UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 0-24791
MASSACHUSETTS FINCORP, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 04-3431804
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1442 Dorchester Avenue, Boston, Massachusetts 02122
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(617) 825-5555
--------------
(Issuer's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changes since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: the Issuer had
545,481 shares of common stock, par value $0.01 per share, outstanding as
of May 10, 1999.
MASSACHUSETTS FINCORP, INC.
FORM 10-QSB
Index
PART I. FINANCIAL INFORMATION 3
ITEM 1. Financial Statements. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION 15
ITEM 1. LEGAL PROCEEDINGS. 15
ITEM 2. CHANGES IN SECURITIES. 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 15
ITEM 5. OTHER INFORMATION. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998
------------ ---------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,156,776 $ 708,827
Federal funds sold 864,602 1,760,909
----------------------------
Total cash and cash equivalents 3,021,378 2,469,736
Securities available for 7,295,196 7,403,857
Securities held to 1,102,856 1,308,286
Federal Home Loan Bank Stock, at cost 762,800 762,800
Mortgages loans held for sale 1,762,450 6,335,665
Loans 56,607,181 51,801,597
Less: allowance for possible loan losses (553,660) (524,924)
----------------------------
Loans, net 56,053,521 51,276,673
Banking premises and equipment, net. 2,350,173 1,206,459
Accrued interest receivable 360,710 350,054
Due from Co-operative Central Bank 242,850 242,850
Other assets 472,982 276,740
----------------------------
$73,424,916 $71,633,120
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $56,910,963 $56,992,800
Federal Home Loan Bank borrowings 6,090,129 4,210,889
Mortgagor's escrow accounts 317,599 292,944
Accrued expenses and other liabilities 499,521 633,277
----------------------------
Total liabilities 63,818,212 62,129,910
----------------------------
Commitments and contingencies
Preferred stock, par value $.01 per share,
500,000 shares authorized;
no shares are issued or outstanding - -
Common stock par value $.01 per share,
2,500,000 shares authorized;
545,481 shares issued and outstanding 5,455 5,455
Additional paid in capital. 4,863,140 4,885,076
Unallocated ESOP shares (392,742) (392,742)
Retained earnings 5,169,668 5,003,347
Accumulated other comprehensive income (38,817) 2,074
----------------------------
Total Shareholders' equity 9,606,704 9,503,210
----------------------------
$73,424,916 $71,633,120
============================
</TABLE>
See accompanying notes to consolidated financial statements.
Massachusetts Fincorp, Inc. and Subsidiaries
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,174,198 $ 961,401
Interest on investments 121,961 100,940
Dividends on investments 24,593 14,802
Interest on short-term investments - 1,329
Interest on federal funds sold 13,912 11,910
--------------------------
Total interest and dividend income 1,334,664 1,090,382
--------------------------
Interest expense:
Interest on deposit accounts 536,445 476,808
Interest on borrowed funds 72,584 63,307
--------------------------
Total interest expense 609,029 540,115
--------------------------
Net interest income 725,635 550,267
Provision for possible loan losses - -
--------------------------
Net interest income, after provision for possible loan losses 725,635 550,267
--------------------------
Non-interest income:
Customer service fees 37,517 37,942
Loan fees and gain on sale of loans and loan servicing rights 148,442 66,885
Net gain on sales of securities available for sale 5,993 11,454
Miscellaneous 17,347 9,749
--------------------------
Total non-interest income 209,299 126,030
--------------------------
Non-interest expense:
Salaries and employee benefits 400,313 299,702
Occupancy and equipment 93,443 82,231
Data processing 62,734 36,300
Contributions 2,077 1,666
Other general and administrative 159,437 137,509
--------------------------
Total non-interest expense 718,004 557,408
--------------------------
Income before income tax provision 216,930 118,889
Income tax provision 50,609 35,191
--------------------------
Net income 166,321 83,698
==========================
Other comprehensive income, net of tax:
Unrealized gains (loss) on securities:
Unrealized holding gains (loss) arising during the
period (36,161) 11,886
Less: reclassification adjustment for (gains) included
in net income (4,731) (8,064)
--------------------------
Other comprehensive income (loss), net of tax (40,892) 3,822
--------------------------
Comprehensive income $ 125,429 $ 87,520
==========================
Basic and diluted earnings per share $ 0.30
Weighted average common shares outstanding - basic and diluted 545,481
</TABLE>
See accompanying notes to consolidated financial statements.
Massachusetts Fincorp, Inc. and Subsidiaries
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Period Ended March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Unallocated Other
Common Paid-in Retained ESOP Comprehensive
Stock Capital Earnings Shares Income(Loss) Total
------ ------- -------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ - $ - $4,932,838 $ - $ 53,680 $4,986,518
Net income for the period ended
March 31, 1998 - - 83,698 - - 83,698
Other comprehensive income,
net of tax - - - - 3,822 3,822
------------------------------------------------------------------------------
Balance at March 31, 1998 $ - $ - $5,016,536 $ - $ 57,502 $5,074,038
===============================================================================
Balance at December 31, 1998 $5,455 $4,885,077 $5,003,345 $(392,742) $ 2,075 $9,503,210
Expenses incurred for initial
public offering - (21,935) - - - (21,935)
Net income for theperiod ended
March 31, 1999 - - 166,321 - - 166,321
Other comprehensive income, net
of tax - - - - (40,892) (40,892)
------------------------------------------------------------------------------
Balance at March 31, 1999 $5,455 $4,863,142 $5,169,666 $(392,742) $(38,817) $9,606,704
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Massachusetts Fincorp, Inc and Subsidiaries
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Cash flow activities:
Net income $ 166,321 $ 83,698
Adjustment to reconcile net income to net cash
(used)provided by operating activities
Provision for possible loan losses - -
Depreciation and amortization expense 38,103 33,572
Net gain on sales of securities available
for sale (5,993) (11,454)
Net gain on sale of foreclosed real estate - -
Loans originated for sale (10,832,700) (10,152,803)
Principal balance on loans sold 15,405,915 7,454,883
Amortization of deferred loan fees (15,666) (19,707)
Amortization of investment securities,
net of accretion 3,139 7,076
Increase in accrued interest receivable (10,656) (1,763)
Increase in other assets (196,242) (142,798)
Increase (decrease) in accrued expenses
and other liabilities (133,756) 29,543
------------------------------
Net cash (used) provided by operating
activities 4,418,465 (2,719,753)
------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (600,000) (1,011,944)
Purchase of securities held to maturity - (860,041)
Proceeds from maturities of securities available
for sale - -
Proceeds from maturities of securities held to
maturity 200,000 -
Proceeds from sales and calls of securities
available for sale 655,993 486,722
Proceeds from calls of securities held to maturity - -
Purchase of Federal Home Loan Bank stock - -
Principal payments received on mortgage-backed
and asset backed securities 29,533 8,025
Loan (originations)/ principal payments, net (4,544,474) (4,121,745)
Purchase of banking premises and equipment (1,181,818) (15,043)
------------------------------
Net cash used by investing activities (5,440,766) (5,514,027)
------------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (81,837) 6,975,870
Net increase (decrease) in Federal Home Loan Bank
advances with maturities less than three months - -
Federal Home Loan Bank advances with maturities
in excess of three months 1,590,129 1,597,026
Repayment of Federal Home Loan Bank advances
with maturities in excess of three months (6,001,760) (3,501,588)
Net increase in mortgagor's escrow accounts 24,655 12,593
------------------------------
Net cash provided by financing activities (4,468,813) 5,083,901
------------------------------
Net change in cash and cash equivalents (5,491,114) (3,149,878)
Cash and cash equivalents at beginning of period 2,469,736 1,492,833
------------------------------
Cash and cash equivalents at end of period $ (3,021,378) $ (1,657,045)
==============================
Supplementary Information
Interest paid on deposit accounts $ 536,445 $ 476,808
Interest paid on borrowed funds 72,584 63,307
Income tax payments (refunds), net 0 0
</TABLE>
See accompanying notes to consolidated financial statements.
MASSACHUSETTS FINCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements of Massachusetts
Fincorp, Inc.. have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
instructions to Form 10-QSB and of Regulation S-B. Accordingly, the
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of a
normal recurring nature) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
current fiscal year.
For further information, refer to the consolidated financial
statements included in the Company's annual report and Form 10-KSB for the
period ended December 31, 1998, filed with the Securities and Exchange
Commission.
(2) REORGANIZATION AND STOCK OFFERING
MASSACHUSETTS FINCORP, INC.. (the "Company") was incorporated under
Delaware law on July 10, 1998. On December 21, 1998, the Company acquired
The Massachusetts Co-operative Bank (the "Bank") as a part of the Bank's
conversion from a mutual to a stock Massachusetts-chartered co-operative
Bank (the "Conversion"). The Company is a savings and loan holding company
and is subject to regulation by the Office of Thrift Supervision (the
"OTS"). Currently, the Company does not transact any material business
other than through the Bank. Prior to December 21, 1998, the Company had
no operations. The Company retained 50% of the net conversion proceeds
amounting to $4.9 million which it used for general business activities and
to form and capitalize the Employee Stock Ownership Plan ("ESOP") Loan
Subsidiary (MCB Funding), which loaned funds to the ESOP to purchase 8% of
the stock issued in the Conversion. At March 31, 1999, the Company had
total assets of $73.4 million and stockholders' equity of $9.6 million.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Form 10-QSB may include forward-looking statements that involve
inherent risks and uncertainties. A number of important factors could cause
actual results to differ materially from those forward looking statements.
Those factors include fluctuations in interest rates, inflation, government
regulations and economic conditions and competition in the geographic and
business areas in which the Bank conducts its operations.
General
Massachusetts Fincorp, Inc.. (the "Company") was incorporated under
Delaware law on July 10, 1998. On December 21, 1998, the Company acquired
The Massachusetts Co-operative Bank (the "Bank") as a part of the Bank's
conversion from a mutual to a stock Massachusetts-chartered co-operative
Bank (the "Conversion"). The Company is a savings and loan holding company
and is subject to regulation by the Office of Thrift Supervision (the
"OTS").
The Bank is a community-oriented co-operative bank which was
originally organized in 1908 as The Massachusetts Co-operative Bank, a
Massachusetts-chartered mutual co-operative bank. The Bank's principal
business consists of the acceptance of retail deposits from the general
public in the areas surrounding its two full-service banking offices and
the investment of those deposits, together with funds generated from
operations and borrowings, primarily in mortgage loans secured by one- to
four-family residences and, to a lesser extent, multi-family and commercial
real estate loans, construction loans, home equity lines of credit and
consumer loans. However, in the future, the Bank intends to increase its
emphasis on multi-family, commercial real estate and construction lending.
The Bank operates through its two full-service banking offices and its two
loan origination offices, all of which are located in the greater Boston
metropolitan area. The Bank originates loans for investment and loans for
sale in the secondary market, generally releasing the servicing rights to
all loans sold. The Bank also invests in mortgage-backed securities,
securities issued by the U.S. Government and other investments permitted by
applicable laws and regulations. The Bank's revenues are derived
principally from the generation of interest and fees on loans originated
and, to a lesser extent, interest and dividends on investment securities.
The Bank's primary sources of funds are retail savings deposits and, to a
lesser extent, principal and interest payments on loans and investment
securities, advances from the FHLB-Boston and proceeds from the sale of
loans.
Operating Strategy
The Bank's operating strategy has in the past consisted of
maintaining profitability and managing its interest rate risk mainly by
originating fixed-rate one- to four-family mortgage loans primarily for
sale, generally on a servicing released basis, and originating adjustable-
rate one- to four-family mortgage loans for investment. The Bank has also
pursued a growth strategy to broaden the Bank's lending and deposit base
through the establishment of a de novo branch office in 1996 and two loan
origination centers in the greater Boston metropolitan area in 1997 and
1998. The Bank has purchased a building for $975,000 to establish another
de novo branch office and expects to be completed this summer and the
branch to be operational in the fall of 1999. The Bank anticipates moving
its administrative and back office functions to the new branch facility.
The opening of the Quincy branch office represents the Bank's strategy to
increase market share in both retail banking and the mortgage origination
in the Quincy market area. The Bank has made substantial infrastructure
investments recently, including staffing, offices and technology, to
support future growth.
Average Balance Sheet
Presented below are the average balance sheets for the period
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------------------------------------------
March 31, 1999 March 31, 1998
------------------------------- -------------------------------
(Unaudited)
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Federal funds sold and
short term investments $ 1,461 $ 18 4.93% $ 980 $ 17 6.94%
Securities 7,538 118 6.26% 6,240 97 6.22%
Mortgage loans, net 58,113 1,130 7.78% 45,114 916 8.12%
Other 876 15 685% 910 16 7.03%
------------------ ------------------
Total interest earning assets 67,988 1,281 7.54% 53,244 1,046 7.86%
Noninterest-earning assets 3,432 2,598
------------------ ------------------
Equity securities 1,030 12 4.66% 519 3 2.31%
------------------ ------------------
Total assets $72,450 $1,293 $56,361 1,049
================== ==================
Liabilities and Surplus:
Interest bearing liabilities:
Deposits:
Savings accounts $ 9,528 $ 46 1.93% $ 9,631 $ 47 1.95%
Money market accounts 724 4 2.21% 926 7 3.02%
Now accounts 13,543 114 3.37% 9,052 99 4.37%
Certificates of deposit 28,697 380 5.30% 23,478 326 5.55%
------------------ ------------------
Total deposits 52,492 544 4.15% 43,087 479 4.45%
FHLB advances 5,132 73 5.69% 4,243 63 5.94%
------------------ ------------------
Total interest bearing liabilities 57,624 617 4.28% 47,330 542 4.58%
------------------ ------------------
Noninterest -bearing demand
checking accounts 4,642 2,994
Noninterest-bearing liabilities 610 1,013
------------------ ------------------
Total liabilities 62,876 51,337
Total surplus 9,574 5,024
------------------ ------------------
Total liabilities and surplus $72,450 $56,361
================== ==================
Net interest income $ 676 $ 507
====== ======
Net interest income/interest
rate spread 3.25% 3.28%
====== ======
Net interest margin as a percent
of interest-earning assets 0.99% 0.95%
====== ======
Ratio of interest-earning assets
to interest-bearing liabilities 117.99% 112.50%
====== ======
</TABLE>
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
The Company's total assets increased by $1.8 million, or 2.5% for the
three months ended March 31, 1999 from $71.6 million on December 31, 1998
to $73.4 million at March 31, 1999. This growth in assets was primarily
due to a $600,000 increase in cash and cash equivalents, as well as, a $1.1
million increase in bank premises and equipment, resulting from the
purchase of a new building in Quincy, Massachusetts to house the Bank's new
branch office. This increase was funded by increased Federal Home Loan Bank
borrowings. Net portfolio loans increased $4.8 million for the three
months ended March 31, 1999 from $51.3 million at December 31, 1998 to
$56.1 million at March 31, 1999. This increase was the result of increased
loan originations in one-to-four-family loans, construction loans and
multi-family loans. This increase was offset by a $4.6 million decrease in
available for sale loans. This decrease was the result of strong year end
loan volumes, which where favorably impacted the increase in mortgage
banking activities.
Non-performing assets totaled $64,000 at March 31, 1999 as compared
to $173,000 at December 31, 1998 a decrease of $109,000. The decrease of
$109,000 was the result of a reduction in non-accrual loans that where paid
off in full in January 1999.
Total shareholders' equity increased $103,000 from $9.5 million, from
December 31, 1998 to $9.6 million at March 31, 1999. The increase was
mainly attributable to $166,000 in net income, which was in part offset by
a $22,000 decrease in additional paid in capital, resulting from
outstanding expenses at December 31, 1998 incurred in connection with the
conversion, and a $41,000 decrease in the valuation allowance for available
for sale stock.
Comparison of Operating Results for the Three Months
Ended March 31, 1999 and 1998
General
Net income for three months ended March 31, 1999 totaled $166,000, or
$0.30 per share, compared to $84,000 for the same period last year. This
represents a 97.6% increase in earnings. Due to the recent conversion, the
earnings per share results for the prior year's period are not meaningful.
The increase in earnings was directly attributable to a $244,000 increase
in interest income due to increased loan origination activity, and a
$83,000 increase in non interest income, as the result of gains on
available for sale loans. This increase was partially offset with a
increase in non-interest expense of $161,000, which was primarily
attributed to increases in salaries and benefits due in part to additional
staff based on growth; occupancy expense, as the result of the purchase of
the Quincy Office and data processing expense increased due to a data
servicer conversion in connection with becoming Year 2000 compliant.
Interest and Dividend Income
Interest and dividend income for the quarter ended March 31, 1999
increased $200,000, or 18.2%, to $1.3 million as compared to $1.1 million
for the quarter ended March 31, 1998. The increase in interest and dividend
income was primarily due to an increase in average interest earning assets,
which was offset, in part, by lower average yield on interest earning
assets. The average balance of interest earning assets increased $14.8
million from $53.2 million for the quarter ended March 31, 1998 as compared
to $68.0 million for the quarter ended March 31, 1999, and the average
yield on interest earning assets decreased 40 basis points to 7.5% for the
quarter ended March 31, 1999 as compared to 7.9% as of quarter ended March
31, 1998. Specifically, the increase was primarily due to a $213,000
increase in interest and fees on loans which was the result of an $11.8
million increase in net loans, due to increased loan origination in to-four
family mortgage loans and construction loans. A $31,000 increase in
interest and dividend income on investments contributed to the increase in
net income.
Interest Expense
Interest expense for the quarter ended March 31, 1999 was $609,000
compared to $540,000 for the quarter ended March 31, 1998, an increase of
$69,000 or 12.8%. The increase in interest expense was the result of a
$10.3 million increase in average interest bearing liabilities, which was
offset in part by a 30 basis point decrease in the cost of funds. The
increase in average interest bearing liabilities was primarily due to a
$4.4 million, or 10.2% increase in average interest bearing checking
accounts to $13.5 million, for the quarter ended March 31, 1999 as compared
to $9.1 million for the quarter ended March 31, 1999. Average term
certificates of deposit increased $5.2 million, or 2.1% to $28.7 million
for the quarter ended March 31, 1999 as compared to $23.5 million, for the
quarter ended March 31, 1998. The increase in interest bearing checking
accounts was mainly the result of the Bank's promotion of tiered interest
bearing checking accounts for retail customers and the increase in term
certificates was the promotion of a new 14 month term certificate. Average
Federal Home Loan Bank borrowings increased $900,000, or 21.2% to $5.1
million for the quarter ended March 31, 1999 as compared to $4.2 million,
for the quarter ended March 31, 1998. This increase was used to fund
increased loan origination.
Provision for Possible Loan Losses
The allowance for possible loan losses is maintained through
provisions for loan losses based on management's on-going evaluation of the
risks inherent in its loan portfolio in consideration of the trends in its
loan portfolio, the national and regional economies and the real estate
market in the Bank's primary lending area. The allowance for possible loan
losses is maintained at an amount management considers adequate to cover
estimated losses in its loan portfolio which are deemed probable and
estimable based on information currently known to management. The Bank's
loan loss allowance determinations also incorporate factors and analyses
which consider the potential principal loss associated with the loan, costs
of acquiring the property securing the loan through foreclosure or deed in
lieu thereof, the periods of time involved with the acquisition and sale of
such property, and costs and expenses associated with maintaining and
holding the property until sale and the costs associated with the Bank's
inability to utilize funds for other income producing activities during the
estimated holding period of the property.
Management periodically calculates a loan loss allowance sufficiency
analysis based upon the loan portfolio composition, asset classifications,
loan-to-value ratios, potential impairments in the loan portfolio and other
factors. Management believes that, based on information available at March
31, 1999, the Bank's allowance for possible loan losses was sufficient to
cover losses inherent in its loan portfolio at that time.
Net Interest Income
Net interest income increased $175,000, or 31.8% to $725,000 for the
quarter ended March 31, 1999 from $550,000 for the same period in 1998.
The increase was due to a combination of an increase in average interest
earning assets in excess of average interest bearing liabilities of $10.4
million, which was offset by the effect of a 2 basis point decline in
interest rate spread, which decreased from 3.28% for the quarter ended
March 31, 1998 to 3.26% for the quarter ended March 31, 1999.
Non-Interest Income
Non-interest income increased $83,000, or 65.9% to $209,000 for the
quarter ended March 31, 1999 from $126,000 for the quarter ended March 31,
1998. This increase was primarily due to a $81,000 increase in the gain of
sale of loans, resulting from increased mortgage banking activity, and
strong year end loan originations.
Non-Interest Expense
Non-interest expense for the quarter ended March 31, 1999 increased
$161,000, or 28.9%, to $718,000 from $557,000 for the quarter ended March
31, 1998. The increase was primarily due to a $101,000 increase in
salaries and benefits primarily due to staff additions based on growth.
Employee benefits increased $39,000, of which $9,000 was the result of last
years employee forfeitures in the retirement fund, $14,000 is the result of
increased payroll taxes and $16,000 was the result of increased retirement
expenses due to increased salaries and the Massachusetts Cooperative
Employee Stock Option Plan. Also contributing to this increase was an
increase in data processing expense of $27,000, which was the result of a
non-recurring data conversion expense related to implementation of a new
data processing system and preparing for the Year 2000.
Income Tax Expense
Income tax expense differs from statutory tax rates due to the effect
of permanent differences such as tax credits and dividends received
deductions.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and
interest payments on loans, proceeds from maturing securities and
borrowings from the FHLB-Boston. While maturities and scheduled
amortization of loans and securities are predictable sources of the funds,
deposit outflows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of
loans, primarily residential one-to four-family mortgage loans, and, to a
lesser extent, multi-family, commercial real estate loans, construction
loans, home equity lines of credit and consumer loans and the investment in
mortgage-backed securities, U.S. Government and agency obligations and
corporate equity securities and debt obligations. These activities are
funded primarily by principal and interest payments on loans, the maturing
of investment securities, deposit growth and the utilization of FHLB
advances. During the three months ended March 31, 1999 and 1998, the
Bank's loan originations totaled $10.8 million, and $10.2 million,
respectively. For the three months ended March 31, 1999 and 1998, the
Bank's investments in U.S. Government and agency obligations and corporate
equity securities and debt obligations totaled $8.4 million and $7.4
million, respectively. The Bank experienced a net decrease in total
deposits of $82,000 for the three months ended March 31, 1999, as compared
to a net increase of $7.0 million for the three months ended March 31,
1998. Deposit flows are affected by the overall level of interest rates,
the interest rates and products offered by the Bank and its local
competitors and other factors. The Bank closely monitors its liquidity
position on a daily basis. In the event the Bank should require funds
beyond its ability to generate them internally, additional sources of funds
are available through FHLB advances. The Bank has total borrowing capacity
of approximately $24.0 million at March 31, 1999 at which time the Bank had
$6.1 million of outstanding FHLB borrowings.
Outstanding commitments for all loans totaled $6.8 million at March
31, 1999. Management of the Bank anticipates that it will have sufficient
funds available to meet its current loan commitments. Certificates of
deposit which are scheduled to mature in one year or less from March 31,
1999 totaled $25.6 million. From March 31, 1998 to March 31, 1999, the
Bank experienced an 80.4% retention rate of funds maturing from
certificates of deposit. It has been and will continue to be a priority of
management to retain time deposits. The Bank relies primarily on
competitive rates, customer service, and long-standing relationships with
customers to retain deposits. From time to time, the Bank will also offer
competitive special products to its customers to increase retention. Based
upon the Bank's experience with deposit retention and current retention
strategies, management believes that, although it is not possible to
predict future terms and conditions upon renewal, a significant portion of
such deposits will remain with the Bank.
At March 31,1999, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $7.7 million, or 16.1% of
adjusted assets, which is above the required level of $1.8 million, or
4.00%, and risk-based capital of $8.2 million, or 17.2% of adjusted assets,
which is above the required level of $3.7 million, or 8.00%.
The net proceeds of the capital injection, as the result of the
Conversion, have been utilized for the funding of loan growth.
Specifically, the Bank has incurred capital expenditures of approximately
$1.0 million and expects to incur an additional $1.0 million in connection
with the establishment of a de novo branch office and relocation of its
administrative offices, and approximately $180,000 in connection with
achieving Year 2000 compliance and upgrading its related technology
systems.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications and systems could fail or create erroneous results by
or at the year 2000. In addressing the year 2000, the Bank has adopted a
"Year 2000 Policy" and has broken down the process into six steps:
awareness, inventory, assessment, conversion and implementation, testing
and contingency.
The Bank has substantially completed its awareness phase with the
exception of its ongoing task of notifying its customers and shareholders
of its preparedness. The Bank has also completed its inventory phase.
During the inventory phase the Bank identified all hardware and software
applications as well as vendor and service providers. The various systems
identified were then prioritized in consideration of their overall
importance of use to the Bank. During the conversion and implementation
phase, the Bank has replaced all internal systems, which were deemed
critical or necessary to the Bank's operation.
While the Bank maintains an internal computer system for certain
operating functions, the substantial majority of the Bank's data processing
is out-sourced to a third party. The Bank has reviewed the Year 2000
compliance of its third party data processing vendor. In connection with
such review, the Bank determined that its current third party data
processing vendor is not Year 2000 compliant and, accordingly, began using
a new third party data processing vendor on March 22, 1999. Such new third
party vendor has provided the Bank with written assurances that the system
and the software which it is licensed to use are Year 2000 compliant. The
Bank's new third party data processor has completed testing the integration
of the system with its licensed software to ensure that the integrated
system will be Year 2000 compliant. The Bank expects to receive
notification by June 30, 1999 certifying such compliancy.
The Bank has completed the internal and external portion of its
testing phase, with the exception of its ongoing testing with the Federal
National Mortgage Association, which it expects to complete by June 30,
1999. During the contingency phase, the Bank has identified alternative
action plans or systems for all critical and necessary systems, which were
not compliant and tested by March 31, 1999. The Bank expects to identify
appropriate business responses to all critical core processes by June
30,1999.
The Bank's operations may also be affected by the Year 2000
compliance of its significant customers, suppliers and other vendors. The
Bank's loan portfolio consists primarily of loans on residential and mixed
use properties whose cash flows depended on payments of leases by tenants
that are unlikely to be materially affected by Year 2000 issues. The Bank
has reviewed its loan relationships and has determined that it does not
have any material amount of loans to individuals or entities that are
susceptible to Year 2000 issues such that their noncompliance with Year
2000 issues will materially affect their ability to repay such loans. New
loan relationships are reviewed for potential year 2000 implications during
the underwriting process.
Although the Bank has contacted each of its significant suppliers and
vendors and continues to monitor their progress, the Bank does not
currently have complete information concerning their compliance status. The
Bank's business or operations could be adversely affected if any of the
Bank's significant customers and suppliers do not successfully achieve Year
2000 compliance in a timely manner. However, management believes that the
Bank's own internal system, networks and resources would allow the Bank to
effectively operate and service its customers in the event its significant
vendors do not achieve satisfactory Year 2000 compliance. In addition, if
significant suppliers fail to meet Year 2000 operating requirements, the
Bank intends to engage alternative suppliers. In the event that the Bank's
progress towards becoming Year 2000 complaint is deemed inadequate,
regulatory action may be undertaken.
The Bank is currently engaging in an upgrade of its technology
systems in addition to implementing its Year 2000 policy. To date, the Bank
has expended approximately $80,000 on Year 2000 issues and related
technology updates. In addition, the Bank has estimated that it will spend
another $100,000 in connection with the future costs associated with
achieving Year 2000 compliance and its related technology systems upgrade.
Approximately $69,000 of the past and $95,000 of the future expenses
represents upgrades to the Bank's general ledger and data processing
systems. The cost of these systems will be capitalized and depreciated over
their expected useful life. While the Bank cannot estimate the costs and
expenses associated with hiring new vendors and suppliers, management
believes that such costs would not have a material impact on the Bank's
earnings or results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings, in the
aggregate, are believed by management to be immaterial to the
Company's financial condition or results of operation.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Amended Plan of Conversion (including Stock Charter
and Bylaws of the Massachusetts Co-operative Bank)*
3.1 Certificate of Incorporation of Massachusetts
Fincorp, Inc..*
3.2 Bylaws of Massachusetts Fincorp, Inc.*
27.0 Financial Data Schedule
* Incorporated by reference into this document from the
Exhibits to the Registration Statement on Form SB-2, and
any amendments hereto, Registration No. 333-60237
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MASSACHUSETTS FINCORP, INC..
Date: May 11, 1999 By: /s/Paul C. Green
Paul C. Green
President and Chief Executive
Officer
Date: May 11, 1999 By: /s/Ruth J. Rogers
Ruth J. Rogers
Chief Financial Officer,
Treasurer and Secretary
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<LEGEND>
This schedule contains summary information extracted from the Form 10-QSB and is
qualified in its entirety by reference to the unaudited financial statements
contained herein.
</LEGEND>
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<NAME> MASSACHUSETTS FINCORP, INC.
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