10-K 1 myst-10k.txt BODY OF FORM 10-K =========================================================================== FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2004 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) (Registrant's telephone number including area code) (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] Indicate by check mark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of September 15, 2004, the aggregate market value of the voting and non- voting common equity held by non-affiliates of the Registrant was approximately $45,549,496. As of September 15, 2004, 1,565,945 shares of Registrant's common stock were outstanding. Documents Incorporated by Reference: Portions of the Registrant's Proxy Statement for its 2004 Annual Meeting of Stockholders are incorporated by reference in Part III. =========================================================================== MYSTIC FINANCIAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2004 TABLE OF CONTENTS PART I ITEM 1. Business 1 ITEM 2. Properties 27 ITEM 3. Legal Proceedings 27 ITEM 4. Submission of Matters to a Vote of Security Holders 27 PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28 ITEM 6. Selected Financial Data 29 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 30 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 41 ITEM 8. Financial Statements and Supplementary Data 42 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42 ITEM 9A. Controls and Procedures 42 PART III ITEM 10. Directors and Executive Officers of the Registrant 43 ITEM 11. Executive Compensation 43 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 43 ITEM 13. Certain Relationships and Related Transactions 44 PART IV ITEM 14. Principal Accounting Fees and Service 44 ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 44 SIGNATURES 48 PART I Forward Looking Statements Mystic Financial, Inc. ("Mystic" or the "Company") and Medford Co-operative Bank (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 other factors discussed in this Form 10-K, 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); * 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 and the Bank do 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. ITEM 1. BUSINESS General On January 8, 1998, the Bank completed its conversion from mutual to stock form and became a wholly-owned subsidiary of 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, not adjusted to reflect the Company's 5% stock dividend declared on July 9, 2003. The 1 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 227,735 shares of the Common Stock in open-market purchases following completion of the Conversion. In April 2002, the Company formed Mystic Financial Capital Trust I and in February 2003, the Company formed Mystic Financial Capital Trust II (the "Trusts"). The Company owns all of the voting stock of the Trusts. The Trusts have issued $12.0 million in trust preferred securities. See Note 9 of the Notes to Consolidated Financial Statements. The Company's principal business activity consists of the ownership of the Bank and the Trusts. The Company also invests in short-term investment grade marketable securities and other liquid investments. Mystic Financial Capital Trust I issued $5.0 million of floating-rate trust preferred securities on April 10, 2002. The trust preferred securities are scheduled to mature in 2032, and are callable at the option of the Company on April 22, 2007 with the prior approval of the Federal Reserve Board. As of June 30, 2004, the floating-rate was 5.07%. Distributions on these securities are payable semi-annually in arrears on April 22nd and October 22nd. In February 2003, Mystic Financial Capital Trust II issued $7.0 million of floating-rate trust preferred securities that are scheduled to mature in 2033, and are callable at the option of the Company on February 15, 2008, with the prior approval of the Federal Reserve Board. As of June 30, 2004 the floating-rate was 4.50%. Distributions on these securities are payable quarterly in arrears on February 15th, May 15th, August 15th, and November 15th. The proceeds were used to purchase subordinated debentures from the Company. The Company has no significant liabilities (other than the subordinated debentures and 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. The Bank is a Massachusetts chartered stock co-operative bank founded in 1886 with three full-service offices in Medford, Massachusetts and an additional four full-service offices in Lexington, Arlington, Bedford and Malden, Massachusetts. The Bank's deposits are 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 of Boston ("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, 2004. 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 2 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. On July 7, 2004, Mystic entered into an agreement and plan of merger with Brookline Bancorp, Inc., ("Brookline") pursuant to which Brookline will acquire Mystic in an exchange of cash and stock. Brookline is headquartered in Brookline, Massachusetts, and operates Brookline Bank. Under the terms of the agreement, stockholders of Mystic will be entitled to receive either cash or shares of Brookline common stock, subject to election and allocation procedures which are intended to ensure that, in aggregate, 40% of the shares of Mystic are converted into the right to receive cash of $39.00 per share and that 60% are converted into the right to receive a fixed exchange of 2.6786 shares of Brookline common stock for each share of Mystic. It is anticipated that the merger will close in the first quarter of 2005, provided that regulatory and Mystic shareholder approvals are obtained. In connection with the merger of Mystic and Brookline, Medford Co-operative Bank will merge into Brookline Bank. Market Area The Bank's main office and two of its branch offices are located in Medford, Massachusetts. The Bank has full-service offices in Lexington, Arlington, Bedford and Malden, Massachusetts. The Bank's Malden office opened in September 2003. All locations are located in Middlesex County. 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 towns of Lexington and Bedford are communities consisting mainly of single-family homes while the towns of Arlington and Malden contain 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, Lexington, Bedford, Woburn and Reading, 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, and Lawrence Memorial Hospital, with approximately 4,000, 1,400, and 900 employees, 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 U.S. Census and HUD estimates for 2002, the median household income for Middlesex County is $74,200. 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 3 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 that 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, loan origination fees, and the range of services offered. While the Bank is subject to competition from other financial institutions, which may have greater financial and marketing resources, the Bank believes it benefits from its community bank orientation and from its relatively high core deposit base. Management believes that the variety, depth and stability of the communities in which the Bank is located support the service and lending activities conducted by the Bank. The relative economic stability of the Bank's lending area is reflected in the small number of residential and commercial loan delinquencies experienced by the Bank during the past several years. Lending Activities The Bank originates loans through its three offices located in Medford and its offices in Lexington, Arlington, Bedford and Malden, 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, Bedford, Melrose, Woburn, and Reading 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 loans. The Bank also lends to commercial businesses in the communities that it serves. The Bank has senior lending officers with considerable lending expertise and a support staff to the commercial lending department. These loan officers are strategically located in our branch system to support local community business. 4 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.

5 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, 2004, loans on one- to four- family residential properties accounted for 53.6% of the Bank's net loan portfolio. During the year ended June 30, 2004, the Bank originated $38.1 million in adjustable-rate mortgage loans and $50.2 million in fixed-rate mortgage loans. Of the fixed-rate loans originated, the Bank sold $24.3 million fixed-rate loans with terms of greater than 15 years and retained $25.9 million fixed-rate loans, which had terms of 15 to 30 years. Approximately 26.5% of all loan originations during fiscal 2004 were refinances of loans already in the Bank's loan portfolio. At June 30, 2004, the Bank's loan portfolio included $71.5 million in adjustable-rate one- to four-family residential mortgage loans or 22.9% of the Bank's net loan portfolio, and $96.2 million in fixed-rate one- to four-family residential mortgage loans, or 30.9% of the Bank's net loan portfolio. Commercial Real Estate Loans. At June 30, 2004, the Bank's commercial real estate loan portfolio consisted of 167 loans, totaling $80.1 million, or 25.7% of net loans. The Bank's largest aggregate loan relationship is a commercial borrower with an outstanding balance of $6.3 million at June 30, 2004 secured by various properties in Massachusetts. Commercial Loans. In the past several years, the Bank has emphasized commercial business loans in order to address the needs of business commercial borrowers. The Bank lends to companies that have $500,000 to $15.0 million in sales. At June 30, 2004, the Bank's commercial loan portfolio consisted of 192 loans, totaling $21.6 million, or 6.9% of net loans. Consumer Loans. The Bank's consumer loans consist of passbook and automobile loans. At June 30, 2004, the consumer loan portfolio totaled $687,000 or 0.2% of net loans. 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 are made for up to 90% 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, 2004, the Bank had $18.2 million in home equity loans with unused credit available to existing borrowers of $27.8 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 construction loans are for the construction or 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 is 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, 2004, the Bank's construction loan portfolio totaled $58.0 million, offset by $31.9 million in unadvanced principal. Loan Commitments. The Bank generally makes loan commitments to borrowers not exceeding 60 days. At June 30, 2004, the Bank had $28.7 million in loan commitments outstanding, all for the 6 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 construction loans and lines of credit totaled $71.4 million on June 30, 2004. Loan Maturities. The following table sets forth certain information at June 30, 2004 regarding the dollar amount of loans maturing in the Bank's commercial real estate, commercial construction and commercial loan portfolio based on their contractual terms to maturity.

Originations and Sales of Loans. The Bank is a qualified seller/servicer for "Fannie Mae." Beginning in 1987, the Bank began to sell a portion of its fixed-rate loans with terms in excess of 15 years to Fannie Mae. The Bank continues to service all loans sold to Fannie Mae. At June 30, 2004, the Bank was servicing $45.4 million in loans for Fannie Mae and $354,000 in loans for the FHLB as part of their Mortgage Partnership Finance program. 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, 2004, the Bank was servicing $237,000 of such loans. Originations for the year ended June 30, 2004 decreased in all loan categories except home equity loan originations that increased by $17.3 million. Loan sales decreased during the same period due to a higher demand for an adjustable-rate product. 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. Non-Performing Assets, Asset Classification and Allowances for Losses. Management and the Security Committee of the Bank perform a monthly review of all delinquent loans and loans are placed on a non- accrual status when loans are over 90 days past due or, in the opinion of management, the collection of principal and interest are doubtful. All delinquent loans are ratified by the Bank's Board of Directors on a monthly basis. One of the primary tools used to manage and control problem loans is the Bank's "Watch-List," a listing of loans or commitments that are considered to have characteristics that could result in loss to the Bank if not properly supervised. The list is managed by the Senior Lending Officer, Chief Executive Officer and other officers as needed from the commercial, residential and consumer loan areas, 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. 7 The following table sets forth the Bank's problem assets and loans at the dates indicated.

At June 30, 2004, management was not aware of any loans not currently classified as non-accrual, 90 days past due or restructured that 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 as 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, 2004, the Bank had loans in the amount of $133,000 classified as doubtful or loss, and loans in the amount of $3.2 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 8 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 generally accepted accounting principles, 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.

9 Allowance for Loan Losses The allowance for loan losses is an estimate of the amount necessary to absorb probable losses in the loan portfolio. The allowance consists of specific, general and unallocated components. Commercial real estate and commercial business loans are evaluated individually for allowance purposes. Other categories of loans are generally evaluated as a group. The specific component relates to loans that are classified as doubtful, substandard or special mention. Loans classified as doubtful are considered impaired in accordance with SFAS No. 114, and an allowance is determined using the fair value of existing collateral. Loss factors for loans are based on the Company's historical loss experience with similar loans of similar quality as determined by the Company's internal rating system. Loss factors are then adjusted for additional points that consider qualitative factors such as current economic trends (both local and national), concentrations, growth and performance trends and the results of risk management assessments. Accordingly, increases or decreases in the amount of each loan category as well as the ratings of the loans within each category are considered in calculating the overall allowance. The allowance is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in earnings of the periods in which they become known. For the each of the years in the preceding table, the provision was principally impacted by growth in the portfolio, as credit quality remained strong. In fiscal year 2004, the increased provision was necessary due to a specific reserve allocated to one impaired loan. 10 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.

11 Investment Activities General. The investment policy of the Bank, which is approved by the Bank's Board of Directors, is based upon its asset and liability management goals and is designed primarily to provide and maintain adequate liquidity, maintain a balance of high quality, diversified investments, minimize risks to the Bank and compliment the Bank's lending activities. The investment policy is implemented by the Chief Financial Officer. Under applicable federal and state regulations, 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, 2004, 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. Government and federal agency securities, mortgage-backed securities, 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 securities pursuant to its investment policy. Available-for-sale securities are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income/loss. The following table sets forth the Bank's securities at the dates indicated.

12 The following table sets forth the final maturity dates, carrying values and average yields for the Bank's debt securities at June 30, 2004.

13 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. The following table sets forth the various types of deposit accounts at the Bank and the balances in these accounts at the dates indicated.

For more information on the Bank's deposit accounts, see Note 7 of Notes to Consolidated Financial Statements. 14 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, 2004.

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 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 a portion of the Bank's mortgage loan portfolio. The Bank had FHLB advances of $47.9 million outstanding at June 30, 2004. 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 its home mortgages provided certain standards related to creditworthiness have been met. Personnel As of June 30, 2004, the Bank had 82 full-time employees and 21 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. 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. 15 However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute non-dividend distributions and, therefore, will not be included in the Bank's income. The amount of additional taxable income created from a non-dividend distribution is equal to the lesser of the Bank's base year reserve and supplemental reserve for losses on loans; or an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, in certain situations, approximately one and one-half times the non-dividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. The Bank does not expect to be subject to the AMT. 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 Massachusetts. 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 securities 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. 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 10 of the Notes to Consolidated Financial Statements. 16 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 of the Massachusetts Division of Banks (the "Commissioner"). In addition, as a bank whose deposits are insured by the FDIC under the Bank Insurance Fund, 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 and the Company are 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. Lending Activities. A Massachusetts chartered co-operative bank may make a wide variety of mortgage loans. Fixed-rate loans, adjustable-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 17 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 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 ("ATMs") 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. 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. The FDIC Regulations define two tiers, or classes, of capital - Tier I Capital and Tier 2 Capital. For an institution with a rating of 1, the highest examination rating of the FDIC for banks, under the Uniform Financial Institutions Ranking System, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For all other institutions, the 18 minimum leverage capital ratio is 4% unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the bank. 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. 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, 2004. Prompt corrective action provisions are not applicable to financial holding companies.

As the preceding table shows, the Company and the Bank exceeded the minimum capital adequacy requirements at June 30, 2004. 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. 19 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." 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, legislation requires BIF-insured institutions like the Bank to assist in the payment of FICO bonds. Under the Federal Deposit Insurance Act (the "FDICIA 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 that 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 comprehensive regulations implementing Sections 23A and 23B, which would establish certain exceptions to this policy. 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 20 its affiliate must be supported by collateral in amounts ranging from 100 to 130 percent of the loan amounts. Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded its interpretations of Sections 23A and 23B of the FRA and is replacing these interpretations with Regulation W. In addition, Regulation W makes various changes to existing law regarding Sections 23A and 23B, including expanding the definition of what constitutes an affiliate subject to Sections 23A and 23B and exempting certain subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B. Under Regulation W, all transactions entered into on or before December 12, 2002, which either became subject to Sections 23A and 23B solely because of Regulation W, and all transactions covered by Sections 23A and 23B, the treatment of which will change solely because of Regulation W, will become subject to Regulation W on July 1, 2003. All other covered affiliate transactions become subject to Regulation W on April 1, 2003. The Federal Reserve Board expects each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W. We do not expect that the changes made by Regulation W will have a material adverse effect on our business. 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 certain requirements are met. Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that are subject to the insider lending restrictions of Section 22(h) of the FRA. 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 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 21 procedures and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted by the federal bank regulators. 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." At June 30, 2004, 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. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by FDIC regulations, a bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. 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. The FDIC is also required to assess the depository institution's record of meeting the credit needs of its community. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "High Satisfactory" CRA rating in its most recent examination from the Commonwealth of Massachusetts. 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 22 basis substantially similar to those of the FDIC for the Bank. As of June 30, 2004, 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 that 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. 23 As of June 30, 2004, 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. The Company is subject to capital adequacy guidelines for bank holding companies (on a consolidated basis) that are substantially similar to those of the FDIC for the Bank. The Company's stockholders' equity exceeds these requirements. The FRB in May 2004 proposed to continue to permit trust preferred securities to qualify as an element of bank holding companies Tier 1 capital but on a more limited basis. The proposal in general would continue to limit the aggregate amount of trust preferred securities and certain other restricted core capital elements to 25% of Tier 1 capital, net of goodwill. Previously, however, goodwill was not deducted when calculating the 25% limit. The amount of trust preferred securities and other restricted core capital elements in excess of the limit could be included in Tier 2 capital, subject to certain limits. The new limits would become fully effective on March 31, 2007. Before then, bank holding companies with outstanding trust preferred securities and other restricted core capital elements that do not conform to the new limits would be asked to consult with their Federal Reserve Banks on plans to ensure that the companies are not placing undue reliance on these instruments and, where appropriate, to reduce such reliance. The Company's wholly-owned subsidiaries, Mystic Financial Capital Trust I ("Trust I") and Mystic Financial Trust II ("Trust II"), have participated in pooled offerings of trust preferred securities. In connection with the offerings, Trust I and Trust II, respectively, issued $5.0 million in April 2002 and $7.0 million in February 2003 of trust preferred securities and reinvested the proceeds in 30-year, subordinated debenture issued by the Company. Approximately $9.2 million of the proceeds of the offerings qualified as an element of the Company's Tier 1 capital under both the current and proposed FRB capital adequacy guidelines, representing the maximum allowed under the 25.0% limitation as of June 30, 2004. The Company currently does not have any goodwill. Federal Home Loan Bank System The Bank is a member of the FHLB of Boston, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB of Boston, must maintain a minimum investment in FHLB of Boston capital stock in an amount equal to the sum of (i) .35% of member eligible collateral (subject to a minimum of $10,000 and a maximum of $25,000,000, per member), and (ii) 4.50% of the member's activity-based assets. The Bank was in compliance with this requirement with an investment in FHLB of Boston stock at June 30, 2004 of $3.2 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would be affected. Under the Gramm-Leach Bliley Financial Services Modernization Act, membership in the FHLB is now voluntary for all state chartered banks, such as the Bank. The Gramm-Leach Bliley Act also 24 replaces the existing redeemable stock structure of the FHLB System with a capital structure that requires each FHLB to meet a leverage limit and a risk-based permanent capital requirement. Two classes of stock are authorized: Class A (redeemable on 6-months notice) and Class B (redeemable on 5-years notice). Federal Reserve System Under Federal Reserve Board regulations, the Bank is required to maintain noninterest-earning reserves against its transaction accounts. The Federal Reserve Board regulations generally require that reserves of 3% must be maintained against aggregate transaction accounts of $38.8 million or less, subject to adjustment by the Federal Reserve Board. Total transaction accounts in excess of $38.8 million are required to have a reserve of 10% held against them, which are also subject to adjustment by the Federal Reserve Board. The first $6.6 million of otherwise reservable balances, subject to adjustments by the Federal Reserve Board, are exempted from the reserve requirements. The Bank is in compliance with these requirements. Because required reserves must be maintained in the form of either vault cash, a noninterest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. Other Federal Regulation The USA PATRIOT Act In response to the events of September 11th, 2001, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions: * Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program. * Pursuant to Section 326, on May 9, 2003, the Secretary of the Department of Treasury, in conjunction with other bank regulators issued Joint Final Rules that provide for minimum standards with respect to customer identification and verification. These rules became effective on October 1, 2003. * Section 312 requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United 25 States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. * Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks. * Bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. The Sarbanes-Oxley Act On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate wrongdoing. The Sarbanes-Oxley Act's principal legislation includes: * the creation of an independent accounting oversight board; * auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients; * additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements; * the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; * an increase the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company's independent auditors; * requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer; * requirement that companies disclose whether at least one member of the committee is an "audit committee financial expert" (as such term is defined by the Securities and Exchange Commission) and if not, why not; * expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; * a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions; * disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; * mandatory disclosure by analysts of potential conflicts of interest; and * a range of enhanced penalties for fraud and other violations. Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. 26 Federal Securities Law Our common stock is registered with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We are subject to information, proxy solicitation, insider trading restrictions, and other requirements under the Exchange Act. ITEM 2. PROPERTIES The following table sets forth certain information at June 30, 2004 regarding the Bank's Medford office facilities, which are owned by the Bank, the Lexington, Arlington, Bedford and Malden offices, which are leased, and certain other information relating to its property at that date.

The Bank also owns an office building adjacent to its main office, located at 66 High Street, Medford, MA 02155. The Bank uses a portion of the second and third floors of this building to house some of its administrative and clerical services and leases the remaining space to third-party tenants. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor the Banks is 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 No matter was submitted to security holders, through the solicitation of proxies or otherwise, during the quarter ended June 30, 2004. 27 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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, 2004, the last trading date in the Company's fiscal year, the Company's common stock closed at $32.15. On September 15, 2004, there were 1,565,945 shares of the Company's common stock outstanding, which were held of record by approximately 850 stockholders, not including persons or entities that 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. Share amounts for the fiscal year ended June 30, 2003 have been restated to reflect the Company's 5% stock dividend declared on July 9, 2003.

28 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 information is only a summary and should be read in conjunction with the consolidated financial statements and notes beginning on page F-1. All share amounts have been restated to reflect the Company's 5% stock dividend declared on July 9, 2003.

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 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, 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 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 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. 30 The Company's profitability is also affected by the level of non- interest income and non-interest expense. Non-interest income consists primarily of service fees, loan servicing and other loan fees and gains on sales of securities. Non-interest expense consists of salaries and benefits, occupancy related expenses and other general operating expenses. The operations of the Bank, and banking institutions in general, are significantly influenced by general economic conditions and related monetary and fiscal policies of financial institution's regulatory agencies. Deposit flows and the cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting loan demand and the availability of funds. Business Strategy The Bank's business strategy is to operate as a well-capitalized, profitable community bank dedicated to financing home ownership, small business and consumer needs in its market area and providing quality service to its customers. The Bank has implemented this strategy by: (i) monitoring the needs of customers and providing quality service; (ii) emphasizing consumer-oriented banking by originating residential mortgage loans and consumer loans, and by offering various deposit accounts and other financial services and products; (iii) recently increasing its emphasis on commercial banking and lending by originating loans for small businesses and providing greater services in its commercial and commercial real estate loan department; (iv) maintaining high asset quality through conservative underwriting; and (v) producing stable earnings. Critical Accounting Policy The Notes to Consolidated Financial Statements for the year ended June 30, 2004 included in our Annual Report on Form 10-K for the year ended June 30, 2004 contain a summary of the Company's significant accounting policies. The Company believes its policy with respect to the methodology for its determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Company's Audit Committee and Board of Directors. Asset/Liability Management A principal operating objective of the Bank is to produce stable earnings by achieving a favorable interest rate spread that can be sustained during fluctuations in prevailing interest rates. Since the Bank'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 Bank's cost of funds before the yield on its asset portfolio adjusts upward. The Bank has sought to reduce its exposure to adverse changes in interest rates by attempting to achieve a closer match between the periods in which its 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. As noted above, one of the principal goals of the Bank's asset/liability program is to maintain and match the interest rate sensitivity characteristics of the asset and liability portfolios. 31 In order to properly manage interest rate risk, the Bank's Board of Directors has established an Asset/Liability Management Committee ("ALCO") made up of members of the Board of Directors and management to monitor the difference between the Bank's maturing and repricing assets and liabilities and to develop and implement strategies to decrease the "negative gap" between the two. The primary responsibilities of the Committee are to assess the Bank's asset/liability mix, recommend strategies to the Board of Directors that will enhance income while managing the Bank's vulnerability to changes in interest rates and report to the Board of Directors 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. 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 Bank has used borrowings from the FHLB to fund the maturity or repricing interval of certain commercial real estate mortgages. At June 30, 2004, the Bank's loan portfolio included $71.5 million of adjustable-rate one- to four-family mortgage loans, $80.1 million of adjustable-rate commercial real estate loans, $11.1 million of adjustable-rate or short-term commercial loans, and $18.2 million of adjustable-rate home equity loans. Together, these loans represent 58.0% of the Bank's net loans at June 30, 2004. Recent Developments On July 7, 2004, Mystic entered into an agreement and plan of merger with Brookline Bancorp, Inc., ("Brookline") pursuant to which Brookline will acquire Mystic in an exchange of cash and stock. Brookline is headquartered in Brookline, Massachusetts, and operates Brookline Bank. Under the terms of the agreement, stockholders of Mystic will be entitled to receive either cash or shares of Brookline common stock, subject to election and allocation procedures which are intended to ensure that, in aggregate, 40% of the shares of Mystic are converted into the right to receive cash of $39.00 per share and that 60% are converted into the right to receive a fixed exchange of 2.6786 shares of Brookline common stock for each share of Mystic. It is anticipated that the merger will close in the first quarter of 2005, provided that regulatory and Mystic shareholder approvals are obtained. In connection with the merger of Mystic and Brookline, Medford Co-operative Bank will merge into Brookline Bank. 32 Average Balances, Interest and Average Yields The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the years indicated and the average yields earned and rates paid for the years indicated. Such yields and costs are derived by dividing income or expense by the average monthly balances of assets and liabilities, respectively, for the years presented. Average balances are derived from daily balances. Loans on nonaccrual status are included in the average balances of loans shown in the table. The securities in the following table are presented at amortized cost.

33 Rate/Volume Analysis The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. For each category of interest-earning assets and interest- bearing liabilities, 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 The Company's operating results depend primarily upon its net interest income, which is the difference between the interest income earned on its interest-bearing assets (loans and securities), and the interest expense paid on its interest-bearing liabilities (deposits and borrowings). Operating results are also significantly affected by provisions for loan losses, other income and operating expenses. Each of these factors is significantly affected not only by the Company's policies, but, to varying degrees, by general economic and competitive conditions and by policies of state and federal regulatory authorities. Comparison of Financial Condition at June 30, 2004 and 2003 The Company's total assets amounted to $441.2 million at June 30, 2004 compared to $429.7 million at June 30, 2003, an increase of $11.5 million or 2.7%. The increase in total assets is primarily attributable to an increase in net loans of $31.9 million or 11.4% offset in part by a decrease in securities available for sale and securities held to maturity of $17.9 million or 15.2%. Cash and cash equivalents totaled $15.7 million at June 30, 2004 compared to $19.8 million at June 30, 2003, a decrease of $4.1 million or 20.7%. The $3.3 million decrease in short-term investments and federal funds sold was due to the increased loan demand in both the residential and commercial real estate areas. 34 Net loans increased by $31.9 million or 11.4% to $311.8 million or 70.7% of total assets at June 30, 2004 as compared to $279.9 million or 65.2% of total assets at June 30, 2003, as the Bank continued its emphasis on originating and retaining residential mortgage loans, commercial loans and commercial real estate loans. Securities, including FHLB stock, held by the Company decreased by $17.6 million or 14.5% to $103.2 million at June 30, 2004 from $120.8 million at June 30, 2003. The proceeds from the sales were used to fund growth in commercial real estate loans, construction loans and home equity loans. Total deposits increased by $7.8 million or 2.3% to $351.4 million at June 30, 2004 from $343.6 million at June 30, 2003. Money market deposits increased to $55.0 million at June 30, 2004 from $51.7 million at June 30, 2003, an increase of $3.5 million or 6.3%. Certificates of deposit decreased to $138.6 million at June 30, 2004 from $142.0 million at June 30, 2003, a decrease of $3.4 million or 2.4%. Demand deposits and IOLTA accounts decreased to $48.6 million at June 30, 2004 from $54.5 million at June 30, 2003, a decrease of $5.6 million or 10.9%. Savings accounts increased by $14.0 million or 20.3% to $83.0 million at June 20, 2004 from $69.0 million at June 30, 2003. During the year ended June 30, 2004, total borrowings increased by $6.7 million to $47.9 million at June 30, 2004 from $41.2 million at June 30, 2003. The increase of $6.7 million reflects additional funding needed to support growth in net loans. Stockholders' equity increased by $0.5 million to $26.7 million at June 30, 2004 from $26.2 million at June 30, 2003 as a result of dividends paid of $599,000, a net unrealized loss on securities available for sale of $1.8 million, offset by net income of $1.9 million, proceeds from exercise of stock options of $342,000, a reduction in unearned Recognition and Retention Plan ("RRP") stock of $99,000, and a reduction in unearned Employee Stock Ownership Plan ("ESOP") shares of $606,000. Book value per share of common stock was $18.14 as of June 30, 2004 as compared to $18.46 as of June 30, 2003. 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 committed to be released to participants' individual accounts, unearned RRP shares and treasury stock. There were 1,473,696 and 1,421,879 shares of common stock outstanding as of June 30, 2004 and June 30, 2003, respectively, for purposes of calculating the Company's book value per share. Comparison of the Operating Results for the Years Ended June 30, 2004 and 2003 Net Income. Net income was $1.9 million for the year ended June 30, 2004 as compared to $1.7 million for the year ended June 30, 2003. This $159,000 increase in net income during the year was the result of an increase in net interest income of $2.1 million offset by a decrease in non-interest income of $446,000, an increase in non-interest expense of $1.4 million and an increase in provision for loan losses of $284,000. The return on average assets for each of the years ended June 30, 2004 and June 30, 2003 was .44%. The return on average equity for the year ended June 30, 2004 was 7.13% compared to 6.86% for the year ended June 30, 2003. Earnings per share on a basic and diluted basis were $1.29 and $1.22, respectively, for the year ended June 30, 2004 compared to $1.23 and $1.18, respectively, on a basic and diluted basis for the year ended June 30, 2003. Interest Income. Total interest and dividend income remained relatively unchanged at $21.4 million for the years ended June 30, 2004 and 2003. The average balance of net loans for the year ended June 30, 2004 was $291.5 million compared to $257.5 million for the year ended June 30, 2003. The 35 average yield on net loans was 5.95% for the year ended June 30, 2004 compared to 6.81% for the year ended June 30, 2003. The average balance of securities for the year ended June 30, 2004 was $113.7 million compared to $90.2 million for the year ended June 30, 2003. The average yield on securities was 3.47% for the year ended June 30, 2004 compared to 3.84% for the year ended June 30, 2003. The average balance of other earning assets for the year ended June 30, 2004 was $8.3 million compared to $25.3 million for the year ended June 30, 2003. The average yield on other earning assets was 1.01% for the year ended June 30, 2004 compared to 1.50% for the year ended June 30, 2003. Interest Expense. Total interest expense decreased by $2.1 million or 20.3% to $8.2 million for the year ended June 30, 2004 from $10.3 million for the year ended June 30, 2003. Interest expense continued to decline during 2004 mainly attributable to the reduction of all deposit and borrowing rates. Average interest-bearing deposits increased by $32.2 million or 11.5% to $312.7 million for the year ended June 30, 2004 from $280.4 million for the year ended June 30, 2003. Average borrowings decreased by $5.8 million to $47.6 million for the year ended June 30, 2004 from $53.3 million for the year ended June 30, 2003. Average subordinated debt increased by $4.8 million to $12.4 million for the year ended June 30, 2004 from $7.6 million for the year ended June 30, 2003. The average rate on interest-bearing deposits decreased 71 basis points to 1.83% for the year ended June 30, 2004 from 2.54% for the year ended June 30, 2003, the average rate on borrowed funds decreased 119 basis points to 4.10% for the year ended June 30, 2004 from 5.29% for the year ended June 30, 2003 and the average rate on subordinated debt decreased 50 basis points to 4.73% for the year ended June 30, 2004 from 5.23% for the year ended June 30, 2003. Net Interest Income. Net interest income for the year ended June 30, 2004 was $13.1 million as compared to $11.0 million for the year ended June 30, 2003. The $2.1 million or 18.9% increase is attributed to the $2.1 million decrease in interest expense on deposits, borrowed funds and subordinated debt. The average yield on interest earning assets decreased 56 basis points to 5.17% for the year ended June 30, 2004 from 5.73% for the year ended June 30, 2003, while the average cost on interest-bearing liabilities decreased by 82 basis points to 2.21% for the year ended June 30, 2004 from 3.03% for the year ended June 30, 2003. As a result, the interest rate spread increased by 26 basis points to 2.96% for the year ended June 30, 2004 from 2.70% for the year ended June 30, 2003. Provision for Loan Losses. The provision for loan losses was $584,000 for the year ended June 30, 2004 as compared to $300,000 for the year ended June 30, 2003. At June 30, 2004, the balance of the allowance for loan losses was $2.5 million or .81% of total loans. During the year ended June 30, 2004, $409,000 was charged against the allowance for loan losses while $15,000 in recoveries was credited to the allowance for loan losses. At June 30, 2003, the balance of the allowance for loan losses was $2.3 million or .84% of total loans. During the year ended June 30, 2003, $40,000 was charged against the allowance for loan losses while $24,000 in recoveries was credited to the allowance for loan losses. There were three non-performing loans with an aggregate balance of $1.8 million at June 30, 2004. At June 30, 2003, there were two non-performing loans with an aggregate balance of $223,000. Non-interest Income. Non-interest income decreased by $447,000 or 20.6% to $1.7 million for the year ended June 30, 2004 as compared to $2.2 million for the year ended June 30, 2003. This decrease was caused by increased net security gains of $424,000 offset by a decrease in loan sale gains of $737,000 and decrease in other income of $134,000. Non-interest Expense. Non-interest expense increased by $1.4 million or 13.4% to $11.4 million for the year ended June 30, 2004 as compared to $10.1 million for the year ended June 30, 2003. This increase was caused by higher personnel costs associated with the asset growth of the Bank, increased benefit costs, expenses to operate the branch office that opened in Malden, MA in September 2003, a prepayment penalty expense of $298,000 relating to the early retirement of various FHLB advances and 36 $174,000 of legal and consulting expenses relating to the Company's merger agreement with Brookline Bancorp, Inc. Provision for Income Taxes. The provision for income taxes was $966,000 for the year ended June 30, 2004 as compared to $1.1 million for the year ended June 30, 2003. The effective tax rate declined from 39.4% for the year ended June 30, 2003 to 34.0% for the year ended June 30, 2004, as a higher percentage of taxable income was included in the Bank's security corporation that has a lower state tax rate. Comparison of the Operating Results for the Years Ended June 30, 2003 and 2002 Net Income. Net income was $1.7 million for the year ended June 30, 2003 as compared to $1.6 million for the year ended June 30, 2002. This $89,000 increase in net income during the year was the result of an increase in net interest income of $1.3 million and an increase in non- interest income of $1.0 million partially offset by an increase in non- interest expense of $2.2 million and an increase in provision for income taxes of $83,000. The return on average assets for the year ended June 30, 2003 was .44% compared to .53% for the year ended June 30, 2002. The return on average equity for the year ended June 30, 2003 was 6.86% compared to 6.27% for the year ended June 30, 2002. Earnings per share on a basic and diluted basis was $1.23 and $1.18, respectively, for the year ended June 30, 2003 compared to $1.06 and $1.03 on a basic and diluted basis for the year ended June 30, 2002. Interest Income. Total interest and dividend income increased by $1.5 million or 7.7% to $21.4 million for the year ended June 30, 2003 from $19.9 million for the year ended June 30, 2002. The increase in interest income was primarily the result of a higher level of loans and securities offset by a decrease in other earning assets and a decrease in average yields due to the declining interest rate environment. The average balance of net loans for the year ended June 30, 2003 was $257.5 million compared to $226.7 million for the year ended June 30, 2002. The average yield on net loans was 6.81% for the year ended June 30, 2003 compared to 7.49% for the year ended June 30, 2002. The average balance of securities for the year ended June 30, 2003 was $90.2 million compared to $50.8 million for the year ended June 30, 2002. The average yield on securities was 3.84% for the year ended June 30, 2003 compared to 4.74% for the year ended June 30, 2002. The average balance of other earning assets for the year ended June 30, 2003 was $25.3 million compared to $17.6 million for the year ended June 30, 2002. The average yield on other earning assets was 1.50% for the year ended June 30, 2003 compared to 2.80% for the year ended June 30, 2002. Interest Expense. Total interest expense increased by $171,000 or 1.7% to $10.3 million for the year ended June 30, 2003 from $10.2 million for the year ended June 30, 2002. The increase in interest expense resulted from an increase in the average balance of FHLB borrowings and an increase in subordinated debt. Average interest-bearing deposits increased by $67.2 million or 31.5% to $280.4 million for the year ended June 30, 2003 from $213.2 million for the year ended June 30, 2002. Average borrowings increased by $3.5 million to $53.3 million for the year ended June 30, 2003 from $49.9 million for the year ended June 30, 2002. Average subordinated debt increased by $6.4 million to $7.6 million for the year ended June 30, 2003 from $1.2 million for the year ended June 30, 2002. The average rate on interest-bearing deposits decreased 89 basis points to 2.54% for the year ended June 30, 2003 from 3.43% for the year ended June 30, 2002, the average rate on borrowed funds decreased 30 basis points to 5.29% from 5.59% for the year ended June 30, 2002 and the average rate on subordinated debt decreased 20 basis points to 5.23% for the year ended June 30, 2003 from 5.52% for the year ended June 30, 2002. 37 Net Interest Income. Net interest income for the year ended June 30, 2003 was $11.0 million as compared to $9.7 million for the year ended June 30, 2002. The $1.3 million or 13.9% increase is attributed to the $1.5 million increase in interest and dividend income offset by the $171,000 increase in interest expense on deposits, borrowed funds and subordinated debt. The average yield on interest earning assets decreased 100 basis points to 5.73% for the year ended June 30, 2003 from 6.73% for the year ended June 30, 2002, while the average cost on interest-bearing liabilities decreased by 82 basis points to 3.03% for the year ended June 30, 2003 from 3.85% for the year ended June 30, 2002. As a result, the interest rate spread decreased by 18 basis points to 2.70% for the year ended June 30, 2003 from 2.88% for the year ended June 30, 2002. Provision for Loan Losses. The provision for loan losses was $300,000 for the year ended June 30, 2003 as compared to $305,000 for the year ended June 30, 2002. At June 30, 2003, the balance of the allowance for loan losses was $2.3 million or .84% of total loans. During the year ended June 30, 2003, $40,000 was charged against the allowance for loan losses while $24,000 in recoveries was credited to the allowance for loan losses. At June 30, 2002, the balance of the allowance for loan losses was $2.1 million or .84% of total loans. During the year ended June 30, 2002, $30,000 was charged against allowance for loan losses while $4,000 in recoveries was credited to the allowance for loan losses. There were two non-performing loans with an aggregate balance of $223,000 at June 30, 2003. At June 30, 2002, there were two non-performing loans with an aggregate balance of $108,000. Non-interest Income. Non-interest income improved by $1.0 million or 90.4% to $2.2 million for the year ended June 30, 2003 as compared to $1.1 million for the year ended June 30, 2002. This increase was caused by increased loan sale gains of $910,000 and an increase in net security gains of $50,000 offset by a decrease in other income of $34,000. Non-interest Expense. Non-interest expense increased by $2.2 million or 28.1% to $10.1 million for the year ended June 30, 2003 as compared to $7.9 million for the year ended June 30, 2002. This increase was caused by higher personnel costs associated with the asset growth of the Bank, marketing expenses incurred to capture deposit market share, expenses to operate the branch office that opened in Bedford, MA in June 2002 and a prepayment penalty expense of $468,000 relating to the early retirement of various FHLB advances. Provision for Income Taxes. The provision for income taxes was $1.1 million for the year ended June 30, 2003 as compared to $1.0 million for the year ended June 30, 2002. The effective tax rate for the year ended June 30, 2003 was 39.4% as compared to 38.8% for the year ended June 30, 2002. 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. Liquidity resources are used 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 Bank is required to maintain adequate levels of liquid assets. This guideline, which may be varied depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The Bank has historically maintained a level of liquid assets in excess of regulatory requirements. The Bank's liquidity ratio at June 30, 2004 was 49.1%, using the short-term 38 assets to short-term liabilities formula defined under the Federal Deposit Insurance Corporation's Uniform Bank Performance Reports. A major portion of the Bank'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 or the Bank requires funds beyond its ability to generate them internally, the Bank believes it could borrow additional funds from the FHLB. At June 30, 2004, the Bank had borrowings of $47.9 million from the FHLB and the capacity to borrow approximately $108 million more based on the Bank's level of qualified collateral. At June 30, 2004, the Bank had $28.7 million in outstanding commitments to originate loans. The Bank 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 $62.8 million at June 30, 2004. Based upon historical experience, management believes that a significant portion of such deposits will remain with the Bank. In April 2002, Mystic Financial Capital Trust I (the "Trust") was formed for the purpose of issuing Trust Preferred Securities and investing the proceeds from the sale of these securities in subordinated debentures issued by the Company. A total of $5 million of floating rate Trust Preferred Securities were issued and are scheduled to mature in 2032, callable at the option of the Company on April 22, 2007, with the prior approval of the Federal Reserve Board. Using interest payments made by the Company on the debentures, the Trust pays semi-annual dividends to preferred security holders. The interest payable on the subordinated debentures and the cumulative dividends payable on the preferred securities is equal to a floating rate of 5.07% at June 30, 2004. Interest payments on these securities are payable semi-annually in arrears on April 22nd and October 22nd. The Company has the option to defer interest payments on the subordinated debentures for up to five years and, accordingly, the Trust may defer dividend distributions for up to five years. In February 2003, Mystic Financial Capital Trust II (the "Trust") was formed for the purpose of issuing Trust Preferred Securities and investing the proceeds from the sale of these securities in subordinated debentures issued by the Company. A total of $7 million of floating rate Trust Preferred Securities were issued and are scheduled to mature in 2033, callable at the option of the Company on February 15, 2008, with the prior approval of the Federal Reserve Board. Using interest payments made by the Company on the debentures, the Trust pays quarterly dividends to preferred security holders. The interest payable on the subordinated debentures and the cumulative dividends payable on the preferred securities is equal to a floating rate of 4.50% at June 30, 2004. Interest payments on these securities are payable every three months in arrears on February 15th, May 15th, August 15th and November 15th. The Company has the option to defer interest payments on the subordinated debentures for up to five years and, accordingly, the Trust may defer dividend distributions for up to five years. At June 30, 2004, the Company and the Bank exceeded all of their regulatory capital requirements. For further information regarding the Company's and the Bank's regulatory capital at June 30, 2004, see Notes to Consolidated Financial Statements. 39 Contractual Obligations The table below contains information on the Company's contractual obligations as of the fiscal year ended June 30, 2004.

Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Impact of Inflation and Changing Prices The consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time because of inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Recent Accounting Pronouncements In December 2002, the FASB issued a Statement of Financial Accounting Standards ("FASB") No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," and provides three alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123. The transition guidance and annual disclosure provisions of this Statement are effective for fiscal years ending after December 15, 2002 and the interim period disclosure provisions are effective for interim periods beginning after December 31, 2002. This Statement did not have any effect on the Company's consolidated financial statements. 40 On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement provides new rules on the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 30, 2003. This Statement is not expected to have material effect on the Company's consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to ALCO, which is composed of members of management and the Board of Directors. In this capacity, ALCO develops guidelines and strategies affecting the Company's asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. ALCO monitors the difference between the Company's maturing and repricing assets and liabilities and develops and implements strategies to manage the possible change in the Company's net interest margin resulting from changes in interest rates. The primary responsibilities of ALCO are to assess the Company's asset/liability mix, recommend strategies to the Board of Directors that will enhance income while managing the Company's vulnerability to changes in interest rates and report to the Board of Directors the results of the strategies used. Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change the interest income and expense streams associated with the Company's financial instruments also change thereby affecting net interest income ("NII"), the primary component of the Company's earnings. During the year ended June 30, 2004, the Company continued working with a consulting group to perform its interest rate risk simulation analysis. ALCO utilizes the results of a simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling one-year horizon, it also utilizes additional tools to monitor potential longer-term risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company's balance sheet. This sensitivity analysis is compared to Board of Directors and ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year horizon, assuming no balance sheet growth, given both a 200 basis point upward and downward shift in interest rates. The Company uses various other assumptions in its sensitivity analysis. For securities, in the event of a call provision, if the interest rate is lower than the contractual rate, reinvestment is assumed at the lower rate. For residential mortgage loans, the Company uses the PSA method to generate different prepayment assumptions. Commercial loans and commercial real estate loans do not include any amortization or prepayment amounts. For money market accounts, NOW accounts, and regular savings deposits, not all deposits within these categories are assumed to increase by the full extent of the interest rate shift based upon management's judgment as to deposit elasticity. The following reflects the Company's NII sensitivity analysis as of June 30, 2004, its most recent analysis. 41

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, changes in deposit levels, pricing decisions on loans and deposits, reinvestment of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. In addition, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate changes caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of Mystic and Subsidiaries are included in pages F-1 through F-40 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Management, including the President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Mystic's disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports that Mystic files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no changes in Mystic's internal control over financial reporting identified in connection with the evaluation that occurred during Mystic's last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, Mystic's internal control over financial reporting. 42 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information included on pages 97 through 98, page 104 and page 115 of the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference: "Information as to Nominees and Continuing Directors," "Nominees for Election as Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The following information included on pages 105 through 106 and pages 110 through 115 of the Proxy Statement is incorporated herein by reference: "Directors' Compensation," "Executive Compensation," "Certain Employee Benefits and Employment Agreements," and "Benefits." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following information included on pages 38 through 40 of the Proxy Statement is incorporated herein by reference: "Security Ownership of Certain Beneficial Owners of Mystic Financial" and "Beneficial Stock Ownership of Management." The following table sets forth the aggregate information of the Company's equity compensation plans as in effect as of June 30, 2004. Equity Compensation Plan Information

43 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following information included on pages 105 and 106 of the Proxy Statement is incorporated herein by reference: "Directors' Compensation" and "Executive Compensation." ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding principal accountant fees and services is presented under the heading "Audit Committee Report" in Mystic's definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on November 17, 2004, which has been filed with the SEC and is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Listed below are all financial statements and exhibits filed as part of this report: (1) The consolidated balance sheets of Mystic Financial, Inc. and subsidiaries as of June 30, 2004 and 2003 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2004, together with the related notes and the independent auditors' report of Wolf & Company, P.C., independent registered public accounting firm. (2) Schedules omitted, as they are not applicable. (3) Exhibits 44 Exhibit No. Exhibit Description ----------- ------------------- 3.1 Certificate of Incorporation of Mystic Financial, Inc.* 3.2 Bylaws of Mystic Financial, Inc.* 4.3 Specimen of Stock Certificate of Mystic Financial, Inc.* 10.1 Employee Stock Ownership Plan and Trust Agreement of Mystic Financial, Inc.* 10.2 Employment Agreement by and between Mystic Financial, Inc. and Ralph W. Dunham.**** 10.3 Employment Agreement by and between Mystic Financial, Inc. and John M. O'Donnell.**** 10.4 Employment Agreement by and between Mystic Financial, Inc. and Anthony J. Patti.***** 10.5 Employment Agreement by and between Medford Co-operative Bank and Thomas G. Burke.* 10.6 Employment Agreement by and between Medford Co-operative Bank and Robert Kaminer.** 10.7 Amendment No. 1 to the Employment Agreement by and between Mystic Financial, Inc. and Ralph W. Dunham. 10.8 Amendment No. 1 to the Employment Agreement by and between Mystic Financial, Inc. and John M. O'Donnell. 10.9 Amendment No. 1 to the Employment Agreement by and between Mystic Financial, Inc. and Anthony J. Patti. 10.10 Severance Pay Plan of Medford Co-operative Bank.** 10.11 Amendment No. 1 to Severance Pay Plan of Medford Co-operative Bank. 10.12 Mystic Financial, Inc. Retirement Plan for Non-Employee Directors.*** 10.13 Amendment No. 1 to the Mystic Financial, Inc. Retirement Plan for Non-Employee Directors. 10.14 Amendment No. 2 to the Mystic Financial, Inc. Retirement Plan for Non-Employee Directors. 10.15 Guarantee Agreement dated as of April 10, 2002 by Mystic Financial, Inc. and Wilmington Trust Company. ***** 10.16 Indenture Agreement dated as of April 10, 2002 by Mystic Financial, Inc. and Wilmington Trust Company. ***** 45 10.17 Amendment No. 1 to the Mystic Financial, Inc. Employee Stock Ownership Plan. 10.18 Amendment No. 2 to the Mystic Financial, Inc. Employee Stock Ownership Plan.***** 10.19 Amendment No. 3 to the Mystic Financial, Inc. Employee Stock Ownership Plan. 10.20 Amendment No. 4 to the Mystic Financial, Inc. Employee Stock Ownership Plan. 10.21 Guarantee Agreement dated as of February 14, 2003 by Mystic Financial, Inc. and Wilmington Trust Company.****** 10.22 Indenture Agreement dated as February 14, 2003 by Mystic Financial, Inc. and Wilmington Trust Company. ****** 10.23 Change of Control Agreement by and among Medford Co-operative Bank, Mystic Financial, Inc. and Todd A. Goldstein. 10.24 Change of Control Agreement by and among Medford Co-operative Bank, Mystic Financial, Inc. and Nancy P. Graham. 10.25 Change of Control Agreement by and among Medford Co-operative Bank, Mystic Financial, Inc. and Annette J. Hunt. 10.26 Change of Control Agreement by and among Medford Co-operative Bank, Mystic Financial, Inc. and Robert W. Kershaw. 14.1 Code of Ethics and Conflict of Interest Policy. 21.1 Subsidiaries of the Registrant. * 23.1 Consent of Wolf & Company, P.C. 31.1 Certifications of the CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications of the CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ___________________ * Incorporated herein by reference to Registration Statement No. 333- 34447 on Form S-1 of Mystic Financial, Inc. filed with the Securities and Exchange Commission on August 27, 1997, as amended. ** Incorporated herein by reference to the Quarterly Report on Form 10-Q of Mystic Financial, Inc. filed with the Securities and Exchange Commission on November 14, 2000. *** Incorporated herein by reference to the Quarterly Report on Form 10-Q of Mystic Financial, Inc. filed with the Securities and Exchange Commission on February 12, 2001. 46 **** Incorporated herein by reference to the Quarterly Report on Form 10-Q of Mystic Financial, Inc. filed with the Securities and Exchange Commission on February 14, 2002. ***** Incorporated herein by reference to the Quarterly Report on Form 10-Q of Mystic Financial, Inc. filed with the Securities and Exchange Commission on May 14, 2002. ****** Incorporated herein by reference to the Annual Report on Form 10-K of Mystic Financial, Inc. filed with the Securities and Exchange Commission on September 29, 2003. (b) Reports on Form 8-K. The Company filed no current reports on Form 8-K during the quarter ended June 30, 2004. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized, in the City of Medford, Commonwealth of Massachusetts, on September 15, 2004. Mystic Financial, Inc. By: /s/ Ralph W. Dunham -------------------------------- Ralph W. Dunham President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.

48 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Income F-4 Consolidated Statements of Changes in Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-8 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Mystic Financial, Inc. We have audited the consolidated balance sheets of Mystic Financial, Inc. and subsidiaries as of June 30, 2004 and 2003, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mystic Financial, Inc. and subsidiaries as of June 30, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2004 in conformity with U.S. generally accepted accounting principles. Boston, Massachusetts July 23, 2004 F-2 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS

See accompanying notes to consolidated financial statements. F-3 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements. F-4 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended June 30, 2004, 2003 and 2002

See accompanying notes to consolidated financial statements. F-5 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued) See accompanying notes to consolidated financial statements. F-6 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)

See accompanying notes to consolidated financial statements. F-7 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2004, 2003 and 2002 l. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and business The consolidated financial statements include the accounts of Mystic Financial, Inc. (the "Company" or "Mystic") and its wholly-owned subsidiary, Medford Co-operative Bank (the "Bank"). The Bank has two wholly-owned subsidiaries, Mystic Securities Corp. which engages in the purchase and sale of securities, and Mystic Investment, Inc. which is inactive. All significant inter-company accounts have been eliminated in consolidation. The Company's wholly-owned subsidiaries, Mystic Financial Capital Trust I and Mystic Financial Capital Trust II were formed for the purpose of issuing trust preferred securities and investing the proceeds from the sale of these securities in subordinated debentures issued by the Company. These subsidiaries are accounted for on the equity method (see Note 9). The Bank provides a variety of financial services to individuals and businesses through its seven offices in Medford, Arlington, Lexington, Bedford and Malden, Massachusetts. Its primary deposit products are checking, savings and term certificate accounts, and its primary lending products are residential and commercial mortgage, commercial and consumer loans. Merger On July 7, 2004, the Company announced the execution of a definitive agreement in which Brookline Bancorp, Inc. ("Brookline") will acquire the Company in an exchange of cash and stock. The merger is subject to regulatory and the Company's shareholder approvals. In connection with the merger of the Company and Brookline, Medford Co-operative Bank will merge into Brookline Bank, a subsidiary of Brookline. Under the terms of the agreement, stockholders of the Company will be entitled to receive either cash or shares of Brookline common stock, subject to election and allocation procedures which are intended to ensure that, in aggregate, 40% of the shares of the Company are converted into the right to receive cash of $39.00 per share, and that 60% are converted into the right to receive a fixed exchange of 2.6786 shares of Brookline common stock for each share of the Company. F-8 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Use of estimates In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Cash and cash equivalents Cash and cash equivalents include amounts due from banks, federal funds sold and short-term investments with original maturities of three months or less. Restrictions on cash and amounts due from banks The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At June 30, 2004 and 2003, these reserve balances amounted to $3,304,000 and $3,726,000, respectively. Short-term investments Short-term investments are carried at cost, which approximates fair value, and consist of interest-bearing deposits in the Bank Investment Liquidity Fund and money market funds. Reclassifications and restatements Certain amounts in the 2003 consolidated financial statement have been reclassified to conform to the 2004 presentation. Prior period common share and per share data have been adjusted to reflect the Company's 5% common stock dividend declared on July 9, 2003 and paid on August 15, 2003 to shareholders of record on July 31, 2003. Securities Debt securities that management has the intent and ability to hold to maturity are classified as "held to maturity" and reported at amortized cost. Securities, not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income/loss. F-9 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Securities (continued) Purchase premiums and discounts are recognized in interest income by the interest method over the terms of the securities. Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date using the specific identification method. Loans The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio consists of mortgage loans in the Greater Boston area. The ability of the Bank's debtors to honor their contracts is dependent upon the local real estate market and economy in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on loans is discontinued at the time the loan is over 90 days past due. Past due status is based on the contractual terms of the loan. Loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non- accrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are generally maintained on a non-accrual basis. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan-by-loan basis by the fair value of the existing collateral. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer loans for impairment disclosures. F-10 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for loan losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating losses in the portfolio. Servicing Effective July 1, 2002, the Company applied the provisions of Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. F-11 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Banking premises and equipment and real estate held for investment Land is carried at cost. Buildings, improvements, leasehold improvements and equipment are stated at cost, less accumulated depreciation and amortization, computed on the straight-line method over the estimated useful lives of the assets, or the terms of the leases, if shorter. Pension plan It is the Company's policy to fund pension plan costs in the year of accrual. Transfers of financial assets Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Income taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes. The Company's base amount of its federal income tax reserve for loan losses is a permanent difference for which there is no recognition of a deferred tax liability. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if it is deemed realizable. Employee stock ownership plan ("ESOP") Compensation expense is recognized based on the current market price of shares committed to be released to employees. All shares released and committed to be released are deemed outstanding for purposes of earnings per share calculations. Dividends declared on all allocated shares held by the ESOP are charged to retained earnings. The value of unearned shares to be allocated to ESOP participants for future services not yet performed is reflected as a reduction of stockholders' equity. F-12 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Stock option plan The Company accounts for its stock option plan (see Note 14) under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the fair value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share for the years ending June 30, if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to the stock option plan.

Recognition and retention plan The Company measures the unearned compensation cost of its Recognition and Retention Plan (the "RRP"), which is reflected as a reduction of stockholders' equity, by the fair value of the stock at the grant date. Unearned compensation cost is recognized as compensation expense over the vesting period. Advertising costs Advertising costs are expensed as incurred. F-13 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings per common share Basic earnings per share represents income available to common stock divided by the weighted-average number of common shares outstanding during the period. 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.

For the year ended June 30, 2004, an average of 6,229 stock options were anti-dilutive and therefore excluded from the earnings per share calculation. For the years ended June 30, 2003 and 2002, there were no anti- dilutive stock options excluded from the earnings per share calculation. Comprehensive income/loss Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available- for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income/loss. F-14 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) Comprehensive income/loss (concluded) The components of other comprehensive income/loss and related tax effects are as follows:

Segments The Company, through the branch network of its subsidiary, Medford Co- operative Bank, provides a broad range of financial services to individuals and businesses. These services include checking, savings and term certificate deposits, lending and ATM processing services. While the Company's chief decision-makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment. Recent accounting pronouncements In January 2003, the FASB issued interpretation No. 46, "Consolidated of Variable Interest Entities," ("FIN 46") which establishes guidance for determining when an entity should consolidate another entity that meets the definition of a variable interest entity. FIN 46 requires a variable interest entity to be consolidated by a company if that company will absorb a majority of the expected losses, will receive a majority of the expected residual returns, or both. In December 2003, the FASB deferred the effective date of FIN 46 to no later than the end of the first reporting period that ends after March 15, 2004. Application of FIN 46 resulted in Mystic Financial Capital Trust I and II being presented on the equity method instead of being consolidated, which had no material affect on the Company's consolidated financial statements. F-15 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SECURITIES The amortized cost and estimated fair value of securities with gross unrealized gains and losses is as follows:

F-16 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SECURITIES (continued)

The amortized cost and estimated fair value of debt securities by contractual maturity at June 30, 2004 is shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

During the years ended June 30, 2004, 2003 and 2002, proceeds from sales of securities available for sale amounted to $60,308,000, $30,848,000 and $1,967,000, respectively. Gross realized gains for 2004, 2003 and 2002 amounted to $742,000, $581,000 and $457,000, respectively, and gross realized losses amounted to $223,000, $486,000 and $412,000, respectively. F-17 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SECURITIES (continued) Information pertaining to securities with gross unrealized losses at June 30, 2004, aggregated by investment and length of time that individual securities have been in a continuous loss position follows:

F-18 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SECURITIES (concluded) Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At June 30, 2004, fifty-eight (58) debt securities had unrealized losses with aggregate depreciation of 3.0% from the Company's amortized cost basis. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts' reports. Unrealized losses on debt securities are generally attributable to changes in interest rates. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2004, twenty-three (23) marketable equity securities had unrealized losses with aggregate depreciation of 11.0% from the Company's cost basis. Two (2) equity securities with unrealized losses have existed for twelve months or more, and twenty-one (21) equity securities with unrealized losses have existed for an average of four months. No credit issues have been identified that caused management to believe the declines in market value are other than temporary. F-19 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. LOANS A summary of the balances of loans follows:

An analysis of the allowance for loan losses follows:

F-20 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) LOANS (concluded) At June 30, 2004 and 2003, the recorded investment in impaired loans amounted to $2,222,000 and $209,000, respectively, none of which related to loans with a corresponding valuation allowance. No additional funds are committed to be advanced in connection with impaired loans. The average investment in impaired loans for the years ended June 30, 2004, 2003, and 2002 amounted to $1,727,000, $365,000 and $28,000, respectively, and interest income recognized on a cash basis on impaired loans amounted to $21,000, $1,000 and $1,000, respectively. Non-accrual loans amounted to $1,822,000 and $223,000 at June 30, 2004 and 2003, respectively. 4. SERVICING Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were $46,030,000 and $38,924,000 at June 30, 2004 and 2003, respectively. All loans serviced for others were sold without recourse provisions. The balance of capitalized servicing rights included in other assets at June 30, 2004 and 2003 amounted to $318,000 and $248,000, respectively. The fair value of servicing rights approximates carrying value at June 30, 2004 and 2003. Mortgage servicing rights capitalized during the year ended June 30, 2004 and June 30, 2003 amounted to $182,000 and $276,000, respectively. Mortgage servicing rights amortized during the year ended June 30, 2004 and June 30, 2003 amounted to $112,000 and $28,000, respectively. 5. BANKING PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation and amortization of banking premises and equipment is as follows:

F-21 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BANKING PREMISES AND EQUIPMENT (concluded) Depreciation and amortization expense for the years ended June 30, 2004, 2003 and 2002 amounted to $600,000, $467,000 and $323,000, respectively. 6. REAL ESTATE HELD FOR INVESTMENT Real estate held for investment represents property adjacent to the Company's main office which is primarily leased as commercial retail and office space. The Company occupies a portion of the building for its own activities. A summary of the cost and accumulated depreciation is as follows:

Depreciation expense for the years ended June 30, 2004, 2003 and 2002 amounted to $71,000, $75,000 and $63,000, respectively. The following is a schedule of minimum future rental income on noncancelable leases:

The provisions of the lease agreements provide that the tenants are responsible for utilities and certain repairs. Certain of the leases also contain provisions that the tenants are responsible for a percentage of real estate taxes and certain other costs. Rental income for the years ended June 30, 2004, 2003 and 2002 amounted to $118,000, $124,000 and $136,000, respectively. F-22 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. DEPOSITS A summary of deposit balances by type is as follows:

A summary of certificate accounts, by maturity, is as follows:

F-23 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. FEDERAL HOME LOAN BANK BORROWINGS Federal Home Loan Bank borrowings consist of the following at June 30, 2004 and 2003:

During the years ended, June 30, 2004 and 2003, advances aggregating $5,000,000 and $5,400,000, respectively, were prepaid resulting in prepayment penalties of $298,000 and $468,000, respectively, which were included in operating expense when incurred. The Bank also has an available line of credit of $3,529,000 with the Federal Home Loan Bank of Boston ("FHLB") at an interest rate that adjusts daily. Borrowings under the line are limited to 2% of the Bank's total assets. All borrowings from the Federal Home Loan Bank of Boston are secured by a blanket lien on qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property. F-24 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. SUBORDINATED DEBT In April 2002, Mystic Financial Capital Trust I (the "Trust") was formed for the purpose of issuing Trust Preferred Securities and investing the proceeds from the sale of these securities in subordinated debentures issued by the Company. A total of $5 million of floating rate Trust Preferred Securities were issued and are scheduled to mature in 2032, callable at the option of the Company on April 22, 2007, with the prior approval of the Federal Reserve Board. Using interest payments made by the Company on the debentures, the Trust pays semi-annual dividends to preferred security holders. The interest payable on the subordinated debentures and the cumulative dividends payable on the preferred securities is equal to a floating rate of 5.07% at June 30, 2004. Interest payments on these securities are payable semi-annually in arrears on April 22nd and October 22nd. The Company has the option to defer interest payments on the subordinated debentures for up to five years and, accordingly, the Trust may defer dividend distributions for up to five years. In February 2003, Mystic Financial Capital Trust II (the "Trust") was formed for the purpose of issuing Trust Preferred Securities and investing the proceeds from the sale of these securities in subordinated debentures issued by the Company. A total of $7 million of floating rate Trust Preferred Securities were issued and are scheduled to mature in 2033, callable at the option of the Company on February 15, 2008, with the prior approval of the Federal Reserve Board. Using interest payments made by the Company on the debentures, the Trust pays quarterly dividends to preferred security holders. The interest payable on the subordinated debentures and the cumulative dividends payable on the preferred securities is equal to a floating rate of 4.50% at June 30, 2004. Interest payments on these securities are payable every three months in arrears on February 15th, May 15th, August 15th and November 15th. The Company has the option to defer interest payments on the subordinated debentures for up to five years and, accordingly, the Trust may defer dividend distributions for up to five years. F-25 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. INCOME TAXES Allocation of federal and state income taxes between current and deferred portions is as follows:

The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:

F-26 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) INCOME TAXES (continued) The components of the net deferred tax asset included in other assets are as follows:

The tax effects of each type of income and expense item that give rise to deferred taxes are as follows:

F-27 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) INCOME TAXES (concluded) A summary of the change in the net deferred tax asset is as follows:

There was no change in the valuation reserve during the years ended June 30, 2004, 2003 and 2002. The federal income tax reserve for loan losses at the Company's base year amounted to $2,663,000. If any portion of the reserve is used for purposes other than to absorb the losses for which established, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the fiscal year in which used. As the Company intends to use the reserve only to absorb loan losses, a deferred income tax liability of $1,090,000 has not been provided. 11. COMMITMENTS AND CONTINGENCIES Loan commitments The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and advance funds under lines of credit and credit card loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated financial statements. F-28 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) COMMITMENTS AND CONTINGENCIES (continued) Loan commitments (concluded) The Bank's exposure to credit loss is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments. A summary of financial instruments outstanding whose contract amounts represent credit risk is as follows:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The commitments for mortgage loans, construction loans and home equity lines of credit are collateralized by real estate. Commercial loans and lines of credit are secured by various assets of the borrowers. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Letters of credit outstanding as of June 30, 2004 have expiration dates within ten years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments if deemed necessary. Employment agreements The Company and the Bank have entered into employment agreements with certain executive officers. The agreements provide for base salaries, participation in employee benefit plans and, in the event of termination of employment, certain lump-sum severance payments and continuation of benefits. However, such employment may be terminated for cause, as defined in the agreements, without incurring any continuing obligations. F-29 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) COMMITMENTS AND CONTINGENCIES (continued) Directors' retirement plan The Company has a retirement plan for non-employee Directors of the Company. Under the Plan, eligible Directors will receive a lump sum benefit equal to three times their annual compensation (as defined), upon retirement from the Board of Directors, death, disability or upon a change of control (as defined). The liability for the benefits is being accrued through the Directors eligible retirement age. Total expense under this Plan amounted to $92,000, $158,000 and $34,000 for the years ended June 30, 2004, 2003 and 2002, respectively. Severance pay plan The Bank has established a severance pay plan which entitles eligible employees to receive a lump sum benefit equal to a maximum of 26 weeks of salary in the event of a change of control (as defined). Lease commitments Pursuant to the terms of the noncancelable lease agreements in effect at June 30, 2004, the future minimum rent commitments for leased premises are as follows:

The leases contain options to extend for two to four five-year periods and contain provisions for reimbursement of real estate taxes and certain other costs. The costs of such options and reimbursements are not included above. Rent expense for the years ended June 30, 2004, 2003 and 2002 amounted to $448,000, $385,000 and $333,000, respectively. F-30 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) COMMITMENTS AND CONTINGENCIES (concluded) Contingencies Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company's consolidated financial position or results of operations. 12. STOCKHOLDERS' EQUITY Stock conversion At the time of the conversion from mutual to stock form in 1998, the Bank established a liquidation account in the amount of $11,761,000. In accordance with Massachusetts statute, the liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts in the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive a distribution in an amount equal to their current adjusted liquidation account balance, to the extent that funds are available. Minimum regulatory capital requirements The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to financial holding companies. F-31 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) STOCKHOLDERS' EQUITY (concluded) Minimum regulatory capital requirements (concluded) Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following tables) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 2004 and 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of June 30, 2004, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk- based and Tier I leverage ratios as set forth in the following table. There are no conditions or events that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios are also presented in the table.

F-32 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. RELATED PARTY TRANSACTIONS At June 30, 2004 and 2003, total loans to directors and officers of the Bank which exceeded $60,000 in the aggregate to each related party, totaled $4,237,000 and $4,128,000, respectively. During the years ended June 30, 2004 and 2003, total principal additions were $786,000 and $2,587,000, respectively, and total principal payments were $677,000 and $2,074,000, respectively. 14. EMPLOYEE BENEFIT PLANS Pension plans The Bank provides pension benefits for its employees through membership in Plan C of the Defined Benefit Plan of the Co-operative Banks Employees Retirement Association ("CBERA"). The plan is a multi-employer plan where the contributions by each bank are not restricted to provide benefits to the employees of the contributing bank. Each employee reaching the age of 21 and having completed 1,000 hours of service in one consecutive twelve-month period beginning with such employee's date of employment automatically becomes a participant in the retirement plan. A participant in the plan is not vested until they have performed two years of service, at which time they become 20% vested. Participants become 100% vested when credited with six years of service. Total pension expense for the years ended June 30, 2004, 2003 and 2002 amounted to $303,000, $167,000 and $127,000, respectively. In addition, the Bank has a savings and retirement plan, which qualifies under Section 401(k) of the Internal Revenue Code, for its employees through membership in Plan A of the Defined Benefit Plan of CBERA. Each employee reaching the age of 21 and having completed 1,000 hours of service in one consecutive twelve-month period beginning with such employee's date of employment automatically becomes a participant in the savings and retirement plan. The plan provides for voluntary contributions by participating employees ranging from one percent to twelve percent of their compensation, subject to certain limitations. The Bank matches 50% of an employee's voluntary contribution up to ten percent of the employee's compensation. Total expense for the 401(k) plan for the years ended June 30, 2004, 2003 and 2002 amounted to $102,000, $87,000 and $72,000, respectively. Employee stock ownership plan ("ESOP") The Company has an ESOP for the benefit of eligible employees who have attained age 21 and have completed one year of service. F-33 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) EMPLOYEE BENEFIT PLANS (continued) Employee stock ownership plan (concluded) The Company loaned the ESOP $3,194,000 to fund the purchase of 227,735 shares of common stock of the Company in open-market purchases following completion of the Bank's conversion from mutual to stock form. The Bank intends to make annual contributions to the ESOP in an aggregate amount at least equal to the principal and interest requirements on the loan. The loan is for a term of 10 years, bears interest at 8% per annum and requires annual principal payments of $319,000 plus interest through December 2007. Shares purchased by the ESOP are pledged as collateral for the loan, and are held in a suspense account until released for allocation among participants in the ESOP as the loan is repaid. The pledged shares are released annually from the suspense account in an amount proportional to the repayment of the ESOP loan for each plan year. The released shares are allocated among the accounts of participants on the basis of the participant's compensation for the year of allocation. Benefits generally become vested at the rate of 20% per year with vesting to begin after an employee's completion of three years of service and full vesting to occur after seven years of service. Participants also become immediately vested upon termination of employment due to death, retirement at age 65 or older, permanent disability or upon the occurrence of a change of control. Upon the effective date of a Change in Control, as defined, all benefits become fully vested. Forfeitures are reallocated among remaining participating employees, in the same proportion as contributions. Vested benefits may be paid in a single sum or installment payments and are payable upon death, retirement at age 65 or older, disability or separation from service. Shares held by the ESOP include the following:

Cash dividends received on allocated shares are allocated to participants and cash dividends received on shares held in suspense are applied to repay the outstanding debt of the ESOP. Total expense applicable to the ESOP amounted to $605,000, $400,000 and $365,000 for the years ended June 30, 2004, 2003, and 2002, respectively. F-34 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) EMPLOYEE BENEFIT PLANS (continued) 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. A summary of the status of the Company's stock option plan is as follows:

F-35 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) EMPLOYEE BENEFIT PLANS (continued) Stock option plan (concluded) Information pertaining to options outstanding at June 30, 2004 is as follows:

The fair value of option grants is estimated on the date of grant using the Bloomberg option-pricing model with the following weighted-average assumptions:

There were no option grants for the year ended June 30, 2002. F-36 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) EMPLOYEE BENEFIT PLANS (concluded) Recognition and retention plan On March 24, 1999, the Company's stockholders approved the Company's adoption of the 1999 Recognition and Retention Plan (the "RRP"), which allows the Company to grant restricted stock awards ("Awards") to certain officers, employees and outside directors. The RRP is authorized to acquire no more than 108,089 shares of Common stock in the open market. Shares granted vest equally each year over three - or five - year periods. In the event of a change in control, all awarded shares become immediately vested. The aggregate purchase price of all shares acquired by the RRP was reflected as a reduction of stockholders' equity and is amortized to compensation expense as the Company's employees and directors become vested in their stock awards. During the years ended June 30, 2004, 2003, and 2002, awards were granted with respect to 0, 4,095, and 0 shares, respectively. Shares forfeited during the years ended June 30, 2004, 2003 and 2002 amounted to 420, 0 and 4,078 shares, respectively. As of June 30, 2004, 88,923 vested shares had been distributed to eligible participants. Compensation expense amounted to $106,000, $230,000 and $211,000 for the years ended June 30, 2004, 2003 and 2002, respectively. Compensation expense is based on the fair value of the common stock on the vesting date. 15. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10% of the Bank's capital stock and surplus on a secured basis. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. Accordingly, at June 30, 2004, $20,779,000 of the Company's equity in the Bank was restricted and funds available for loans and advances amounted to $3,720,000. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. F-37 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts of cash, federal funds sold and short-term investments approximate fair values. Securities: Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non- performing loans are estimated using underlying collateral values when applicable. Deposit liabilities: Fair values for interest and non-interest checking, passbook savings, and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for term certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities. Federal Home Loan Bank borrowings: Fair values for borrowings are estimated using discounted cash flow analysis based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Subordinated debt: The fair value of subordinated debt is estimated using discounted cash flow analysis based on current market rates for similar types of debt agreements. Accrued interest: The carrying amounts of accrued interest approximate fair value. Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing and are not material. F-38 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded) The estimated fair values, and related carrying amounts, of the Company's financial instruments are as follows:

F-39 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY Condensed financial information pertaining only to Mystic Financial, Inc., is as follows: BALANCE SHEETS --------------

F-40 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (continued) STATEMENTS OF INCOME --------------------

F-41 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded) STATEMENTS OF CASH FLOWS ------------------------

F-42 MYSTIC FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded) 18. QUARTERLY DATA (UNAUDITED)

F-43

MYSTIC FINANCIAL INC 10-K