only be estimated at the time
the loan is approved. Because payment on loans secured by construction
properties are dependent upon the sale of completed homes or the successful
operation of the completed property, repayment of such loans may be
subject, to a greater extent, to adverse conditions in the real estate
market or the economy. At June 30, 2000, the Bank's construction loan
portfolio totaled $12.8 million offset by $7.1 million in unadvanced
principal.
Loan Commitments. The Bank generally makes loan commitments to
borrowers not exceeding 60 days. At June 30, 2000, the Bank had $16.1
million in loan commitments outstanding, all for the origination of one- to
four-family residential real estate loans, home equity loans, commercial
loans and commercial real estate loans. In addition, unadvanced funds on
lines of credit and credit card loans were $11.0 million on June 30, 2000.
Loan Solicitation and Loan Fees. Loan originations are derived from a
number of sources, including the Bank's existing customers, referrals,
realtors, advertising and "walk-in" customers at the Bank's office.
Additionally, the Bank has two residential loan originators, both of whom
actively cover the local community, working with local real estate brokers
and agents to identify and contact potential new customers.
Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income and credit standing.
For all mortgage loans, an appraisal of real estate intended to secure the
proposed loan is obtained from an independent appraiser who has been
approved by the Bank's board of directors. Fire and casualty insurance are
required on all loans secured by improved real estate. Insurance on other
collateral is required unless waived by the Loan Committee. The Board of
Directors of the Bank has the responsibility and authority for the general
supervision over the loan policies of the Bank. The Board has established
written lending policies for the Bank. All residential and commercial real
estate mortgages and commercial business loans must be ratified by the
Bank's board of directors. In addition, certain designated officers of the
Bank have authority to approve loans not exceeding specified levels, while
the Board of Directors must approve loans in excess of (a) $300,000 for
commercial real estate loans; (b) $100,000 for commercial loans; (c) loans
over the current FNMA limit for residential mortgage loans; and (d) $20,000
for consumer loans.
Interest rates charged by the Bank on all loans are primarily
determined by competitive loan rates offered in its market area and
interest rate costs of the source of funding for the loan. The Bank may
charge an origination fee on new mortgage loans. The net origination fees
are deferred and amortized into income over the life of the loan. At June
30, 2000, the amount of net deferred loan origination costs was $12,000.
Loan Maturities. The following table sets forth certain information
at June 30, 2000 regarding the dollar amount of loans maturing in the
Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans and loans having no stated
schedule of repayments and no stated maturity are reported as due in one
year or less.
Residential Commercial
Mortgage Real Estate Construction Commercial Consumer Total
Loan(1) Loans Loans Loans Loans Loans
----------- ----------- ------------ ---------- -------- -----
(In thousands)
Total loans schedule to mature:
In 1 year or less $ 39 $ 828 $ 6,377 $ 5,064 $ 52 $ 12,360
After 1 year through 5 years 1,139 313 6,385 3,746 980 12,563
Beyond 5 years 130,154 40,153 --- 2,071 494 172,872
------------------------------------------------------------------------------
Total $131,332 $41,294 $12,762 $10,881 $1,526 $197,795
==============================================================================
Loan balance by type scheduled
to mature after 1 year:
Fixed-rate $ 68,173 $ 2,782 $ --- $ 3,133 $1,474 $ 75,562
Adjustable-rate 63,120 37,684 6,385 2,684 --- 109,873
- --------------------
For purposes of this schedule, home equity loans with revolving and
fixed rates, have been included in residential mortgage loans.
Originations and Sales of Loans. The Bank is a qualified
seller/servicer for FNMA. Beginning in 1987, the Bank began to sell a
portion of its fixed-rate loans with terms in excess of 15 years to FNMA.
All of the Bank's sales to FNMA have been made with servicing retained on
the loans. At June 30, 2000, the Bank was servicing $21.5 million in loans
for FNMA. Depending upon market conditions, the Bank retains a portion of
its fixed-rate loans from time to time. In addition, the Bank has also sold
loans to other private investors. At June 30, 2000, the Bank was servicing
$2.0 million of such loans.
Originations for the year ended June 30, 2000 increased in commercial
loans, construction loans, and consumer loans, while decreasing in
commercial real estate and residential mortgages. Loan sales were reduced
during the same period as the Bank borrowed from the FHLB to fund loan
originations held in its portfolio. Historically, the Bank has not
purchased loans. However, the Bank may in the future consider making
limited loan purchases, including purchases of commercial loans and
commercial real estate loans.
The following table sets forth information with respect to
originations and sales of loans during the periods indicated.
Years Ended June 30,
--------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Beginning balance $154,689 $138,593 $114,568
--------------------------------
Mortgage originations 37,513 47,662 43,141
Consumer loan originations 3,716 2,494 2,218
Commercial real estate loan originations 13,260 13,713 6,338
Commercial loan originations 12,598 5,313 3,680
Commercial construction loan originations 9,569 3,080 ---
Loan participations repurchased --- --- 1,914
--------------------------------
Total loans originated and repurchased 76,656 72,262 57,291
--------------------------------
Less:
Amortization and payoffs 39,937 42,901 27,675
Provision for loan losses 200 145 245
Total loans sold 1,433 13,120 5,346
Loan participations sold 575 --- ---
--------------------------------
Ending balance $189,200 $154,689 $138,593
================================
Non-Performing Assets, Asset Classification and Allowances for
Losses. Management and the Security Committee of the Board of Directors
perform a monthly review of all delinquent loans and loans are placed on a
non-accrual status when loans are 90 days past due or, in the opinion of
management, the collection of principal and interest are doubtful. One of
the primary tools used to manage and control problem loans is the Bank's
"Watch-List," a listing of all loans or commitments larger than $50,000,
that are considered to have characteristics that could result in loss to
the Bank if not properly supervised. The list is managed by the Senior
Lending Officer for Commercial Loans, Senior Loan Officer for Mortgage
Lending, Chief Financial Officer, Chief Executive Officer, and Vice
President, Residential Lending (the "Watch-List Committee"), who meet
periodically to discuss the status of the loans on the Watch-List and to
add or delete loans from the list. The Board of Directors can request that
a loan relationship be placed on Watch-List status.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of the unpaid principal
balance or its fair value. Any required write-down of the loan to its fair
value is charged to the allowance for loan losses.
The following table sets forth the Bank's problem assets and loans at
the dates indicated.
Years Ended June 30,
----------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Loans 30-89 days past due
(not included in non-performing loans) $ 540 $1,685 $1,374
Loans 90 days or more past due
(not included in non-performing loans) 148 --- ---
----------------------------
Total delinquent loans $ 688 $1,685 $1,374
Delinquent loans as a percentage of net loans 0.36% 1.09% 0.99%
Non-performing loans (90 days past due) $ 2 $ --- $ 150
Foreclosed real estate --- --- ---
----------------------------
Total non-performing assets $ 2 $ --- $ 150
============================
Non-performing loans as a percent of net loans 0.00% 0.00% 0.11%
Non-performing assets as a percent of total loans 0.00% 0.00% 0.08%
At June 30, 2000, management was not aware of any loans not currently
classified as non-accrual, 90 days past due or restructured but which may
be so classified in the near future because of concerns over the borrower's
ability to comply with repayment terms.
Federal regulations require each banking institution to classify its
asset quality on a regular basis. In addition, in connection with
examinations of such banking institutions, federal and state examiners have
authority to identify problem assets and, if appropriate, classify them. An
asset is classified substandard if it is determined to be inadequately
protected by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. As a general rule, the Bank will classify a
loan as substandard if the Bank can no longer rely on the borrower's income
as the primary source for repayment of the indebtedness and must look to
secondary sources such as guarantors or collateral. An asset is classified
as doubtful if full collection is highly questionable or improbable. An
asset is classified as loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. The regulations also
provide for a special mention designation, described as assets which do not
currently expose a banking institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require a banking institution to establish general
allowances for loan losses. If an asset or portion thereof is classified as
a loss, a banking institution must either establish specific allowances for
loan losses in the amount of the portion of the asset classified as a loss,
or charge off such amount. Examiners may disagree with a banking
institution's classifications and amounts reserved. If a banking
institution does not agree with an examiner's classification of an asset,
it may appeal this determination to the Regional Director of the FDIC. At
June 30, 2000, the Bank had no assets classified as doubtful or loss, and
$1.2 million classified as substandard.
In originating loans, the Bank recognizes that credit losses will
occur and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term
of the loan, general economic conditions and, in the case of a secured
loan, the quality of the security for the loan. It is management's policy
to maintain an adequate general allowance for loan losses based on, among
other things, evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Further, after properties are
acquired following loan defaults, additional losses may occur with respect
to such properties while the Bank is holding them for sale. The Bank
increases its allowances for loan losses and losses on real estate owned by
charging provisions for losses against the Bank's income. Specific reserves
are also recognized against specific assets when management believes it is
warranted.
While the Bank believes it has established its existing allowances
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the
Bank to increase its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings. Alternately, there
can be no assurance that increases in the Bank's allowance for loan losses
will occur.
The following table analyzes activity in the Bank's allowance for
loan losses for the years indicated.
Years Ended June 30,
----------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Average loans, net $173,319 $144,663 $124,971
==================================
Year-end net loans $189,200 $154,689 $138,593
==================================
Allowance for loan losses at beginning of year $ 1,348 $ 1,236 $ 977
Provision charged to operations 200 145 245
Recoveries:
Real estate mortgage:
Residential --- --- ---
Commercial --- --- ---
Commercial loans --- --- ---
Consumer and home equity 6 3 16
Construction --- --- ---
----------------------------------
Total recoveries 6 3 16
----------------------------------
Loans charged-off:
Real estate-mortgage:
Residential --- --- ---
Commercial --- --- ---
Commercial loans --- (2) ---
Consumer and home equity (23) (34) (2)
Construction --- --- ---
----------------------------------
Loans charged-off (23) (36) (2)
----------------------------------
Allowance for loan losses at end of year $ 1,531 $ 1,348 $ 1,236
----------------------------------
Ratios:
Allowance for loan losses to year-end net loans 0.81% 0.87% 0.89%
Allowance for loan losses to non-performing loans 76,550% N/A 824%
Net charge-offs (recoveries) to average loans, net 0.01% 0.02% (0.01)%
Net charge-offs (recoveries) to allowance for loan losses 1.11% 2.45% (1.13)%
The following table sets forth a breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that
the allowance can be allocated by category only on an approximate basis.
These allocations are not necessarily indicative of future losses and do
not restrict the use of the allowance to absorb losses in any other loan
category.
At June 30,
-----------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------- ------ ------------- ------ -------------
(Dollars in thousands)
Real estate-mortgage:
Residential $ 563 64.6% $ 563 67.4% $ 559 75.8%
Commercial 687 20.9 592 21.4 531 17.5
Commercial Loans 172 5.5 133 4.5 100 3.3
Consumer and home equity 19 2.5 15 2.3 46 2.5
Construction 90 6.5 45 4.4 --- 0.9
-------------------------------------------------------------------------
Total allowance for loan losses $1,531 100.0% $1,348 100.0% $1,236 100.0%
=========================================================================
Investment Activities
General. The Bank is required to maintain an amount of liquid assets
appropriate for its level of net savings withdrawals and current
borrowings. It has generally been the Bank's policy to maintain a liquidity
portfolio in excess of regulatory requirements. The Bank uses several
measures to assess the adequacy of its liquidity. At June 30, 2000, the
Bank's liquidity was adequate to meet its foreseeable needs. Liquidity
levels may be increased or decreased depending upon the yields on
investment alternatives, management's judgment as to the attractiveness of
the yields then available in relation to other opportunities, management's
expectations of the level of yield that will be available in the future and
management's projections as to the short-term demand for funds to be used
in the Bank's loan origination and other activities.
The Bank invests in U.S. Treasury and Federal Agency securities,
mortgage-backed securities, bank certificates of deposits, equity
securities, corporate debt securities and overnight federal funds. The
balance of securities maintained by the Bank in excess of regulatory
requirements reflects management's historical objective of maintaining
liquidity at a level that assures the availability of adequate funds,
taking into account anticipated cash flows and available sources of credit,
for meeting withdrawal requests and loan commitments and making other
investments.
The Bank purchases securities through a primary dealer of U.S.
Government obligations or such other mortgage-backed securities, securities
dealers authorized by the Board of Directors and requires that the
securities be delivered to a safekeeping agent before the funds are
transferred to the broker or dealer. The Bank purchases investment
securities pursuant to an investment policy established by the board of
directors.
Available for sale securities are reported at fair value with
unrealized gains or losses reported as a separate component of other
comprehensive income/loss. Held-to-maturity securities are carried at
amortized cost. Substantially all purchases of securities conform to the
Company's interest rate risk policy. The following table sets forth the
Company's securities at the dates indicated.
At June 30,
-------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- -----
(In thousands)
Securities available for sale:
- ------------------------------
Marketable equity securities $ 2,459 $ 3,054 $ 2,287 $ 3,247 $ 2,544 $ 3,222
U.S. Government and Federal
Agency obligations 18,821 18,337 24,323 24,027 11,540 11,527
Other bonds and obligations 2,547 2,393 4,556 4,498 --- ---
Mortgage-backed securities 8,709 8,668 --- --- --- ---
-------------------------------------------------------------------
Total 32,536 32,452 31,166 31,772 14,084 14,749
-------------------------------------------------------------------
Securities held to maturity:
- ----------------------------
U.S. Government and Federal
Agency obligations --- --- 500 501 9,498 9,510
Other bonds and obligations --- --- 1,000 1,001 2,508 2,520
-------------------------------------------------------------------
Total --- --- 1,500 1,502 12,006 12,030
-------------------------------------------------------------------
Total $32,536 $32,452 $32,666 $33,274 $26,090 $26,779
===================================================================
The following table sets forth the scheduled maturities, carrying
values and average yields for the company's debt securities at June 30,
2000.
At June 30, 2000
--------------------------------------------------------------------------------------------
One Year of Less One to Five Years Over Ten Years Totals
-------------------- -------------------- -------------------- ---------------------
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
Securities available for sale:
- ------------------------------
U.S. Government and Federal
Agency obligations $2,205 5.24% $16,616 5.98% $ --- --- $18,821 5.89%
Other bonds and obligations --- --- 2,547 5.80% --- --- 2,547 5.80%
Mortgage-backed securities --- --- --- --- 8,709 7.61% 8,709 7.61%
------ ------- ------ -------
Total $2,205 5.24% $19,163 5.96% $8,709 7.61% $30,077 6.38%
====== ======= ====== =======
Deposit Activity and Other Sources Of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank
derives funds from principal repayments and interest payments on loans and
investments as well as other sources arising from operations in the
production of net earnings. Loan repayments and interest payments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources, or on a longer
term basis for general business purposes.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments, including checking accounts, passbook savings, NOW accounts,
demand deposits, money market accounts and certificates of deposit. Deposit
account terms vary, with the principal differences being the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate.
The Bank's policies are designed primarily to attract deposits from
local residents and businesses rather than to solicit deposits from areas
outside its primary market. The Bank does not accept deposits from brokers
due to the volatility and rate sensitivity of such deposits. Interest rates
paid, maturity terms, service fees and withdrawal penalties are established
by the Bank on a periodic basis. Determination of rates and terms are
predicated upon funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
During the past several years, there has been an increase in demand
deposit and NOW accounts, resulting from the increase in commercial
customers during this time period. NOW account balances are volatile due to
a large deposit relationship with a law firm which maintains short-term
deposits in real estate conveyancing accounts and has significant
fluctuations in deposit account balances, particularly at month-ends.
The following table sets forth the various types of deposit accounts
at the Bank and the balances in these accounts at the dates indicated.
At June 30,
--------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Savings deposit $ 42,413 21.8% $ 40,903 25.4% $ 40,460 27.9%
NOW accounts 33,927 17.5 29,361 18.3 34,208 23.6
Money market deposits 8,370 4.3 7,020 4.4 6,256 4.3
Demand deposits 16,346 8.4 8,556 5.3 6,603 4.6
Certificates of deposits 93,079 48.0 75,027 46.6 57,239 39.6
-------------------------------------------------------------
Total deposits $194,135 100.0% $160,867 100.0% $144,766 100.0%
=============================================================
For more information on the Bank's deposit accounts, see Note 6 of
Notes to Consolidated Financial Statements.
The following table indicates the amount of the Bank's certificates
of deposit of $100,000 or more by time remaining until maturity at June 30,
2000.
Maturity Period Certificates of Deposit Rate
--------------- ----------------------- ----
(Dollars in thousands)
0-3 months $ 5,271 4.76%
3-6 months 4,214 7.14
6-12 months 10,733 5.88
1-2 years 3,955 6.10
2-3 years 220 5.70
-------
Total $24,393 5.89%
=======
Borrowings. Deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from
the Federal Home Loan Bank ("FHLB") to supplement its supply of lendable
funds and to meet liquidity requirements. Due to recent lending activity
and demand for liquidity, the Bank has utilized this borrowing power, and
has received advances from the FHLB. Advances from the FHLB are secured by
the Bank's stock in the FHLB, the Bank's deposits at the FHLB and a portion
of the Bank's mortgage loans and securities. The Bank had FHLB advances of
$38.8 million outstanding at June 30, 2000.
The FHLB functions as a central reserve bank providing credit for
savings institutions and certain other financial institutions. As a member,
the Bank is required to own capital stock in the FHLB and is authorized to
apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities which are obligations
of, or guaranteed by the United States) provided certain standards related
to creditworthiness have been met.
Personnel
As of June 30, 2000, the Bank had 62 full-time employees and 28 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.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The following is intended only as a discussion of material
tax matters and does not purport to be a comprehensive description of the
tax rules applicable to the Bank or the Company. The Bank has not been
audited by the IRS during the last five years. For federal income tax
purposes, the Company and the Bank file consolidated income tax returns and
report their income on a fiscal year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's
tax reserve for bad debts, discussed below.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to
result in distributions from the Bank's "base year reserve," i.e., its
reserve as of April 30, 1988, to the extent thereof and then from its
supplemental reserve for losses on loans, and an amount based on the amount
distributed will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid
out of the Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not constitute non-
dividend distributions and, therefore, will not be included in the Bank's
income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Bank's base year reserve and
supplemental reserve for losses on loans; or an amount that, when reduced
by the tax attributable to the income, is equal to the amount of the
distribution. Thus, in certain situations, approximately one and one-half
times the non-dividend distribution would be includable in gross income for
federal income tax purposes, assuming a 34% federal corporate income tax
rate.
Elimination of Dividends; Dividends Received Deduction. The Company
may exclude from its income 100% of dividends received from the Bank as a
member of the same affiliated group of corporations. A 70% dividends
received deduction generally applies with respect to dividends received
from domestic corporations that are not members of such affiliated group,
except that an 80% dividends received deduction applies if the Company and
the Bank own more than 20% of the stock of a corporation paying a dividend.
State and Local Taxation
The Bank is subject to an annual Massachusetts excise (income) tax
equal to 10.50% of its pre-tax income, adjusted for certain items. 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. In addition, carryforwards and carrybacks of net
operating losses are not allowed.
The Bank's active subsidiary, Mystic Securities Corporation, was
established solely for the purpose of acquiring and holding investments
which are permissible for banks to hold under Massachusetts law. Mystic
Securities Corporation is classified with the Massachusetts Department of
Revenue as a "security corporation" under Massachusetts law, qualifying it
to take advantage of the low 1.32% income tax rate on gross income
applicable to companies that are so classified.
State of Delaware. 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 has paid an annual franchise
tax to the State of Delaware.
For additional information regarding taxation, see Note 8 of the
Notes to Consolidated Financial Statements.
REGULATION
General
As a co-operative bank chartered by the Commonwealth of
Massachusetts, the Bank is subject to extensive regulation under state law
with respect to many aspects of its banking activities; this state
regulation is administered by the Commissioner. In addition, as a bank
whose deposits are insured by the FDIC under the BIF, the Bank is subject
to deposit insurance assessments by the FDIC, and the FDIC has examination
and supervisory authority over the Bank, with a broad range of enforcement
powers. Finally, the Bank is required to maintain reserves against deposits
according to a schedule established by the Federal Reserve System. These
laws and regulations have been established primarily for the protection of
depositors and the deposit insurance funds, not bank stockholders.
The following references to the laws and regulations under which the
Bank is regulated are brief summaries thereof, do not purport to be
complete, and are qualified in their entirety by reference to such laws and
regulations.
Massachusetts Banking Laws and Supervision
Massachusetts co-operative banks such as the Bank 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 bank holding company, to issue stock or to undertake many other
activities. Any Massachusetts bank that does not operate in accordance with
the regulations, policies and directives of the Commissioner is subject to
sanctions. The Commissioner may under certain circumstances suspend or
remove directors or officers of a bank who have violated the law, conducted
a bank's business in a manner which is unsafe, unsound or contrary to the
depositors' interests, or been negligent in the performance of their
duties.
All Massachusetts-chartered co-operative banks are required to be
members of the Co-operative Central Bank and are subject to its
assessments. The Co-operative Central Bank maintains the Share Insurance
Fund, a private deposit insurer, which insures all deposits in member banks
in excess of FDIC deposit insurance limits. In addition, the Co-operative
Central Bank acts as a source of liquidity to its members in supplying them
with low-cost funds, and purchasing certain qualifying obligations from
them.
Major changes in Massachusetts law in 1982 and 1983 substantially
expanded the powers of co-operative banks, and made their powers virtually
identical to those of state-chartered commercial banks. The powers which
Massachusetts-chartered co-operative banks can exercise under these laws
are summarized below.
Lending Activities. A Massachusetts chartered co-operative bank may
make a wide variety of mortgage loans. Fixed-rate loans, adjustable-rate
loans, variable-rate loans, participation loans, graduated payment loans,
construction loans, condominium and co-operative loans, second mortgage
loans and other types of loans may be made in accordance with applicable
regulations. Mortgage loans may be made on real estate in Massachusetts or
in another New England state if the bank making the loan has an office
there or under certain other circumstances. In addition, certain mortgage
loans may be made on improved real estate located anywhere in the United
States. Commercial loans may be made to corporations and other commercial
enterprises with or without security. With certain exceptions, such loans
may be made without geographic limitation. Consumer and personal loans may
be made with or without security and without geographic limitation. Loans
to individual borrowers generally will be limited to 20% of the total of
the Bank's capital accounts and stockholders' equity.
Investments Authorized. Massachusetts-chartered co-operative banks
have broad investment powers under Massachusetts law, including so-called
"leeway" authority for investments that are not otherwise specifically
authorized. The investment powers authorized under Massachusetts law are
restricted by federal law to permit, in general, only investments of the
kinds that would be permitted for national banks. The Bank has authority to
invest in all of the classes of loans and investments that are permitted by
its existing loan and investment policies.
Payment of Dividends. Under Massachusetts banking laws, a stock co-
operative bank may declare and pay a dividend on its capital stock out of
the bank's net profits. Net profits means the remainder of all earnings
from current operations plus actual recoveries on loans and investments and
other assets after deducting from the total, all current operating
expenses, actual losses, accrued dividends on preferred stock, if any, and
all current operating expenses, actual losses, accrued dividends on
preferred stock, if any, and all federal and state taxes. A dividend,
however, may not be declared, credited or paid by a stock co-operative bank
so long as there is impairment of capital stock.
Prior approval of the Commissioner is required if the Bank intends to
declare dividends on its common stock for any period other than for which
dividends are declared upon the preferred stock; or the total of all
dividends declared by the Bank in any calendar year shall exceed the total
of its net profits for that year combined with its retained net profit of
the preceding two years, less any required transfer to surplus or a fund
for the retirement of any preferred stock.
In addition, federal law also may limit the amount of dividends that
may be paid by the Bank.
Branches. With the approval of the Commissioner, bank branches may be
established in any city or town in Massachusetts; in addition, co-operative
banks may operate automated teller machines at any of their offices or,
with the Commissioner's approval, anywhere in Massachusetts. Sharing of
ATMs or "networking" is also permitted with the Commissioner's approval.
Massachusetts chartered co-operative banks may also operate ATMs outside of
Massachusetts if permitted to do so by the law of the jurisdiction in which
the ATM is located.
Interstate Acquisitions. An out-of-state bank may (subject to various
regulatory approvals and to reciprocity in its home state) establish and
maintain bank branches in Massachusetts by (i) merging with a Massachusetts
bank that has been in existence for at least three years, (ii) acquiring a
branch or branches of a Massachusetts bank without acquiring the entire
bank, or (iii) opening such branches de novo. Massachusetts banks' ability
to exercise similar interstate banking powers in other states depends upon
the laws of the other states. For example, according to the law of the
bordering state of New Hampshire, out-of-state banks may acquire New
Hampshire banks by merger, but may not establish de novo branches in New
Hampshire.
Other Powers. Massachusetts-chartered co-operative banks may also
lease machinery and equipment, act as trustee or custodian for tax
qualified retirement plans, establish trust departments and act as
professional trustee or fiduciary, provide payroll services for their
customers, issue or participate with others in the issuance of mortgage-
backed securities and establish mortgage banking companies and discount
securities brokerage operations. Some of these activities require the prior
approval of the Commissioner.
Post-conversion Oversight. The Commissioner continues to oversee the
Bank following the conversion on a number of matters specifically relating
to the conversion. For example, the Bank has agreed to submit written
quarterly progress reports to the Commissioner for three years following
the conversion which detail the implementation of the Bank's conversion
business plan's objectives and goals.
Federal Banking Regulations
Capital Requirements. Under FDIC regulations, state-chartered banks
that are not members of the Federal Reserve System ("state non-member
banks"), such as the Bank, are required to comply with minimum leverage
capital requirements. For an institution determined by the FDIC to not be
anticipating or experiencing significant growth and to have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and to be in general a strong
banking organization, rated composite 1 under the Uniform Financial
Institutions Ranking System (the CAMELS 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 4% unless
a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the bank. Tier 1 capital is the sum of
common stockholders' equity, non-cumulative perpetual preferred stock
(including any related retained earnings) and minority investments in
certain subsidiaries, less most intangible assets.
The FDIC regulations also require that co-operative banks meet a
risk-based capital standard. The risk-based capital standard requires the
maintenance of a ratio of total capital, which is defined as the sum of
Tier 1 capital and Tier 2 capital, to risk-weighted assets of at least 8%
and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In
determining the amount of risk-weighted assets, all assets, plus certain
off balance sheet items, are multiplied by a risk-weight of 0% to 100%,
based on the risks the FDIC believes are inherent in the type of asset or
item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to
declines in the economic value of a bank's capital due to changes in
interest rates when assessing the bank's capital adequacy. Under such a
risk assessment, examiners will evaluate a bank's capital for interest rate
risk on a case-by-case basis, with consideration of both quantitative and
qualitative factors. According to the agencies, applicable considerations
include:
* the quality of the bank's interest rate risk management process;
* the overall financial condition of the bank; and
* the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to
hold additional capital. The agencies also issued a joint policy statement
providing guidance on interest rate risk management, including a discussion
of the critical factors affecting the agencies' evaluation of interest rate
risk in connection with capital adequacy.
The following table shows the Company's and the Bank's leverage
ratio, its Tier 1 risk-based capital ratio, and its total risk-based
capital ratio, at June 30, 2000.
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
---------------- ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total Capital to Risk Weighed Assets
Consolidated $30,775 20.2% $12,174 8.0% N/A N/A
Bank 27,737 18.3 12,121 8.0 $15,151 10.0%
Tier 1 Capital to Risk Weighed Assets
Consolidated 29,244 19.2 6,087 4.0 N/A N/A
Bank 26,206 17.3 6,060 4.0 9,090 6.0
Tier 1 Capital to Average Assets
Consolidated 29,244 11.4 10,309 4.0 N/A N/A
Bank 26,206 10.8 9,719 4.0 12,149 5.0
As the preceding table shows, the Company and the Bank exceeded the
minimum capital adequacy requirements at June 30, 2000.
Enforcement. The FDIC has extensive enforcement authority over
insured co-operative banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties,
to issue cease and desist orders and to remove directors and officers. In
general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices.
The FDIC has authority under federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is
required, with certain exceptions, to appoint a receiver or conservator for
an insured state bank if that bank was "critically undercapitalized" on
average during the calendar quarter beginning 270 days after the date on
which the bank became "critically undercapitalized." For this purpose,
"critically undercapitalized" means having a ratio of tangible equity to
total assets equal to or less than 2%. See "-Prompt Corrective Action." The
FDIC may also appoint a conservator or receiver for a state bank on the
basis of the institution's financial condition or upon the occurrence of
certain events, including: (i) insolvency (whereby the assets of the bank
are less than its liabilities to depositors and others); (ii) substantial
dissipation of assets or earnings through violations of law or unsafe or
unsound practices; (iii) existence of an unsafe or unsound condition to
transact business; (iv) likelihood that the bank will be unable to meet the
demands of its depositors or to pay its obligations in the normal course of
business; and (v) insufficient capital, or the incurring or likely
incurring of losses that will deplete substantially all of the
institution's capital with no reasonable prospect of replenishment of
capital without federal assistance.
Deposit Insurance. The FDIC has adopted a risk-based deposit
insurance assessment system. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information,
as of the reporting period ending seven months before the assessment
period, consisting of (1) well capitalized, (2) adequately capitalized or
(3) undercapitalized, and one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information that the FDIC
determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for BIF deposits currently range from 0 basis
points to 27 basis points. The Bank's assessment rate is currently 0 basis
points. The FDIC is authorized to raise the assessment rates in certain
circumstances, including to maintain or achieve the designated reserve
ratio of 1.25%, which requirement the BIF currently meets. The FDIC has
exercised its authority to raise rates 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. In addition, recent
legislation requires BIF-insured institutions like the Bank to assist in
the payment of FICO bonds.
Under the Federal Deposit Insurance Act (the "FDI Act"), insurance of
deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the Division.
The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Transactions with Affiliates and Insiders of the Bank. Transactions
between an insured bank, such as the Bank, and any of its affiliates is
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate
of a bank is any company or entity which controls, is controlled by or is
under common control with the bank. Currently, a subsidiary of a bank that
is not also a depository institution is not treated as an affiliate of the
bank for purposes of Sections 23A and 23B, but the FRB has proposed
treating any subsidiary of a bank that is engaged in activities not
permissible for bank holding companies under the Bank Holding Company Act,
as an affiliate for purposes of Sections 23A and 23B. Generally, Sections
23A and 23B (i) limit the extent to which the bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, and limit all such
transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
that are consistent with safe and sound banking practices. The term
"covered transaction" includes the making of loans, purchase of assets,
issuance of guarantees and similar other types of transactions. In
addition, any covered transaction and certain other transactions, including
the sale of assets or purchase of services, between a bank and any of its
affiliates must be on terms that are substantially the same, or at least as
favorable, to the bank as those that would be provided to a non-affiliate.
Further, most loans by a bank to its affiliate must be supported by
collateral in amounts ranging from 100 to 130 percent of the loan amounts.
A bank's loans to its executive officers, directors, any owner of 10%
or more of its stock and any of certain entities affiliated to any such
person (each an "insider") are subject to the conditions and limitations
imposed by Section 22(h) of the Federal Reserve Act and the Federal Reserve
Board's Regulation O thereunder. Under Section 22(h), loans to an insider
may not exceed, together with all other outstanding loans to such person
and affiliated interests, the loans-to-one-borrower limit applicable to
national banks (generally 15% of the institution's unimpaired capital and
surplus), and all loans to all such persons in the aggregate may not exceed
the institution's unimpaired capital and unimpaired surplus. Regulation O
also prohibits the making of loans in an amount greater than either (a)
$500,000 or (b) the greater of $25,000 or 5% of the bank's unimpaired
capital and surplus, unless such loans are approved in advance by a
majority of the Board of Directors of the bank, with any "interested"
director not participating in the voting. Further, Regulation O requires
that loans to insiders be made on terms substantially the same as those
that are offered in comparable transactions to other persons. Regulation O
also prohibits a depository institution from paying the overdrafts over
$1,000 of any of its executive officers or directors unless they are paid
pursuant to written pre-authorized extension of credit or transfer of funds
plans. Also, loans to an executive officer, other than loans for the
education of the officer's children and certain loans secured by the
officer's residence, may not exceed the lesser of (a) $100,000 or (b) the
greater of $25,000 or 2.5% of the bank's capital stock, surplus fund and
undivided profits.
State chartered non-member banks are further subject to the
requirements and restrictions of 12 U.S.C. [SECTION]1972 on certain tying
arrangements and extensions of credit by correspondent banks. Specifically,
this statute (i) prohibits a depository institution from extending credit
to or offering any other service, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution,
subject to certain exceptions, and (ii) also prohibits extensions of credit
to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit
is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than
the normal risk of repayment or present other unfavorable features.
Real Estate Lending Policies. FDIC regulations require that state-
chartered non-member banks must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit that
are secured by liens or interest in real estate or are made for the purpose
of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards, including loan-to-value limits that are clear and measurable,
loan administration procedures and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration
of the Interagency Guidelines for Real Estate Lending Policies (the
"Interagency Guidelines") that have been adopted by the federal bank
regulators.
The Interagency Guidelines, among other things, call upon a
depository institution to establish internal loan-to-value limits for real
estate loans that are not in excess of the following supervisory limits:
(i) for loans secured by raw land, the supervisory loan-to-value limit is
65% of the value of the collateral; (ii) for land development loans (i.e.,
loans for the purpose of improving unimproved property prior to the
erection of structures), the supervisory limit is 75%; (iii) for loans for
the construction of commercial, multi-family or other nonresidential
property, the supervisory limit is 80%; (iv) for loans for the construction
of one- to four-family properties, the supervisory limit is 85%; and (v)
for loans secured by other improved property (e.g., farmland, completed
commercial property and other income-producing property including non owner
occupied, one- to four-family property), the limit is 85%. Although no
supervisory loan-to-value limit has been established for owner-occupied,
one- to four-family and home equity loans, the Interagency Guidelines state
that for any such loan with a loan-to-value ratio that equals or exceeds
90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Safety and Soundness Standards. Pursuant to the requirements of
FDICIA, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, each federal banking agency, including the FDIC,
has adopted guidelines establishing general standards relating to internal
controls, information and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, asset quality,
earnings, and compensation, fees and benefits. In general, the guidelines
require, among other things, appropriate systems and practices to identify
and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound
practice and describe compensation as excessive when the amounts paid are
unreasonable or disproportionate to the services performed by an executive
officer, employee, director, or principal shareholder. In addition, the
FDIC adopted regulations to require a bank that is given notice by the FDIC
that it is not satisfying any of such safety and soundness standards to
submit a compliance plan to the FDIC. If, after being so notified, a bank
fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an
order directing corrective and other actions of the types to which a
significantly undercapitalized institution is subject under the "prompt
corrective action" provisions of FDICIA. If a bank fails to comply with
such an order, the FDIC may seek to enforce such an order in judicial
proceedings and to impose civil monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
The FDIC, as well as the other federal banking regulators, adopted
regulations governing the supervisory actions that may be taken against
undercapitalized institutions. The regulations establish five categories,
consisting of "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." The FDIC's regulations defines the five capital
categories as follows: Generally, an institution will be treated as "well
capitalized" if its ratio of total capital to risk-weighted assets is at
least 10%, its ratio of core capital to risk-weighted assets is at least
6%, its ratio of core capital to total assets is at least 5%, and it is not
subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its
ratio of total capital to risk-weighted assets is at least 8%, its ratio of
core capital to risk-weighted assets is at least 4%, and its ratio of core
capital to total assets is at least 4% (3% if the bank receives the highest
rating on the CAMELS financial institutions rating system) and it is not a
well-capitalized institution. An institution that has total risk-based
capital of less than 8%, Tier 1 risk-based capital of less than 4% or a
leverage ratio that is less than 4% (or less than 3% if the institution is
rated a composite "1" under the CAMELS rating system) would be considered
to be "undercapitalized." An institution that has total risk-based capital
of less than 6%, core capital of less than 3% or a leverage ratio that is
less than 3% would be considered to be "significantly undercapitalized,"
and an institution that has a tangible capital to assets ratio equal to or
less than 2% would be deemed to be "critically undercapitalized." At June
30, 2000, the Bank was categorized as "well capitalized."
The severity of the action authorized or required to be taken under
the prompt corrective action regulations increases as a bank's capital
deteriorates within the three undercapitalized categories. All banks are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution,
the bank would be undercapitalized. The FDIC is required to monitor closely
the condition of an undercapitalized bank and to restrict the growth of its
assets. An undercapitalized bank is required to file a capital restoration
plan within 45 days of the date the bank receives notice that it is within
any of the three undercapitalized categories, and the plan must be
guaranteed by any parent holding company. The aggregate liability of a
parent holding company is limited to the lesser of: (i) an amount equal to
the five percent of the bank's total assets at the time it became
"undercapitalized," and (ii) the amount which is necessary (or would have
been necessary) to bring the bank into compliance with all capital
standards applicable with respect to such bank as of the time it fails to
comply with the plan. If a bank fails to submit an acceptable plan, it is
treated as if it were "significantly undercapitalized." Banks that are
significantly or critically undercapitalized are subject to a wider range
of regulatory requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a
receiver or conservator for an insured depositary bank. If one or more
grounds exist for appointing a conservator or receiver for a bank, the FDIC
may require the bank to issue additional debt or stock, sell assets, be
acquired by a depository bank holding company or combine with another
depository bank. Under FDICIA, the FDIC is required to appoint a receiver
or a conservator for a critically undercapitalized bank within 90 days
after the bank becomes critically undercapitalized or to take such other
action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive
90-day periods. However, if the bank continues to be critically
undercapitalized on average during the quarter that begins 270 days after
it first became critically undercapitalized, a receiver must be appointed,
unless the FDIC makes certain findings that the bank is viable.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by FDIC regulations, a bank savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including
low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC, in connection with its
examination of a bank, to assess the bank's record of meeting the credit
needs of its community and to take such record into account in its
evaluation of certain applications by such bank. The CRA also requires all
institutions to make public disclosure of their CRA ratings. The Bank
received an "Outstanding" CRA rating in its most recent examinations from
both the FDIC and Commonwealth of Massachusetts.
The CRA regulations establish an assessment system that bases a
bank's rating on its actual performance in meeting community needs. In
particular, the assessment system focuses on three tests: (a) a lending
test, to evaluate the institution's record of making loans in its service
areas; (b) an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing, and
programs benefiting low or moderate income individuals and businesses; and
(c) a service test, to evaluate the institution's delivery of services
through its branches, ATMs, and other offices. Small banks would be
assessed pursuant to a streamlined approach focusing on a lesser range of
information and performance standards. The term "small bank" is defined as
including banks with less than $250 million in assets or an affiliate of a
holding company with banking and thrift assets of less than $1 billion,
which would include the Bank.
Holding Company Regulation
Federal Regulation. The Company is subject to examination, regulation
and periodic reporting under the Bank Holding Company Act (the "BHCA"), as
administered by the Federal Reserve Board (the "FRB"). The FRB has adopted
capital adequacy guidelines for bank holding companies on a consolidated
basis substantially similar to those of the FDIC for the Bank. As of June
30, 2000, the Company's total capital and Tier 1 capital ratios exceeded
these minimum capital requirements.
The Company will be required to obtain the prior approval of the FRB
to acquire all, or substantially all, of the assets of any bank or bank
holding company. Prior FRB approval will be required for the Company to
acquire direct or indirect ownership or control of any voting securities of
any bank or bank holding company if, after giving effect to such
acquisition, it would, directly or indirectly, own or control more than 5%
of any class of voting shares of such bank or bank holding company.
The Company will be required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, will be equal to 10% or more of the Company's
consolidated net worth. The FRB may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe
and unsound practice, or would violate any law, regulation, FRB order or
directive, or any condition imposed by, or written agreement with, the FRB.
Such notice and approval is not required for a bank holding company that
would be treated as "well capitalized" under applicable regulations of the
FRB, that has received a composite "1" or "2" rating at its most recent
bank holding company inspection by the FRB, and that is not the subject of
any unresolved supervisory issues.
The status of the Company as a registered bank holding company under
the BHCA does not exempt it from certain federal and state laws and
regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws.
In addition, a bank holding company which does not qualify as a
financial holding company under the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 (the "GLBA") is generally prohibited from
engaging in, or acquiring direct or indirect control of any company engaged
in non-banking activities. One of the principal exceptions to this
prohibition is for activities found by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be
permissible. Some of the principal activities that the Federal Reserve
Board has determined by regulation to be so closely related to banking as
to be permissible are:
* making or servicing loans;
* performing certain data processing services;
* providing discount brokerage services;
* acting as fiduciary, investment or financial advisor;
* leasing personal or real property;
* making investments in corporations or projects designed primarily
to promote community welfare; and
* acquiring a savings and loan association.
Bank holding companies that do qualify as a financial holding company
may engage in activities that are financial in nature or incident to
activities which are financial in nature. Bank holding companies may
qualify to become a financial holding company if:
* each of its depository institution subsidiaries is "well capitalized";
* each of its depository institution subsidiaries is "well managed";
* each of its depository institution subsidiaries has at least a
"satisfactory" Community Reinvestment Act rating at its most
recent examination; and
* the bank holding company has filed a certification with the
Federal Reserve Board that it elects to become a financial holding
company.
As of June 30, 2000, the Company had registered as a financial
holding company.
Under the Federal Deposit Insurance Act, depository institutions are
liable to the FDIC for losses suffered or anticipated by the FDIC in
connection with the default of a commonly controlled depository institution
or any assistance provided by the FDIC to such an institution in danger of
default. This law would potentially be applicable to the Company if it ever
acquired as a separate subsidiary a depository institution in addition to
the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12
regional Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks
provide a central credit facility primarily for member institutions. As a
member of the FHLB, the Bank is required to acquire and hold shares of
capital stock in the FHLB in an amount equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations, but not less than $500. The Bank was in compliance with this
requirement with an investment in FHLB stock at June 30, 2000, of $2.4
million.
The FHLB serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB
System. It offers advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of the FHLB.
Long-term advances may only be made for the purpose of providing funds for
residential housing finance.
Federal Home Loan Bank System Modernization Act of 1999. Title 6 of
the GLBA, entitled the Federal Home Loan Bank System Modernization Act of
1999 ("FHLB Modernization Act"), has amended the FHLB Act by allowing for
voluntary membership and modernizing the capital structure and governance
of the FHLB system. The new capital structure established under the FHLB
Modernization Act sets forth new leverage and risk-based capital
requirements based on permanence of capital. It also requires some minimum
investment in FHLB stock of all member entities. Capital will include
retained earnings and two forms of stock: Class A stock redeemable within
six months, written notice and Class B stock redeemable within five years,
written notice. The FHLB Modernization Act provides a transition period to
the new capital regime, which will not be effective until the FHLB enacts
implementing regulations. The FHLB Modernization Act also reduces the
period of time in which a member exiting the FHLB system must stay out of
the system.
Federal Reserve System
Pursuant to regulations of the FRB, a bank must maintain average
daily reserves equal to 3% on the first $46.5 million of net transaction
accounts (subject to an exemption for the first $4.9 million), plus 10% on
the remainder. This percentage is subject to adjustment by the FRB. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. As of June 30, 2000, the Bank met its reserve requirements.
Financial Services Modernization Bill
On November 12, 1999, President Clinton signed the GLBA, federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms and other financial
service providers. Generally, the GLBA (i) repeals the historical
restrictions and eliminates many federal and state law barriers to
affiliations among banks, securities firms, insurance companies and other
financial service providers, (ii) provides a uniform framework for the
functional regulation of the activities of banks, savings institutions and
their holding companies, (iii) broadens the activities that may be
conducted by national banks, banking subsidiaries of bank holding companies
and their financial subsidiaries, (iv) provides an enhanced framework for
protecting the privacy of consumer information, (v) adopts a number of
provisions related to the capitalization, membership, corporate governance
and other measures designed to modernize the Federal Home Loan Bank system,
(vi) modifies the laws governing the implementation of the Community
Reinvestment Act and (vii) addresses a variety of other legal and
regulatory issues affecting both day-to-day operations and long-term
activities of financial institutions.
The GLBA allows bank holding to engage in a wider variety of
financial activities than permitted under prior law, particularly with
respect to insurance and securities activities. In addition, in a change
from prior law, bank holding companies may be owned, controlled or acquired
by any company engaged in financially related activities.
The Company does not believe that the GLBA has had a material adverse
effect on the Company's operations thus far. However, to the extent that
the GLBA permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further
consolidation. This could result in a growing number of larger financial
institutions that offer a wider variety of financial services than the
Company currently offers and that can aggressively compete in the markets
currently served by the Company.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Accordingly, the Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
ITEM 2. PROPERTIES
The following table sets forth certain information at June 30, 2000
regarding the Bank's office facilities which are owned by the Bank, with
the exception of the High School Educational Branch, Lexington and
Arlington offices, which are leased, and certain other information relating
to its property at that date.
Year Square Net Book
Completed Footage Value
--------- ------- --------
(In thousands)
Main Office 60 High Street 1931 7,000 $1,059
Medford, MA 02155
West Medford Office 430 High Street 1970 2,500 21
Medford, MA 02155
Salem Street Office 201 Salem Street 1995 3,500 900
Medford, MA 02155
Lexington Office 1793 Massachusetts Avenue 1998 2,500 117
Lexington, MA 02420
Arlington Office 856 Massachusetts Avenue 2000 3,000 290
Arlington, MA
High School 489 Winthrop Street 1986 500 ---
Educational Branch Medford, MA 02155 ------
Net Book Value $2,387
======
The Bank also owns an office building adjacent to its main office,
located at 66 High Street, Medford, MA 02155, which had a net book value of
$1.7 million at June 30, 2000. The Bank uses a portion of the top floor of
this building to house some of its administrative and clerical services and
leases the remaining space to third-party tenants.
At June 30, 2000, the net book value of the Bank's computer equipment
and other furniture, fixtures and equipment at its existing offices totaled
$418,000. For more information, see Note 4 of the Notes to Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company 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 Company's consolidated financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market
under the symbol "MYST." The table below shows the high and low sales price
during the periods indicated. The Company's common stock began trading on
January 8, 1998, the date of the conversion and initial public offering. At
June 30, 2000, the last trading date in the Company's fiscal year, the
Company's common stock closed at $12.063. On August 24, 2000, there were
1,991,104 shares of the Company's common stock outstanding, which were held
of record by approximately 943 stockholders, not including persons or
entities who hold the stock in nominee or "street" name through various
brokerage firms.
The Board of Directors considers paying dividends, dependent on the
results of operations and financial condition of the Company, tax
considerations, industry standards, economic conditions, regulatory
restrictions and other factors. There are significant regulatory
limitations on the Company's ability to pay dividends depending on the
dividends it receives from its subsidiary, Medford Co-operative Bank, which
are subject to regulations and the Bank's continued compliance with all
regulatory capital requirements and the overall health of the institution.
Quarter Ended High Low Dividends
------------- ---- --- ---------
Fiscal year ended June 30, 2000:
Fourth Quarter ended June 30, 2000 $12.500 $ 9.750 $0.07
Third Quarter ended March 31, 2000 11.500 9.875 0.07
Second Quarter ended December 31, 1999 12.313 10.250 0.06
First Quarter ended September 30, 1999 13.500 10.625 0.06
Fiscal year ended June 30, 1999:
Fourth Quarter ended June 30, 1999 12.875 10.000 0.06
Third Quarter ended March 31, 1999 12.250 11.625 0.05
Second Quarter ended December 31, 1998 13.875 9.688 0.05
First Quarter ended September 30, 1998 14.875 10.750 0.05
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data concerning the
Company at the dates and for the years indicated. The following data is
qualified in its entirety by the detailed information and consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-
K.
At or for the Years Ended June 30,
----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Balance sheet data:
Total assets $ 263,888 $ 215,214 $199,049 $149,653 $131,366
Loans, net 189,200 154,689 138,593 114,568 94,760
Securities:
Available for sale 32,452 31,772 14,749 3,819 1,568
Held to maturity --- 1,500 12,006 17,504 16,929
Deposits 194,135 160,867 144,766 129,303 119,634
Borrowings 38,750 18,978 16,505 7,532 ---
Total stockholders' equity 29,189 34,052 36,127 11,940 10,949
Asset quality data:
Non-performing loans 2 --- 150 365 622
Allowance for loan losses 1,531 1,348 1,236 977 742
Number of:
Mortgage loans outstanding 1,609 1,626 1,548 1,384 1,329
Deposit accounts 21,661 19,644 18,920 18,809 18,465
Full service offices 5 4 3 3 3
Number of employees:
Full-time 62 52 48 44 42
Part-time 28 21 21 22 22
Statement of income data:
Interest and dividend income $ 16,177 $ 13,745 $ 12,210 $ 9,899 $ 8,928
Interest expense 7,446 6,221 5,648 4,911 4,569
----------------------------------------------------------
Net interest income 8,731 7,524 6,562 4,988 4,359
Provision for loan losses 200 145 245 272 100
----------------------------------------------------------
Net interest income after provision
for loan losses 8,531 7,379 6,317 4,716 4,259
Other income 945 1,136 1,035 882 658
Operating expenses 6,715 6,042 4,774 4,330 3,878
----------------------------------------------------------
Income before income taxes 2,761 2,473 2,578 1,268 1,039
Provision for income taxes 1,072 971 1,031 527 440
----------------------------------------------------------
Net income $ 1,689 $ 1,502 $ 1,547 $ 741 $ 599
==========================================================
Per share data:
Weighted average shares outstanding 2,024,201 2,375,440 N/A N/A N/A
Basic and diluted earnings per share $ 0.83 $ 0.63 N/A N/A N/A
Cash dividends paid per share 0.26 0.21 $ 0.05 N/A N/A
Book value per share 16.43 15.06 14.50 N/A N/A
At or for the Years Ended June 30,
----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Selected operating ratios:
Interest rate spread (1) 3.43% 3.26% 3.54% 3.63% 3.48%
Net interest margin (2) 4.04 3.96 4.05 3.84 3.67
Return on average assets 0.74 0.75 0.90 0.54 0.48
Return on average equity 5.37 4.29 6.70 6.40 5.53
Operating expenses as a percent
of average total assets 2.95 3.01 2.79 3.15 3.08
Efficiency ratio (3) 69.40 69.77 62.84 73.76 77.30
Asset quality ratios:
Non-performing loans as a percent
of net loans 0.00 0.00 0.11 0.32 0.66
Non-performing loans as a percent
of total assets 0.00 0.00 0.08 0.24 0.47
Allowance for loan losses as a percent
of non-performing loans 76,550 N/A 824 268 119
Net charge-offs (recoveries) to average
Loans 0.01 0.02 (0.01) 0.04 0.13
Capital ratios:
Average equity to average assets 13.81 17.48 13.48 8.42 8.60
Regulatory Tier 1 leverage capital ratio 11.35 16.05 19.07 8.08 8.51
Total equity to total assets 11.06 15.82 18.15 7.98 8.33
- --------------------
Interest rate spread represents the difference between weighted
average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
Net interest margin represents net interest income divided by average
interest-earning assets.
Operating expenses divided by the sum of net interest income and
other income.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Medford Co-operative Bank (the "Bank") completed its conversion from
a mutual to a stock institution and was simultaneously acquired by Mystic
Financial, Inc. ("Mystic" or the "Company") on January 8, 1998. The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes thereto included within
this report.
The Company and the Bank may from time to time make written or oral
"forward-looking statements." These forward-looking statements may be
contained in this annual filing with the Securities and Exchange Commission
(the "SEC"), the Annual Report to Shareholders, other filings with the SEC,
and in other communications by the Company and the Bank, which are made in
good faith pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The words "may," "could,"
"should," "would," "believe," "anticipate," "estimate," "expect," "intend,"
"plan" and similar expressions are intended to identify forward-looking
statements.
Forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties. The following factors, many of which are subject to change
based on various other factors beyond the Company's control, and o