10-Q 1 myst-q1.txt BODY OF FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2003 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 (I.R.S. Employer of incorporation or organization) Identification No.) 60 HIGH STREET MEDFORD, MASSACHUSETTS 02155 ---------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (781) 395-2800 -------------- 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 12 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 ----- ----- As of November 14, 2003, 1,542,706 shares of the registrant's common stock were outstanding. MYSTIC FINANCIAL, INC. AND SUBSIDIARIES INDEX PART I FINANCIAL INFORMATION Page --------------------- ---- Item 1 Financial Statements: (unaudited) Consolidated Balance Sheets - September 30, 2003 and June 30, 2003 3 Consolidated Statements of Income - Three Months Ended September 30, 2003 and 2002 4 Consolidated Statements of Changes in Stockholders' Equity - Three Months Ended September 30, 2003 and 2002 5 Consolidated Statements of Cash Flows - Three Months Ended September 30, 2003 and 2002 6 Notes to Unaudited Consolidated Financial Statements - September 30, 2003 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 Quantitative and Qualitative Disclosures About Market Risk 23 Item 4 Controls and Procedures 23 PART II OTHER INFORMATION ----------------- Item 4 Submission of Matters to a Vote of Security Holders 24 Item 5 Other Information 24 Item 6 Exhibits and Reports on Form 8-K 24 SIGNATURES 26 ---------- Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 1 - Financial Statements Consolidated Balance Sheets (In Thousands)

See accompanying notes to unaudited consolidated financial statements. 3 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 1 - Financial Statements Consolidated Statements of Income (In Thousands, Except Per Share Data)

See accompanying notes to unaudited consolidated financial statements. 4 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 1 - Financial Statements Consolidated Statements of Changes in Stockholders' Equity Three Months Ended September 30, 2003 and 2002 (In Thousands) (Unaudited)

See accompanying notes to unaudited consolidated financial statements 5 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 1 - Financial Statements Consolidated Statements of Cash Flows (In Thousands)

6 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 1 - Financial Statements Notes to Unaudited Consolidated Financial Statements Three Months Ended September 30, 2003 and 2002 1) Basis of Presentation and Consolidation The unaudited consolidated interim financial statements of Mystic Financial, Inc. and subsidiary ("Mystic" or the "Company") presented herein should be read in conjunction with the consolidated financial statements for the year ended June 30, 2003, included in the Annual Report on Form 10- K of Mystic Financial, Inc., the holding company for Medford Co-operative Bank (the "Bank"). The significant accounting policies followed by the Company for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The unaudited consolidated interim financial statements herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of such information. Interim results are not necessarily indicative of results to be expected for the entire year. 2) Restatements for Stock Dividend Prior period common share and per share data have been adjusted to reflect Mystic Financial's 5% common stock dividend declared on July 9, 2003 and paid on August 15, 2003 to shareholders of record on July 31, 2003. 3) Commitments and Contingencies At September 30, 2003, the Bank had outstanding commitments to originate loans amounting to approximately $29.7 million, and unadvanced funds on construction loans, lines of credit and equity loans amounting to approximately $24.2 million, $9.8 million and $14.9 million, respectively. The Bank has sold loans with recourse in the amount of $782,000. 4) Earnings Per Share Basic earnings per share represents income available to common stock divided by the weighted-average number of common shares outstanding during the period. In calculating earnings per share, the number of shares of common stock outstanding is reduced by the number of shares held by the Company's Employee Stock Ownership Plan (the "ESOP") and the Company's 1999 Recognition and Retention Plan (the "RRP") that have not been allocated or are not committed for release to participants' individual accounts. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed conversion. Potential common shares that may be issued by the Company relate to outstanding stock options and unearned RRP shares and are determined using the treasury stock method. 7 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 1 - Financial Statements Notes to Unaudited Consolidated Financial Statements Three Months Ended September 30, 2003 and 2002 5) Book Value Per Share Book value per share was $18.31 as of September 30, 2003 and $16.96 as of September 30, 2002. In calculating book value per share, the number of shares of common stock outstanding is reduced by the number of shares held by the ESOP that have not been allocated or are not committed to be released to participants' individual accounts, unearned RRP shares and treasury stock. There were 1,432,094 and 1,441,005 shares of common stock outstanding as of September 30, 2003 and 2002, respectively, for purposes of calculating the Company's book value per share. 6) Securities The following table sets forth the Company's securities at the dates indicated.

8 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 1 - Financial Statements Notes to Unaudited Consolidated Financial Statements Three Months Ended September 30, 2003 and 2002 7) Loans The following table presents selected data relating to the composition of the Company's loan portfolio by type of loan on the dates indicated.

8) Allowance for Loan Losses The following table analyzes activity in the Company's allowance for loan losses for the periods indicated.

9 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 1 - Financial Statements Notes to Unaudited Consolidated Financial Statements Three Months Ended September 30, 2003 and 2002 9) Deposits and Borrowed Funds The following tables set forth the various types of deposit accounts at the Company and the balances in these accounts as well as the borrowings of the Company at the dates indicated.

10) Stock Option Plan On March 24, 1999, the Company's stockholders approved the 1999 Stock Option Plan (the "Stock Option Plan"). Under the Stock Option Plan, the Company may grant options to its directors, officers and employees for up to 270,223 shares of common stock. Both incentive stock options and non- qualified stock options may be granted under the Stock Option Plan. The exercise price of each option equals the market price of the Company's stock on the date of grant and an option's maximum term is ten years. Options generally vest over a five year period. The Company applies APB Opinion 25 and related Interpretations in accounting for the Stock Option Plan. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's Stock Option Plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share would have been adjusted to the pro forma amounts indicated below: 10 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 1 - Financial Statements Notes to Unaudited Consolidated Financial Statements Three Months Ended September 30, 2003 and 2002

11 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 Item 2 - Management's Discussion and Analysis of Financial Condition The following discussion compares the consolidated financial condition of the Company at September 30, 2003 to June 30, 2003, and the results of operations for the three months ended September 30, 2003, compared to the same period in 2002. This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto included within this report. Forward-looking Statements 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 quarterly 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 other factors discussed in this Form 10-Q, as well as other factors identified in the Company's filings with the SEC and those presented elsewhere by management from time to time, could cause its financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: * the strength of the United States economy in general and the strength of the local economies in which the Company and the Bank conduct operations; * the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; * inflation, interest rate, market and monetary fluctuations; * the timely development of and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; * the willingness of users to substitute competitors' products and services for the Company's and the Bank's products and services; * the Company's and the Bank's success in gaining regulatory approval of their products and services, when required; * the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); 12 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 * the impact of technological changes; * acquisitions; * changes in consumer spending and saving habits; and * the Company's and the Bank's success at managing the risks involved in their business. This list of important factors is not exclusive. The Company or the Bank does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. General The Bank completed its conversion from a mutual to a stock institution and was simultaneously acquired by the Company on January 8, 1998. 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 Bank is a Massachusetts chartered stock co-operative bank founded in 1886 with three full-service offices in Medford, Massachusetts and four other full-service offices located in Lexington, Arlington, Bedford and Malden, Massachusetts. 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 has one active subsidiary, Mystic Securities Corporation, which was established for the sole purpose of acquiring and holding investment securities. All securities held by Mystic Securities Corporation are investments which are permissible for banks to hold under Massachusetts law. The Company'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 Federal Home Loan Bank of Boston. 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. 13 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 Average Balances, Interest and Average Yields The following tables set forth certain information relating to the Company's average balance sheet and reflect the interest earned on assets and interest cost of liabilities for the periods indicated and the average yields earned and rates paid for the periods indicated. Such yields and costs are derived by dividing income or expense by the average monthly balances of assets and liabilities, respectively, for the periods presented. Average balances are derived from daily balances. Loans on nonaccrual status are included in the average balances of loans shown in the tables. The securities in the following tables are presented at amortized cost. 14 MYSTIC FINANCIAL, INC. AND SUBSIDIARY AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

15 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 Rate/Volume Analysis The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate); and (ii) changes in rates (change in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume.

Financial Condition and Results of Operations Comparison of Financial Condition at September 30, 2003 and June 30, 2003 The Company's total assets amounted to $438.0 million at September 30, 2003 compared to $429.3 million at June 30, 2003, an increase of $8.7 million or 2.0%. This increase in total assets is primarily a result of increased loan originations and continued loan growth funded by deposit growth, short-term borrowings and proceeds from loan sales. Cash and cash equivalents decreased to $19.4 million at September 30, 2003 from $19.8 million at June 30, 2003, a decrease of $425,000 or 2.2%. Securities available for sale decreased to $116.0 million at September 30, 2003 from $117.9 million at June 30, 2003. 16 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 Net loans decreased by $3.6 million or 1.3% to $276.4 million or 63.1% of total assets at September 30, 2003 as compared to $279.9 million or 65.2% of total assets at June 30, 2003. During the three months ended September 30, 2003, the Company originated $25.8 million in loans, had pay-offs of $32.6 million, had normal amortization of $1.5 million, and sold $3.7 million of loans into the secondary market. At September 30, 2003, the Company also had committed to sell an additional $13.4 million of loans into the secondary market. These loans are categorized as mortgage loans held for sale on the Company's accompanying balance sheet. Residential mortgage loans decreased by $9.0 million or 5.5% to $156.4 million at September 30, 2003 from $165.5 million at June 30, 2003. With interest rates remaining near historically low levels, many customers sought fixed rate loans. As the Company originates fixed rate residential mortgage loans, it sells much of this product into the secondary market, retaining the servicing. Selling fixed rate residential mortgage loans into the secondary market helps protect the Company against interest rate risk and provides the Company with fee income. The proceeds from the sale of loans are then available to lend back into the Company's market area and to purchase investment securities. At September 30, 2003, the Company had $34.4 million in its servicing portfolio. The Company expects to continue to sell fixed rate residential mortgage loans into the secondary market in order to manage interest rate risk. Commercial real estate, construction and commercial loans, net of unadvanced funds, increased by $5.6 million or 5.3% to $112.2 million at September 30, 2003 from $106.6 million at June 30, 2003. The Company continued its emphasis on originating commercial real estate, construction and commercial loans. The Company's deposits increased to $346.8 million at September 30, 2003 from $343.6 million at June 30, 2003, an increase of $3.2 million or 0.9%. Savings accounts increased by $4.0 million or 5.8% to $73.0 million at September 30, 2003 from $69.0 million at June 30, 2003. Money market accounts increased by $4.2 million or 8.2% to $55.9 million at September 30, 2003 from $51.7 million at June 30, 2003. Demand deposit accounts increased by $1.2 million or 4.7% to $27.1 million at September 30, 2003 from $25.9 million at June 30, 2003. NOW accounts decreased by $1.2 million or 4.4% to $25.2 million at September 30, 2003 from $26.3 million at June 30, 2003. IOLTA accounts decreased by $4.9 million or 17.1% to $23.7 million at September 30, 2003 from $28.7 million at June 30, 2003. Certificates of deposit decreased by $160,000 or 0.1% to $141.8 million at September 30,2003 from $142.0 million at June 30, 2003. Deposits are the primary source of funds for investment and lending activities. Deposit flows vary significantly and are influenced by prevailing interest rates, market conditions and competition. Borrowings increased by $9.4 million to $50.6 million at September 30, 2003 from $41.2 million at June 30, 2003. The increase consisted of short-term borrowings to fund loan and investment growth. 17 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 Comparison of the Operating Results for the Three Months Ended September 30, 2003 and 2002 Net Income. Net income was $440,000 for the three months ended September 30, 2003, compared to $465,000 for the three months ended September 30, 2002. Return on average assets was 0.41% for the three months ended September 30, 2003, compared to 0.53% for the three months ended September 30, 2002. Return on average equity was 6.88% for the three months ended September 30, 2003, compared to 7.68% for the three months ended September 30, 2002. The decrease in income before income taxes for the three months ended September 30, 2003 compared to the three months ended September 30, 2002 was attributable to an increase in total interest and dividend income of $35,000 and a decrease in total interest expense of $390,000, offset by a decrease in non-interest income of $136,000 and an increase in non-interest expense of $343,000. Interest and Dividend Income. Total interest and dividend income increased by $35,000 or .7% to $5.3 million for the three months ended September 30, 2003 from $5.3 million for the three months ended September 30, 2002. The increase in interest income was a result of a higher level of loans and securities resulting from general asset growth, partially offset by a decrease in the average yield on interest-earning assets caused by generally declining interest rates. The average balance of net loans for the three months ended September 30, 2003 was $281.8 million compared to $247.0 million for the three months ended September 30, 2002. The average yield on net loans was 6.12% for the three months ended September 30, 2003 compared to 7.11% for the three months ended September 30, 2002. The average balance of securities for the three months ended September 30, 2003 was $117.9 million compared to $66.5 million for the three months ended September 30, 2002. The average yield on securities was 3.26% for the three months ended September 30, 2003 compared to 4.57% for the three months ended September 30, 2002. The average balance of other earning assets for the three months ended September 30, 2003 was $8.3 million compared to $23.3 million for the three months ended September 30, 2002. The average yield on other earning assets was 1.15% for the three months ended September 30, 2003 compared to 1.91% for the three months ended September 30, 2002. The average yield on other earning assets declined because of the short-term repricing intervals of these assets combined with several decreases in short-term interest rates made by the Federal Reserve Bank. Interest Expense. Total interest expense decreased by $390,000 or 14.7% to $2.3 million for the three months ended September 30, 2003 from $2.6 million for the three months ended September 30, 2002. Average interest- bearing deposits increased by $66.3 million or 27.2% to $310.4 million for the three months ended September 30, 2003. Average borrowings decreased by $10.2 million to $47.9 million for the three months ended September 30, 2003 from $58.1 million for the three months ended September 30, 2002. The average rate on interest-bearing deposits decreased 97 basis 18 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 points to 1.97% for the three months ended September 30, 2003 from 2.94% for the three months ended September 30, 2002, while the average rate on borrowed funds decreased 45 basis points to 4.74% from 5.19% during the same period. The decline in interest expense resulted from continued growth in lower-rate core deposits while higher rate term deposits declined, and from lower interest rates in the economy, in general. Interest expense on subordinated debt for the three months ended September 30, 2003 was $143,000 as compared to $77,000 for the three months ended September 30, 2002. Average subordinated debt for the three months ended September 30, 2003 was $12 million with an average rate of 4.70% as compared to $5 million with an average rate of 6.03% for the three months ended September 30, 2002. Net Interest Income. Net interest income for the three months ended September 30, 2003 was $3.0 million as compared to $2.6 million for the three months ended September 30, 2002. The $425,000 increase can be attributed to a combination of the $35,000 increase in interest and dividend income, and a $390,000 decrease in interest expense on deposits, borrowed funds and subordinated debt. The average yield on interest earning assets decreased 106 basis points to 5.19% for the three months ended September 30, 2003 from 6.25% for the three months ended September 30, 2002, while the average cost on interest-bearing liabilities decreased by 100 basis points to 2.42% for the three months ended September 30, 2003 from 3.42% for the three months ended September 30, 2002. As a result, the interest rate spread decreased to 2.78% for the three months ended September 30, 2003 from 2.83% for the three months ended September 30, 2002. The decline in the yield on interest earning assets and the cost of funds was primarily due to lower interest rates in the economy. Provision for Loan Losses. The provision for loan losses for the three months ended September 30, 2003 was $87,000, compared to $75,000 for the three months ended September 30, 2002. At September 30, 2003, the balance of the allowance for loan losses was $2.4 million or .88% of net loans. At September 30, 2002, the balance of the allowance for loan losses was $2.3 million or .84% of net loans. Provisions result from management's continuing review of the loan portfolio as well as its judgment as to the adequacy of the reserves in light of the condition of the economy and the real estate market. Non-performing loans at September 30, 2003 totaled $2.4 million as compared to $454,000 at September 30, 2002. The increase is primarily due to a $1.5 million residential mortgage loan that became 90 days delinquent at September 30, 2003. Management believes that the value of the property exceeds that of the loan balance. Non-interest Income. Non-interest income decreased by $136,000 or 29.6% to $324,000 for the three months ended September 30, 2003 as compared to $460,000 for the three months ended September 30, 2002. The decrease in non-interest income reflects a decrease in net gains on sale of loans and other income, partially offset by an increase in gains on the sale of securities. Gain on sales of loans decreased by $129,000 to $63,000 for the three months ended September 30, 2003 from $192,000 for the three months ended September 30, 2002. The Company sold only $3.7 19 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 million loans during the quarter ended September 30, 2003 compared to $6.1 million for the comparable period in 2002. However, at September 30, 2003, the Company had committed to sell an additional $13.4 million in loans and will recognize gain on the sale of such loans in the quarter ending December 31, 2003. Fee income decreased by $44,000 to $215,000 for the three months ended September 30, 2003 compared to $259,000 for the three months ended September 30, 2002. This decrease reflects a $35,000 increase in the amortization of mortgage servicing rights. If the Company continues to sell loans into the secondary market, as it currently intends to do, the Company's servicing portfolio will continue to grow and additional amortization expense will result. For the three months ended September 30, 2003, gain on sale of securities available for sale totaled $45,000 as compared to $0 for the three months ended September 30, 2002. Non-interest Expense. Non-interest expense increased by $343,000 or 15.3% to $2.6 million for the three months ended September 30, 2003 as compared to $2.2 million for the three months ended September 30, 2002. This increase was caused predominantly by higher personnel costs, as well as, occupancy costs, data processing costs and marketing costs associated with the asset growth of the Bank and the branch office that opened in Malden, MA in September 2003. Asset/Liability Management A principal operating objective of the Company is to produce stable earnings by achieving a favorable interest rate spread that can be sustained during fluctuations in prevailing interest rates. Since the Company's principal interest-earning assets have longer terms to maturity than its primary source of funds, i.e. deposit liabilities, increases in general interest rates will generally result in an increase in the Company's cost of funds before the yield on its asset portfolio adjusts upward. Banking institutions have generally sought to reduce their exposure to adverse changes in interest rates by attempting to achieve a closer match between the periods in which their interest-bearing liabilities and interest-earning assets can be expected to reprice through the origination of adjustable-rate mortgages and loans with shorter terms and the purchase of other shorter term interest-earning assets. The term "interest rate sensitivity" refers to those assets and liabilities, which mature and reprice periodically in response to fluctuations in market rates and yields. Thrift institutions have historically operated in a mismatched position with interest-sensitive liabilities exceeding interest-sensitive assets in the short-term time periods. As noted above, one of the principal goals of the Bank's asset/liability program is to more closely match the interest rate sensitivity characteristics of the asset and liability portfolios. In order to properly manage interest rate risk, the Board of Directors has established an Asset/Liability Management Committee ("ALCO") made up of members of management to monitor the difference between the Company's maturing and repricing assets and liabilities and to develop 20 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 and implement strategies to decrease the "negative gap" between the two. The primary responsibilities of the committee are to assess the Company's asset/liability mix, recommend strategies to the Board that will enhance income while managing the Company's vulnerability to changes in interest rates and report to the Board the results of the strategies used. Since the early 1980s, the Bank has stressed the origination of adjustable- rate residential mortgage loans and adjustable-rate home equity loans. Historically, the Bank has attempted to sell fixed-rate loans with terms in excess of 15 years. However, following the conversion, the Bank has retained a greater portion of its fixed-rate loans. A substantial portion of the fixed-rate loans retained in portfolio has been funded with borrowings from the Federal Home Loan Bank of Boston (the "FHLB"). Since 1995, the Bank has also emphasized commercial loans with short-term maturities or repricing intervals as well as commercial real estate mortgages with short-term repricing intervals. In addition, the Company has used borrowings from the FHLB to fund the maturity or repricing interval of certain commercial real estate mortgages. Liquidity and Capital Resources The Company's primary sources of funds consist of deposits, borrowings, repayment and prepayment of loans, sales and participations of loans, maturities of securities and interest-bearing deposits, and funds provided from operations. While scheduled repayments of loans and maturities of securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions, and competition. The Company uses its liquidity resources primarily to fund existing and future loan commitments, to fund net deposit outflows, to invest in other interest-earning assets, to maintain liquidity, and to meet operating expenses. The Company is required to maintain adequate levels of liquid assets. This requirement, which may be varied depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The Company has historically maintained a level of liquid assets in excess of regulatory requirements. The Company's liquidity ratio at September 30, 2003 was 40.6%, using the short-term assets to short-term liabilities formula defined under the Federal Deposit Insurance Corporation's Uniform Bank Performance Reports. A major portion of the Company's liquidity consists of cash and cash equivalents, short-term U.S. Government and federal agency obligations, and corporate bonds. The level of these assets is dependent upon the Company's operating, investing, lending and financing activities during any given period. Liquidity management is both a daily and long-term function of management. If the Company requires funds beyond its ability to generate them internally, the Company believes it could borrow additional funds from the FHLB. At September 30, 2003, the Company had outstanding borrowings of $50.6 million and an available line of credit of $3.5 million from the FHLB. 21 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 2003 and 2002 At September 30, 2003, the Company had $29.7 million in outstanding commitments to originate loans. The Company anticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificates of deposit which are scheduled to mature in one year or less totaled $100.9 million at September 30, 2003. Based upon historical experience, management believes that a significant portion of such deposits will remain with the Bank. At September 30, 2003, the Company and the Bank exceeded all of their regulatory capital requirements. 22 Mystic Financial, Inc. and Subsidiaries Part I - Financial Information Item 3 - Quantitative and Qualitative Disclosures About Market Risk September 30, 2003 Item 3. Quantitative and Qualitative Disclosures About Market Risk In management's opinion, there has been no material change in market risk since disclosed in Item 7A of the Company's Annual Report on Form 10-K for the year ended June 30, 2003. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this quarterly report, (the "Evaluation Date") have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and are designed to ensure that material information relating to the Company would be made known to such officers by others within the Company on a timely basis. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. (c) Changes in internal control over financial reporting. There were no significant changes in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company's internal control over the financial reporting. 23 Mystic Financial, Inc. and Subsidiaries Part II - Other Information September 30, 2003 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders (the "Meeting") on October 22, 2003. All of the proposals submitted to the stockholders were approved. The proposals submitted to stockholders and the tabulation of votes for each proposal is as follows: 1. For the election of each of the nominees for director: Nominee: For Withheld -------- --- -------- Ralph W. Dunham 1,200,216 4,112 John J. McGlynn 1,196,243 8,085 There were no broker held non-voted shares represented at the Meeting with respect to this matter. 2. For the ratification of the appointment of Wolf & Company, P.C. to act as independent auditors for the Company for the fiscal year ending June 30, 2004. For: 1,193,214 Against 6,054 Abstained 5,059 There were no broker held non-voted shares represented at the Meeting with respect to this matter. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Rule 13a-14(a) Certification of President and Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. 31.2 Rule 13a-14(a) Certification of Senior Vice President and Treasurer, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. 32.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Senior Vice President and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 24 Mystic Financial, Inc. and Subsidiaries Part II - Other Information September 30, 2003 (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K with the SEC, dated July 9, 2003, (a) reporting the Company's earnings for the quarter and year ended June 30, 2003 under Item 12 and (b) reporting under Item 5 the declaration of a 5% stock dividend with respect to shares of the Company's common stock to shareholders of record as of July 31, 2003. The Company furnished a Current Report on Form 8-K, dated September 3, 2003, reporting under Item 12 that the Company had adjusted its quarterly net income for the quarters ended September 30, 2002, December 31, 2002, March 31, 2003 and June 30, 2003 to reflect the capitalization of the value of mortgage servicing rights. 25 Mystic Financial, Inc. and Subsidiaries Part II - Other Information Signatures September 30, 2003 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MYSTIC FINANCIAL, INC. (Registrant) Date: November 14, 2003 By: /s/ Ralph W. Dunham ----------------- ------------------------------- Ralph W. Dunham President and Chief Executive Officer Date: November 14, 2003 By: /s/ Anthony J. Patti ----------------- ------------------------------- Anthony J. Patti Senior Vice President, Chief Financial Officer and Treasurer 26

MYSTIC FINANCIAL INC 10-Q