U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-24791
MASSACHUSETTS FINCORP, INC
--------------------------
(Name of small business issuer in its charter)
Delaware 04-3431804
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
70 Quincy Avenue, Quincy, Massachusetts 02169
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (617) 825-5555
--------------
Securities registered under Section 12(b)
of the Exchange Act: None
----
Securities registered under Section 12(g)
of the Exchange Act: Common Stock, par value
$.01 per share
-----------------------
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 [ ]
Check if no disclosure of delinquent filers in response to Item 405
of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
The Issuer's revenues for the fiscal year under report were $403,001.
As of March 14, 2000, there were issued and outstanding 545,481
shares of the Registrant's Common Stock. Based on the average of the bid
and ask prices, the aggregate market value of the Common Stock outstanding
held by the nonaffiliates of the Registrant on March 14, 2000, was
$5,570,002 (484,348 shares at $11.50 per share).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-
KSB.
INDEX
PART I
ITEM 1. DESCRIPTION OF BUSINESS. 3
ITEM 2. DESCRIPTION OF PROPERTY. 26
ITEM 3. LEGAL PROCEEDINGS. 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 27
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. 28
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 28
ITEM 7. FINANCIAL STATEMENTS 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. 65
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. 66
ITEM 10. EXECUTIVE COMPENSATION. 66
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. 66
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 66
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. 66
SIGNATURES 68
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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"). 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 December 31, 1999, the Company had
total assets of $96.4 million and stockholders' equity of $9.6 million.
The Bank is a community-oriented co-operative bank which was
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 three 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 multi-family and commercial real estate loans, construction
loans and to a lesser extent, home equity lines of credit and consumer
loans. The Bank operates through its three full-service banking offices and
a loan origination office, 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, advances
from the FHLB-Boston and, to a lesser extent, principal and interest
payments on loans and investment securities, and proceeds from the sale of
loans.
The following discussion refers to the Bank's operations as it makes
up the vast majority of the Company's assets.
Market Area and Competition
The Bank moved its administrative headquarters and executive offices
to Quincy, Massachusetts in December 1999. In conjunction with this move,
the Bank closed its loan origination offices in Norwell, Massachusetts and
Dorchester, Massachusetts due to their close proximity to the Quincy
office. The Bank's primary deposit gathering area is concentrated in the
communities surrounding its three full service offices located in
Dorchester, Milton and Quincy. The Bank also maintains a loan origination
office located in the Boston suburban community of Wakefield,
Massachusetts. All of the Bank's banking and loan origination offices are
located within 30 miles of Boston. Although the Bank originates loans
throughout Massachusetts and New Hampshire, the Bank's primary lending area
is the greater Boston metropolitan area.
The Quincy and Dorchester sections of Boston, Massachusetts are fully
developed and densely populated urban areas located south of downtown
Boston. The major traffic roadways running through Quincy and Dorchester,
including U.S. Interstate Highway 93, are heavily traveled and lined with
commercial and retail business operations. The greater Boston metropolitan
area benefits from the presence of numerous institutions of higher
education, medical care and research facilities and the corporate
headquarters of several significant investment and technology companies
employing individuals with specialized skills. These firms and businesses,
along with tourism, form the backbone of the economy of the greater Boston
metropolitan area.
The Bank faces significant competition both in generating loans and
in attracting deposits. The Bank's primary market area is highly
competitive and the Bank faces direct competition from a significant number
of financial institutions, many with a state-wide or regional presence and,
in some cases, a national presence. Many of these financial institutions
are significantly larger and have greater financial resources than the
Bank. The Bank's competition for loans comes principally from commercial
banks, savings banks, co-operative banks, credit unions, mortgage brokers,
mortgage banking companies and insurance companies. Its most direct
competition for deposits has historically come from savings, co-operative
and commercial banks and credit unions. In addition, the Bank faces
significant competition for deposits from non-bank institutions such as
brokerage firms and insurance companies in such instruments as short-term
money market funds, corporate and government securities funds, mutual funds
and annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. The
Bank has also experienced significant competition from credit unions which
have a competitive advantage as they do not pay state or federal income
taxes. Such competitive advantage has placed increased pressure on the
Bank with respect to its loan and deposit pricing.
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may
originate are subject to federal and state laws and regulations. Interest
rates charged by the Bank on loans are affected principally by the demand
for such loans, the supply of money available for lending purposes and the
rates offered by its competitors. These factors are, in turn, affected by
general and economic conditions, monetary policies of the federal
government, including the Federal Reserve Board ("FRB"), legislative tax
policies and governmental budgetary matters.
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percentages of the respective portfolios
at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------- -------- ------- -------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $54,943 72.96% $44,887 77.02% $37,953 84.61%
Multi-family 7,715 10.24% 3,267 5.61% 2,460 5.48%
Commercial real estate 4,283 5.69% 1,557 2.67% 1,485 3.31%
Construction, net of due mortgagor 7,829 10.40% 8,011 13.75% 2,169 4.84%
Home equity lines 260 0.35% 404 0.69% 560 1.25%
------------------------------------------------------------------
Total mortgage loans 75,030 99.64% 58,126 99.73% 44,627 99.49%
------------------------------------------------------------------
Consumer loans:
Auto loans 208 0.28% 83 0.14% 119 0.27%
Loans on savings accounts 41 0.05% 38 0.07% 76 0.17%
------------------------------------------------------------------
Total consumer loans 249 0.33% 121 0.20% 195 0.44%
------------------------------------------------------------------
Other loans 24 0.03% 36 0.06% 35 0.07%
------------------------------------------------------------------
Total loans 75,303 100.00% 58,283 100.00% 44,857 100.00%
====== ====== ======
Less:
Deferred loan fees 35 (146) (57)
Allowance for loan losses (596) (525) (349)
Mortgage loans held for sale (813) (6,336) (3,185)
Loans, net $73,929 $51,276 $41,266
======= ======= =======
</TABLE>
Origination, Sale and Servicing of Loans. The Bank's mortgage
lending activities are conducted primarily by its commissioned loan
personnel operating at its three full-service banking offices and one loan
origination office. All loans originated by the Bank are underwritten by
the Bank pursuant to the Bank's policies and procedures. The Bank
originates both adjustable-rate and fixed-rate mortgage loans depending
upon the relative customer demand for such loans, which is affected by the
current and expected future level of interest rates.
Generally, all adjustable-rate mortgage loans originated by the Bank
are originated for investment. While the Bank has historically originated
all fixed-rate one-to-four family mortgage loans for sale in the secondary
market to either Fannie Mae or private investors, the Bank has begun to
retain certain one-to-four family fixed-rate loans for its portfolio, based
on various factors, including its asset/liability position and market
interest rates. The one-to-four family mortgage loan products currently
originated for sale by the Bank include a variety of loans which conform to
the underwriting standards specified by Fannie Mae ("conforming loans")
and, to a lesser extent, loans which do not conform to Fannie Mae standards
due to loan amounts ("jumbo loans"). Some one-to-four family mortgage
loans sold by the Bank are sold pursuant to master commitments negotiated
with Fannie Mae and other investors to purchase loans meeting such
investor's defined criteria. Although the Bank has entered into such
master commitment contracts, such contracts generally do not require the
purchasers to buy or the Bank to deliver a specific amount of mortgage
loans. All conforming loans currently sold by the Bank are sold to Fannie
Mae and private investors and all non-conforming loans, which are sold, are
generally sold to private investors. Sales of loans are made without
recourse to the Bank in the event of default by the borrower. The Bank
generally retains the servicing rights on the mortgage loans sold to Fannie
Mae and generally releases the servicing rights on the mortgage loans sold
to private investors.
At December 31,1999, the Bank was servicing $3.7 million of loans for
others, primarily consisting of conforming fixed-rate mortgage loans sold
by the Bank. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event
of unremedied defaults, making certain insurance and tax payments on behalf
of the borrowers and generally administering the loans.
During the years ended December 31, 1999 and December 31, 1998, the
Bank originated $62.7 million and $66.7 million of fixed-rate and
adjustable-rate one-to-four family loans, respectively, of which $49.7
million and $21.3 million, respectively, were retained by the Bank. The
Bank recognizes, at the time of sale, the cash gain or loss on the sale of
the loans based on the difference between the net cash proceeds received
and the carrying value of the loans sold. On January 1, 1996, the Bank
implemented SFAS No. 122 pursuant to which the value of servicing rights
may be recognized as an asset of the Bank. In the three years ended
December 31, 1999, the fair market value of servicing rights under SFAS No.
122 and SFAS No. 125 were not material and were not recognized in the
financial statements for those periods.
The following table set forth the Bank's loan originations, sales and
principal repayments for the periods indicated.
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Gross loans:
Balance outstanding at beginning of year $51,947 $41,672 $40,418
Loans originated:
One-to four-family 62,735 66,714 30,371
Multi-family 6,176 746 453
Commercial real estate 6,295 1,218 -
Construction 657 12,094 6,284
Home equity lines - 79 43
Auto loans 196 46 93
Loans on savings accounts 64 72 51
Other loans 16 34 1
---------------------------------
Total loans originated 76,139 81,003 37,296
Less:
Principal repayments 26,641 21,760 11,326
Sales of loans 26,142 42,631 21,520
Transfers to real estate owned - - -
Principal charged off - 1 11
---------------------------------
Total loans 75,303 58,283 44,857
Less:
Loans held for sale, net 813 6,336 3,185
---------------------------------
Loans receivable held for investment at end
of year $74,490 $51,947 $41,672
=================================
</TABLE>
Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's loan portfolio at December 31, 1999. The table does
not include prepayments or scheduled principal amortization. Prepayments
and scheduled principal amortization on mortgage loans totaled $29.9
million, $20.4 million and $11.4 million for the years ended December 31,
1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------------------------------------------------------
One-to Loans on Total
Four- Multi- Commercial Construction Home Auto Savings Loans
Family Family Real Estate and Land Equity Loans Accounts Other Receivable
------- ------ ----------- ------------ ------ ----- -------- ----- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 1,430 $ 244 $ 552 $6,747 $ 21 $ 4 $34 $ - $ 9,032
-----------------------------------------------------------------------------------------------------
After one year:
More than one year
to three years 729 408 111 344 43 56 3 19 1,713
More than three years
to five years 348 - 130 - - 148 - 5 631
More than five years
to 10 years 2,378 6,144 2,063 486 176 - 4 - 11,251
More than 10 years
to 20 years 9,888 395 1,327 252 20 - - - 11,882
More than 20 years 40,170 524 100 - - - - - 40,794
-----------------------------------------------------------------------------------------------------
Total due after
January 1, 2001 53,513 7,471 3,731 1,082 239 204 7 24 66,271
-----------------------------------------------------------------------------------------------------
Total amount due
(gross) $54,943 $7,715 $4,283 $7,829 $260 $208 $41 $24 $75,303
==================================================================================================
Less:
Deferred loan fees, net 35
Allowance for loan losses (596)
Mortgage loans held for sale (813)
--------
Total loans, net $73,929
=======
<FN>
<F1> Included in amounts due in more than 20 years are mortgage loans held
for sale totaling $800,000. Although these loans have a maturity
date of more than 20 years, they are typically sold within 90 days.
</FN>
</TABLE>
The following table sets forth at December 31, 1999, the dollar
amount of gross loans receivable contractually due after December 31, 2000,
and whether such loans have fixed interest rates or adjustable interest
rates.
<TABLE>
<CAPTION>
Due After December 31, 2000
---------------------------------
Fixed Adjustable Total
------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family $21,684 $31,829 $53,513
Multi-family 474 6,997 7,471
Commercial real estate 48 3,683 3,731
Construction 682 400 1,082
Home equity lines - 239 239
---------------------------------
Total mortgage loans 22,888 43,148 66,036
---------------------------------
Consumer loans:
Auto loans 204 - 204
Loans on savings accounts 7 - 7
---------------------------------
Total consumer loans 211 - 211
---------------------------------
Other loans 24 - 24
---------------------------------
Total loans $23,123 $43,148 $66,271
=================================
</TABLE>
One-to-Four Family Lending. The Bank currently offers both fixed-
rate and adjustable-rate mortgage ("ARM") loans with maturities of up to 30
years secured by one-to-four family residences substantially all of which
are located in the Bank's primary market area. At December 31, 1999, the
Bank's one-to-four family mortgage loans totaled $54.9 million, or 73.0% of
total loans. Of the one-to-four family mortgage loans outstanding at that
date, 39.7% were fixed-rate mortgage loans and 60.3% were ARM loans.
The Bank currently offers fixed-rate one-to-four family mortgage
loans with terms from 15 to 30 years. The Bank currently offers a number of
ARM loans with terms of up to 30 years and interest rates which adjust
every one or three years from the outset of the loan or which adjust
annually after a five year initial fixed period. The interest rates for
the Bank's ARM loans are indexed to the applicable Constant Maturity
Treasury ("CMT") Index. The Bank's ARM loans generally provide for
periodic (not more than 2%) and overall (not more than 6%) caps on the
increase or decrease in the interest rate at any adjustment date and over
the life of the loan.
The origination of adjustable-rate residential mortgage loans, as
opposed to fixed-rate residential mortgage loans, helps reduce the Bank's
exposure to increases in interest rates. However, adjustable-rate loans
generally pose credit risks not inherent in fixed-rate loans, primarily
because as interest rates rise, the underlying payments of the borrower
rise, thereby increasing the potential for default. Periodic and lifetime
caps on interest rate increases help to reduce the risks associated with
adjustable-rate loans but also limit the interest rate sensitivity of such
loans.
Generally, the Bank originates one-to-four family residential
mortgage loans in amounts of up to 95% of the appraised value or selling
price of the property securing the loan, whichever is lower, with the
exception of certain loans in the Bank's "First-Time Home Buyer" program,
which allows for a 97% loan-to-value ("LTV") ratio. Private Mortgage
Insurance ("PMI") may be required for loans with a LTV ratio of greater
than 80%. Mortgage loans originated by the Bank generally include due-on-
sale clauses which provide the Bank with the contractual right to deem the
loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses
are an important means of adjusting the yields on the Bank's fixed-rate
mortgage loan portfolio and the Bank has generally exercised its rights
under these clauses. The Bank requires fire, casualty, title and, in
certain cases, flood insurance on all properties securing real estate loans
made by the Bank.
In an effort to provide financing for moderate income and first-time
home buyers, the Bank offers Federal Housing Authority ("FHA") and Veterans
Administration ("VA") loans and has its own First-Time Home Buyer loan
program. These programs offer residential mortgage loans to qualified
individuals. These loans are offered with adjustable- and fixed-rates of
interest and terms of up to 30 years. Such loans may be secured by a one-
to-four family residential property, in the case of FHA and VA loans, and
must be secured by a single family owner-occupied unit in the case of
First-Time Home Buyer loans. These loans are originated using modified
underwriting guidelines, in the case of FHA and VA loans, and the same
underwriting guidelines as the Bank's other one-to-four family mortgage
loans in the case of First-Time Home Buyer loans. All such loans are
originated in amounts of up to 97% of the lower of the property's appraised
value or the sale price. Private mortgage insurance is required on all such
loans.
The Bank also originates "investor rehab loans" to local contractors
and investors for the improvement and remodeling of existing non-owner
occupied one-to-four family residential properties. Such first mortgage
loans are originated with a maximum LTV ratio of 80% of the purchase price
of the property plus up to 80% of the cost of the improvements, as
confirmed by an independent appraiser. Investor rehab loans are offered
with terms of one-year and fixed-rates of interest, generally 1.5% above
the prime rate of interest as reported in The Wall Street Journal and as a
10 year balloon payment. During the term of the loan, the borrower is
required to remit monthly payments of interest only. The principal balance
of such loan is due at the end of the one or ten year term. The Bank
primarily relies on the borrower's income statements and tax returns when
underwriting such loans. The Bank generally requires personal and/or
corporate guarantees on such loans. At December 31, 1999, investor rehab
loans totaled $2.1 million, or 3.8% of one-to-four family loans, and 2.8%
of the Bank's total loans.
The Bank also offers a limited documentation mortgage loan product
("Low Doc" loans). Such loans are secured by owner-occupied one-to-four
family properties and are offered with both fixed and adjustable rates of
interest. The terms and interest rate caps of Low Doc loans are generally
the same as those of the Bank's other fixed and adjustable-rate one-to-four
family loan products; however, borrowers pay a premium in the form of
higher interest rates and loan fees and provide larger down payments (75%
maximum LTV ratio) in exchange for more expedient loan processing by virtue
of less income and asset information as compared to loans underwritten in
conformance with Fannie Mae standards. When underwriting a Low Doc loan,
the Bank requires executed income tax returns and a satisfactory credit
report but does not verify employment status. At December 31, 1999, Low
Doc loans totaled $ 7.8 million, or 14.2% of one-to-four family loans, and
10.4% of the Bank's total loans.
Multi-Family and Commercial Real Estate Lending. The Bank originates
multi-family and commercial real estate loans that are generally secured by
five or more unit apartment buildings and properties used for business
purposes such as small office buildings, restaurants or retail facilities
primarily located in the Bank's primary market area. The Bank's multi-
family and commercial real estate underwriting policies provide that such
real estate loans may be made in amounts of up to 80% of the appraised
value of the property, subject to the Bank's current loans-to-one-borrower
limit, which at December 31, 1999 was $1.9 million. The Bank's multi-
family and commercial real estate loans may be made with terms of up to 10
years and are offered with interest rates that adjust periodically. In
reaching its decision on whether to make a multi-family or commercial real
estate loan, the Bank considers the net operating income of the property,
the borrower's expertise, credit history and profitability and the value of
the underlying property. The Bank has generally required that the
properties securing these real estate loans have debt service coverage
ratios (the ratio of earnings before debt service) of at least 1.30x.
Environmental impact surveys are generally required for all commercial real
estate loans. Generally, all multi-family and commercial real estate loans
made to corporations, partnerships and other business entities require
personal guarantees by the principals. The Bank may not require a personal
guarantee on such loans depending on the creditworthiness of the borrower
and the amount of the down payment and other mitigating circumstances. The
Bank's multi-family real estate loan portfolio at December 31, 1999 was
$7.7 million, or 10.3% of total loans, and the Bank's commercial real
estate loan portfolio at such date was $4.3 million, or 5.7% of total
loans.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk
than one-to-four family residential mortgage loans. Because payments on
loans secured by multi-family and commercial real estate properties are
often dependent on successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real
estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards.
Construction Lending. The Bank originates fixed-rate construction
loans for the development of one-to-four family residential properties
primarily located in the Bank's primary market area. Although the Bank
does not generally make loans secured by raw land, the Bank's policies
permit the origination of such loans. Construction loans are generally
offered to experienced local developers operating in the Bank's primary
market area and, to a lesser extent, to individuals for the construction of
their primary residence. Construction loans are generally offered with
terms of up to 12 months and may be made in amounts of up to 70% of the
appraised value of the property, as improved, in the case of construction
loans to developers up to 90% of the appraisal value of the property, as
improved, in the case of construction loans to individuals for the
construction of their primary residence and up to 50% of the appraised
value of the property in the case of land loans. Construction loan
proceeds are disbursed periodically in increments as construction
progresses and as inspections by the Bank's lending officers warrant.
Generally, if the borrower is a corporation, partnership or other business
entity, personal guarantees by the principals are required for all
construction loans.
At December 31, 1999, the Bank had $7.8 million of advanced
construction loans that amounted to 10.4% of the Bank's total loans.
Construction financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied
real estate. Risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value at completion
of construction compared to the estimated cost (including interest) of
construction and other assumptions, including the estimated time to sell
residential properties. If the estimate of value proves to be inaccurate,
the Bank may be confronted with a project, when completed, having a value
which is insufficient to assure full repayment.
Home Equity Lines of Credit. Substantially all of the Bank's home
equity lines of credit are secured by second mortgages on owner-occupied
one-to-four family residences located in the Bank's primary market area.
At December 31, 1999, these loans totaled $260,000, or .4% of the Bank's
total loans. Home equity lines of credit generally have adjustable-rates
of interest, which adjust on a monthly basis. The adjustable-rate of
interest charged on such loans is indexed to the prime rate as reported in
The Wall Street Journal. Home equity lines of credit generally have an 18%
lifetime limit on interest rates. Generally, the maximum combined LTV
ratio on home equity lines of credit is 80%. The underwriting standards
employed by the Bank for home equity lines of credit include a
determination of the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the
proposed loan and the value of the collateral securing the loan. The
stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment and,
additionally, from any verifiable secondary income. Creditworthiness of
the applicant is of primary consideration.
Consumer Lending. Consumer loans at December 31, 1999 amounted to
$249,000, or 0.3% of the Bank's total loans, and consisted primarily of new
and used automobile loans and passbook loans. Such loans are generally
originated in the Bank's primary market area and generally are secured by
automobiles and deposit accounts. Loans on savings accounts are generally
secured by deposit accounts. Automobile loans have a maximum borrowing
limitation of 80% of the sale price of the automobile or average value in
the National Automobile Dealer's Association price guide, whichever is
lower. At December 31, 1999, automobile loans totaled $208,000, or 83.5%
of consumer loans and 0.3% of the Bank's total loans; and loans on savings
accounts totaled $41,000, or 16.5% of consumer loans and 0.1% of the Bank's
total loans.
Loans secured by rapidly depreciable assets such as automobiles
entail greater risks than one-to-four family residential mortgage loans.
In such cases, repossessed collateral for a defaulted loan may not provide
an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the
underlying collateral. Further, consumer loan collections on these loans
are dependent on the borrower's continuing financial stability and,
therefore, are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Finally, the application of various
federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans
in the event of a default.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies and loan approval limits of the Bank. The
Board of Directors has established the Security Committee of the Board that
considers and approves all loans within its designated authority as
established by the Board. In addition, the Board of Directors has
authorized certain officers of the Bank to consider and approve all loans
within their designated authority as established by the Board.
Delinquent Loans, Classified Assets and Real Estate Owned
Reports listing all delinquent accounts are generated and reviewed by
management on a monthly basis and the Board of Directors performs a monthly
review of all loans or lending relationships delinquent 60 days or more.
The procedures taken by the Bank with respect to delinquencies vary
depending on the nature of the loan, period and cause of delinquency and
whether the borrower is habitually delinquent. When a borrower fails to
make a required payment on a loan, the Bank takes a number of steps to have
the borrower cure the delinquency and restore the loan to current status.
The Bank generally sends the borrower a written notice of non-payment after
the loan is first past due. The Bank's guidelines provide that telephone
and written correspondence will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Bank will attempt to obtain
full payment, offer to work out a repayment schedule with the borrower to
avoid foreclosure or, in some instances, accept a deed in lieu of
foreclosure. In the event payment is not then received or the loan not
otherwise satisfied, additional letters and telephone calls generally are
made. If the loan is still not brought current or satisfied and it becomes
necessary for the Bank to take legal action, which typically occurs after a
loan is 90 days or more delinquent, the Bank will commence foreclosure
proceedings against any real property that secured the loan. If a
foreclosure action is instituted and the loan is not brought current, paid
in full, or refinanced before the foreclosure sale, the property securing
the loan generally is sold at foreclosure and, if purchased by the Bank,
becomes real estate owned.
Federal regulations and the Bank's internal policies require that the
Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank currently
classifies problem and potential problem assets as "Substandard,"
"Doubtful" or "Loss". An asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard assets include
those characterized by the distinct possibility that the Bank will sustain
some loss if the deficiencies are not corrected. Assets classified as
Doubtful have all of the weaknesses inherent in those classified
Substandard with the added characteristic that the weaknesses present make
collection or liquidation in full, on the basis of currently existing
facts, conditions and values, highly questionable and improbable. Assets
classified as Loss are those considered uncollectible and of such little
value that their continuance as assets, without the establishment of a
specific loss reserve, is not warranted. Assets which do not currently
expose the Bank to a sufficient degree of risk to warrant classification in
one of the aforementioned categories but possess weaknesses are required to
be designated "Special Mention."
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for loan
losses in an amount deemed prudent by management unless the loss of
principal appears to be remote. When the Bank classifies one or more
assets or portions thereof, as Loss, it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified or to charge off such amount.
The Bank's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the FDIC and
the Massachusetts Commissioner of Banks ("the Commissioner"), which can
order the establishment of additional general or specific loss allowances.
The FDIC, in conjunction with the other federal banking agencies, recently
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions
on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency
examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that institutions
have effective systems and controls to identify, monitor and address asset
quality problems; that management has analyzed all significant factors that
affect the collectibility of the portfolio in a reasonable manner; and that
management has established acceptable allowance evaluation processes that
meet the objectives set forth in the policy statement. While the Bank
believes that it has established an adequate allowance for loan losses,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to materially increase its allowance
for loan losses, thereby negatively affecting the Bank's financial
condition and earnings at that time. Although management believes that
adequate specific and general loan loss allowances have been established,
future provisions are dependent upon future events such as loan growth and
portfolio diversification and, as such, further additions to the level of
specific and general loan loss allowances may become necessary.
Management of the Bank reviews and classifies its assets on a
quarterly basis, and the Board of Directors reviews the results of the
reports on a quarterly basis. The Bank classifies its assets in accordance
with the management guidelines described above. At December 31, 1999, the
Bank had the following classified assets:
<TABLE>
<CAPTION>
Substandard Doubtful Loss Special Mention
------------------------------------------------------------------------------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
-------- --------- -------- --------- -------- --------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family mortgages 6 $ 612 - $ - - $ - - $ -
Multi-family mortgages. 2 408 - - - - - -
Commercial real estate loans - - - - - - - -
Construction loans. - - - - - - - -
Home equity lines - - - - - - - -
Consumer loans - - - - - - - -
----------------------------------------------------------------------------------
Total 8 $1,020 - $ - - $ - - $ -
==================================================================================
</TABLE>
Non-performing Assets. The following table sets forth information
regarding non-performing loans and REO. At December 31, 1999, the Bank had
no REO in its portfolio. It is the general policy of the Bank to cease
accruing interest on loans 90 days or more past due and to fully reserve
for all previously accrued interest unless the loan is well secured and in
the process of collection. If interest payments on all non-accrual loans
for the years ended December 31, 1999, 1998 and 1997 had been made in
accordance with original loan agreements, interest income of $3,000, $8,000
and $9,000, respectively, would have been recognized compared to no
interest income recognized in 1999 and 1998 and $8,000 interest income
recognized in 1997.
<TABLE>
<CAPTION>
At December 31,
--------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Non-performing loans:
One- to four-family $92 $173 $115
-------------------------
Total non-performing assets $92 $173 $115
-------------------------
Non-performing loans as a percent of loans (1) 0.12% 0.33% 0.28%
Non-performing loans as a percent of total assets 0.10% 0.24% 0.21%
<FN>
- -------------------
<F1> Loans include loans receivable held for investment, net, excluding
the allowance for loan losses.
<F2> Non-performing assets consist of non-performing loans and REO. The
Bank had no REO at December 31, 1999, 1998, and 1997. Non-performing
loans consist of non-accruing loans and all loans 90 days or more
past due and other loans which have been identified by the Bank as
presenting uncertainty with respect to the collectibility of interest
or principal.
</FN>
</TABLE>
Real Estate Owned. At December 31, 1999, the Bank had no REO in its
portfolio. When the Bank does acquire property through foreclosure or deed
in lieu of foreclosure, it is initially recorded at the lower of the
recorded investment in the corresponding loan or the fair value of the
related assets at the date of foreclosure, less costs to sell. Thereafter,
if there is a further deterioration in value, the Bank provides for a
specific valuation allowance and charges operations for the diminution in
value.
Allowance for Loan Losses
The allowance for loan losses is maintained through provisions for
loan losses based on management's on-going evaluation of the risks inherent
in its loan portfolio, consideration of the trends in its loan portfolio,
the national and regional economies and the real estate market in the
Bank's primary lending area. The allowance for loan losses is maintained at
an amount management considers adequate to cover estimated losses in its
loan portfolio which are deemed probable and estimable based on information
currently known to management. The Bank's loan loss allowance
determinations also incorporate factors and analyses which consider the
potential principal loss associated with the loan, costs of acquiring the
property, securing the loan through foreclosure or deed in lieu thereof,
the periods of time involved with the acquisition and sale of such
property, 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. The analysis is compared to actual losses, peer group comparisons
and economic conditions. The Bank will continue to monitor and modify its
allowance for loan losses as conditions dictate. Management believes that,
based on information available at December 31, 1999, the Bank's allowance
for loan losses was sufficient to cover losses inherent in its loan
portfolio at that time. However, no assurances can be given that the
Bank's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Bank or that further future adjustments
to the allowance for loan losses will not be necessary if economic and
other conditions differ substantially from the economic and other
conditions used by management to determine the current level of the
allowance for loan losses. In addition, the FDIC and the Commissioner, as
an integral part of their examination processes, periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to
make additional provisions for estimated loans losses based upon judgements
different from those of management.
The following table sets forth activity in the Bank's allowance for
loan losses for each period set forth.
<TABLE>
<CAPTION>
At or For the
Years ended December 31,
---------------------------
1999 1998 1997
----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 525 $ 349 $ 322
Provision for loan losses (19) 87 (90)
Charge-offs:
One- to four-family - - 11
Auto loans - 1 -
---------------------------
Total charge-offs - 1 11
Recoveries:
One- to four-family 90 90 128
Auto loans - - -
Total recoveries 90 90 128
---------------------------
Net charge-offs (recoveries) (90) (89) (117)
---------------------------
Balance at end of year $ 596 $ 525 $ 349
===========================
Allowance for loan losses as a percent of
loans 0.79% 0.90% 0.84%
Allowance for loan losses as a percent of
nonperforming loans 647.83% 303.47% 303.50%
</TABLE>
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.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four family $319 73.31% $295 77.02% $160 84.61%
Multi-family 116 10.24% 49 5.61% 57 5.48%
Commercial real estate 64 5.69% 23 2.67% 15 3.31%
Construction and land 83 10.40% 119 13.75% 22 4.84%
Consumer Loans 5 0.33% 2 0.89% 3 1.69%
Other - 0.03% 1 0.06% - 0.07%
Unallocated 9 0.00% 36 0.00% 92 0.00%
--------------------------------------------------------------
Total allowance for loan losses $596 100.00% $525 100.00% $349 100.00%
==============================================================
</TABLE>
Investment Activities
The Board of Directors sets the investment policy and procedures of
the Bank. This policy generally provides that investment decisions will be
made based on the safety of the investment, liquidity requirements of the
Bank and, to a lesser extent, potential return on the investments. In
pursuing these objectives, the Bank considers the ability of an investment
to provide earnings consistent with factors of quality, maturity,
marketability and risk diversification. The Bank generally invests in
securities as a method of utilizing funds not utilized for loan origination
activity and as a method of maintaining liquidity at levels deemed
appropriate by management. While the Board of Directors has final
authority and responsibility for the securities investment portfolio, the
Board has delegated day-to-day oversight of the Bank's investments to the
President of the Bank. On a monthly basis, the Board reviews and evaluates
all investment activities for safety and soundness, adherence to the Bank's
investment policy and assurance that authority levels are maintained.
As required by SFAS No. 115, the Bank has established an investment
portfolio of securities that are categorized as held-to-maturity,
available-for-sale or held for trading. The Bank does not currently
maintain a portfolio of securities categorized as held for trading. At
December 31, 1999, the available-for-sale securities portfolio totaled
$12.1 million, or 12.5% of assets and the held-to-maturity portfolio
totaled $524,000, or 1.0% of assets.
The Bank currently does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. Similarly, the Bank does not invest in
mortgage-related securities that are deemed to be "high risk," or purchase
bonds that are not investment grade.
Mortgage-Backed Securities. The Bank currently invests in mortgage-
backed securities insured or guaranteed by Fannie Mae, Freddie Mac and
Ginnie Mae. At December 31, 1999, mortgage-backed securities totaled $5.6
million, or 5.8%, of total assets and 6.1% of total interest earning
assets, all of which were classified as available-for-sale. At December
31, 1999, all of the mortgage-backed securities were backed by adjustable-
rate loans. The mortgage-backed securities portfolio had a stated rate of
6.7% and 6.5% at December 31, 1999. The estimated fair value of the Bank's
mortgage-backed securities at December 31, 1999, was $5.6 million, which is
$200,000 less than the amortized cost of $5.8 million. Investments in
mortgage-backed securities involve a risk that actual prepayments may
differ from estimate prepayments over the life of the security, which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on
such securities. There is also reinvestment risk associated with the cash
flows from such securities or in the event such securities are redeemed by
the issuer. In addition, the market value of such securities may be
adversely affected by changes in interest rates.
U.S. Government and Federal Agency Obligations. At December 31,
1999, the Bank's U.S. Government and federal agency obligations securities
portfolio totaled $874,000, all of which were classified as available-for-
sale. Such portfolio at December 31, 1999 primarily consisted of short- to
medium-term (maturities of one to five years) securities issued by federal
agencies.
Corporate Equity Securities and Debt Obligations. The Bank currently
invests in the equity securities and debt obligations of United States
corporations. At December 31, 1999, the Bank's equity securities portfolio
totaled $1.1 million, or 1.2% of total assets, all of which were classified
as available-for-sale. Such portfolio consisted of $260,000 of common
stock and $850,000 in preferred stock issued by corporate issuers. The
Bank's current policies generally provide that the maximum equity
investment in any one corporation shall not exceed 3% of the Bank's equity
and reserves and the maximum aggregate investment in any one industry shall
not exceed 15% of the Bank's equity and reserves. At December 31, 1999,
the Bank had $5.0 million, or 5.2% of total assets, in corporate debt
obligations, all of which were investment grade.
Investments in corporate equity securities and debt obligations
involve risk as they are not insured or guaranteed by the U.S. government
or any agency thereof, generally not secured by collateral and generally
rely upon future income from the operations of the issuer for repayment of
principal and interest.
The following table sets forth at the dates indicated certain
information regarding the amortized cost and market values of the Bank's
investment securities.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities (1):
Held to maturity:
U.S. Government and federal agency $ - $ - $ - $ - $1,499 $1,500
Corporate debt 524 514 1,308 1,314 1,480 1,483
--------------------- -------------------- ------------------
Total investment securities held
to maturity 524 514 1,308 1,314 2,979 2,983
Available for sale:
U.S. Government and federal agency 898 874 1,842 1,861 1,340 1,353
Corporate debt 4,573 4,486 3,557 3,494 - -
Mortgage-backed securities 5,829 5,597 988 1,027 1,015 1,044
Marketable equity securities 1,312 1,111 1,013 1,022 575 626
--------------------- -------------------- ------------------
Total securities available for sale 12,612 12,068 7,400 7,404 2,930 3,023
--------------------- -------------------- ------------------
Total securities $13,136 $12,582 $8,708 $8,718 $5,909 $6,006
====================================================================
</TABLE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
securities portfolio as of December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------------------------------------------------------
More than One More than Five More than
One Year or Less Year to Five Years Years to Ten Years Ten Years Total
------------------ ------------------ ------------------ ------------------ -------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Corporate debt $ - - $ 524 8.28% $ - - $ - - $ 524 8.28%
----------------------------------------------------------------------------------------------------
Total held-to-maturity - - 524 8.28% - - - - 524 8.28%
Available for sale:
Mortgage-backed securities - - - - - - 5,597 6.81% 5,597 6.81%
U.S. Government and
federal agency - - 487 5.49% 387 6.92% - - 874 6.12%
Corporate debt 1,179 6.77% 945 6.84% - - 2,362 6.33% 4,486 6.55%
Marketable equity
securities - - - - - - - - 1,111 -
----------------------------------------------------------------------------------------------------
Total available-for-sale 1,179 6.77% 1,432 6.38% 387 6.92% 7,959 6.67% 12,068 6.04%
----------------------------------------------------------------------------------------------------
Total securities $1,179 6.77% $1,956 6.85% $ 387 6.92% $7,959 6.67% $12,592 6.12%
===================================================================================================
</TABLE>
Sources of Funds
General. Deposits, repayments and prepayments of loans, cash flows
generated from operations and FHLB advances are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range
of interest rates and terms. The Bank's deposit accounts consist of
savings, retail checking/interest bearing checking accounts, commercial
checking accounts, money market accounts, club accounts and certificate of
deposit accounts. The Bank offers certificate of deposit accounts with
balances in excess of $100,000 at preferential rates (jumbo certificates),
Individual Retirement Accounts ("IRAs") and other qualified plan accounts.
At December 31, 1999, the Bank's deposits totaled $63.3 million, or
73.9%, of total liabilities. For the year ended December 31, 1999, the
average balance of core deposits (savings, interest bearing checking, money
market and noninterest-bearing checking accounts) totaled $29.4 million, or
49.6% of total average deposits. At December 31, 1999, the Bank had a
total of $35.2 million in certificates of deposit, of which $28.1 million
had maturities of one year or less. For the year ended December 31, 1999,
the average balance of core deposits represented approximately 46.5% of
total deposits and certificate accounts represented 47.2%. Management
monitors activity on the Bank's core deposits and, based on historical
experience and the Bank's current pricing strategy, believes it will
continue to retain a large portion of such accounts. The Bank is not
limited with respect to the rates it may offer on deposit products.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas
in which its banking offices are located. The Bank relies primarily on
customer service and long-standing relationships with customers to attract
and retain these deposits; however, market interest rates and rates offered
by competing financial institutions affect the Bank's ability to attract
and retain deposits. The Bank uses traditional means of advertising its
deposit products, including radio and print media and generally does not
solicit deposits from outside its market area. While certificate accounts
in excess of $100,000 are accepted by the Bank, and may be subject to
preferential rates, the Bank does not actively solicit such deposits as
such deposits are more difficult to retain than core deposits. Although
the Bank's policies do permit the use of brokered deposits, the Bank does
not currently accept brokered deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
For the Years ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Beginning balance. $56,993 $42,668 $33,961
Net deposits before interest credited. 4,099 12,144 7,124
Interest credited on deposit accounts 2,208 2,181 1,583
---------------------------------
Total increase in deposit accounts 6,307 14,325 8,707
---------------------------------
Ending balance. $63,300 $56,993 $42,668
---------------------------------
</TABLE>
At December 31, 1999, the Bank had outstanding $11.7 million in
certificate of deposits accounts in amounts of $100,000 or more, maturing as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Maturity Period Amount Rate
- --------------- ------- --------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 4,209 5.24%
Over three through six months. 3,428 5.15%
Over six through 12 months 1,597 4.98%
Over 12 months 2,483 5.65%
-------
Total $11,717 5.27%
=======
</TABLE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
Percent Weighted Percent Weighted Percent Weighted
Average of Total Average Average of Total Average Average of Total Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- -------- ------- -------- -------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposits $ 266 0.45% 2.42% $ 808 1.51% 2.62% $ 1,079 2.02% 2.59%
Demand accounts 5,156 8.70% - 4,486 8.38% - 2,255 4.21% -
Interest-bearing checking 13,971 23.56% 3.41% 11,963 22.35% 4.08% 5,377 10.05% 3.20%
Regular and other savings 10,032 16.92% 1.96% 9,685 18.09% 1.97% 10,328 19.29% 2.35%
Total certificates of deposit 29,869 50.37% 5.11% 26,585 49.67% 5.57% 20,471 38.24% 5.57%
------------------------------------------------------------------------------------------------
Total $59,294 100.00% 3.76% $53,527 100.00% 4.08% $39,510 73.81% 4.25%
===============================================================================================
</TABLE>
Borrowed Funds. As part of its operating strategy, the Bank utilizes
advances from the FHLB as a supplement to retail deposits to fund its
operations. By utilizing FHLB advances, which possess varying stated
maturities, the Bank can meet its liquidity needs without otherwise being
dependent upon retail deposits, which have no stated maturities (except for
certificates of deposit), which are interest rate sensitive and which are
subject to withdrawal from the Bank at any time. These FHLB advances are
collateralized primarily by the Bank's mortgage loans and mortgage-backed
securities and secondarily by the Bank's investment in capital stock of the
FHLB. FHLB advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities.
The maximum amount that the FHLB will advance to member institutions,
including the Bank, fluctuates from time-to-time in accordance with the
policies of the FHLB. The Bank's borrowing limit from the FHLB was $52.3
million at December 31, 1999
The following table sets forth certain information regarding the
bank's borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the Years Ended
December 31,
-------------------------------
1999 1998 1997
------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $14,542 $4,267 $6,402
Maximum amount outstanding at any month-end
during the year 22,617 6,093 9,251
Balance outstanding at end of year 22,617 4,211 6,436
Weighted average interest rate during the year 5.32% 5.80% 5.87%
Weighted average interest rate at end of year 5.58% 6.11% 6.11%
</TABLE>
Subsidiary Activities
Mass Securities Corporation ("MSC") was organized in March 1998 to
acquire and hold investment securities of a type that are permissible for
banks to hold under applicable law. MSC was qualified as a "securities
corporation" for Massachusetts tax purposes. Income earned by a qualifying
securities corporation is generally entitled to special tax treatment from
Massachusetts income tax. The Bank established a second subsidiary, Mass
SEC Corp II, in August 1998 for a similar purpose. In February 1999 the
Bank established a Delaware limited liability company, 70 Quincy Ave. LLC,
to acquire, hold and lease property in connection with the acquisition of
the building and land for the new office in Quincy, Massachusetts. The
results of operations of these subsidiaries will be consolidated in the
results and operations of the Company.
Personnel
As of December 31, 1999, the Bank had 44 full-time employees and 2
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.
REGULATION AND SUPERVISION
General
As a co-operative bank chartered by the Commonwealth of
Massachusetts, the Bank is subject to extensive regulation under state law
with respect to many aspects of its banking activities; this state
regulation is administered by the Commissioner. In addition, as a bank
whose deposits are insured by the FDIC under the Bank Insurance Fund, the
Bank is subject to deposit insurance assessments by the FDIC. The FDIC has
examination and supervisory authority over the Bank, with a broad range of
enforcement powers and the FDIC regulates the Bank's activities and
operations. 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, customers and borrowers of the Bank, not bank
stockholders.
The following discussion of the laws and regulations material to the
operations of the Company and Bank are brief summaries. The summaries do
not purport to be complete and are qualified in their entirety by reference
to the applicable laws and regulations. As a savings and loan holding
company, the Company is required to file certain reports with, and
otherwise comply with the rules and regulations, of the OTS, the
Commissioner and of the Securities and Exchange Commission ("SEC") under
the federal securities laws. Certain of the regulatory requirements
applicable to the Bank and to the Holding Company are referred to below or
elsewhere herein.
Massachusetts Banking Laws and Supervision
The powers of a Massachusetts co-operative bank are established by
Massachusetts law, as qualified by applicable federal law and regulation.
Massachusetts co-operative banks are regulated and supervised by the
Commissioner. The Commissioner is required to regularly examine each state-
chartered bank. The approval of the Commissioner is required to establish
or close branches, to merge with another bank, to form a holding company,
to issue stock or to undertake many other activities. Any Massachusetts
bank that does not operate in accordance with the regulations, policies and
directives of the Commissioner 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.
A co-operative bank may only pay dividends on its capital stock if
such payment would not impair the bank's capital stock and surplus account.
No dividends may be paid to stockholders of a bank if such dividends would
reduce stockholders' equity of the bank below the amount of the liquidation
account required by Massachusetts's conversion regulations.
Federal Regulations
Capital Requirements. Under FDIC regulations, federally insured
state-chartered banks that are not members of the Federal Reserve System
("state non-member banks"), such as the Bank, are required to comply with
minimum leverage capital requirements. For an institution determined by the
FDIC to not be anticipating or experiencing significant growth and to be in
general a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Ranking System, the minimum capital leverage
requirement is a ratio of Tier 1 capital to total assets of 3%. For all
other institutions, the minimum leverage capital ratio is 4%. Tier 1
capital is the sum of common stockholders' equity, noncumulative perpetual
preferred stock including any related surplus and minority investments in
certain subsidiaries, less intangible assets except for servicing rights
and credit card relationships.
The FDIC has also adopted risk-based capital guidelines to which the
Bank is subject. The FDIC guidelines require state non-member banks to
maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items to four risk-
weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater risk.
State non-member banks must maintain a minimum ratio of qualifying
capital to risk-weighted assets of at least 8%, of which at least one-half
must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital
plus Tier 2 or supplementary capital items, must include allowances for
loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative
preferred stock, preferred stock with a maturity of over 20 years, and
certain other capital instruments.
The following is a summary of the Bank's regulatory capital at
December 31, 1999:
<TABLE>
<S> <C>
GAAP Capital to Total Assets 10.0%
Total Capital to Risk-Weighted Assets 13.3%
Tier I Leverage Ratio 7.9%
Tier I to Risk-Weighted Assets 12.3%
</TABLE>
The federal banking agencies have also adopted a regulation providing
that the agencies will take account of the exposure of a bank's capital and
economic value to changes in interest rate risk in assessing a bank's
capital adequacy.
Standards for Safety and Soundness. The federal banking agencies
have adopted regulations and Interagency Guidelines Establishing Standards
for Safety and Soundness to implement safety and soundness standards. The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to
submit to the agency an acceptable plan to achieve compliance with the
standard.
Investment Activities
All state-chartered FDIC insured banks, including co-operative banks,
are generally limited to activities as principal and equity investments of
the type and in the amount authorized for national banks, notwithstanding
state law. Applicable regulations permit certain exceptions to these
limitations. For example, certain state chartered banks, such as the Bank,
may, with FDIC approval, continue to exercise state authority to invest in
common or preferred stocks listed on a national securities exchange or the
Nasdaq National Market and in the shares of an investment company
registered under the Investment Company Act of 1940, as amended. Such
banks may also continue to sell savings bank life insurance. In addition,
the FDIC is authorized to permit such institutions to engage in state
authorized activities or investments that do not meet this standard (other
than non-subsidiary equity investments) for institutions that meet all
applicable capital requirements if it is determined that such activities or
investments do not pose a significant risk to the Bank Insurance Fund. The
Bank received grandfathering authority from the FDIC in February, 1993 to
invest in listed stocks and/or registered shares subject to the maximum
permissible investment of 100% of Tier 1 capital, as specified by the
FDIC's regulations, or the maximum amount permitted by Massachusetts
Commonwealth Banking Law, whichever is less. Such grandfathering authority
is subject to termination upon the FDIC's determination that such
investments pose a safety and soundness risk to the Bank or in the event
the Bank converts its charter, other than a mutual to stock conversion, or
undergoes a change in control. As of December 31, 1999, the Bank had $1.1
million of securities which were subject to such grandfathering authority.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank
regulatory authorities take "prompt corrective action" with respect to
banks that do not meet minimum capital requirements. An institution is
deemed to be "undercapitalized" if it has a total risk-based capital ratio
of less than 8%, a Tier I risk-based capital ratio of less than 4%, or
generally a leverage ratio of less than 4%. An institution is deemed to be
"significantly undercapitalized" if it has a total risk-based capital ratio
of less than 6%, a Tier I risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%. As of
December 31, 1999, the Bank was a well-capitalized institution.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a
capital restoration plan. A bank's compliance with such plan is required
to be guaranteed by any company that controls the undercapitalized
institutions. If an "undercapitalized" bank fails to submit an acceptable
plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" banks are subject to one or more of a
number of additional restrictions, including but not limited to an order by
the FDIC to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets and cease receipt of deposits from
correspondent banks or dismiss directors or officers, and restrictions on
interest rates paid on deposits, compensation of executive officers and
capital distributions by the parent holding company. Generally, subject to
a narrow exception, the appointment of a receiver or conservator is
required for a "critically undercapitalized" institution within 270 days
after it obtains such status.
Transactions with Affiliates
Transactions between depository institutions and their affiliates are
governed by federal law. An affiliate of an institution is any company
that controls, is controlled by, or is under common control with the
institution, other than a subsidiary. In a holding company context, at a
minimum, the parent holding company of an institution and any companies
which are controlled by such parent holding company are affiliates of the
institution. Generally, federal law limits the extent to which the
institution and 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 contains an aggregate limit on such transactions
with all affiliates of 20% of capital stock and surplus. The law also
establishes specific collateral requirements for loans or extensions of
credit to, or guarantees, acceptances on letters of credit issued on behalf
of an affiliate and requires that affiliate transactions generally be on
terms substantially the same, or no less favorable, to the institution or
its subsidiary as similar transactions with nonaffiliates.
Further, federal law restricts an institution with respect to loans
to directors, executive officers, and principal stockholders. Loans to
directors, executive officers and stockholders who control, directly or
indirectly, 10% or more of voting securities of the institution, and
certain related interests of any of the foregoing, may not exceed, together
with all other outstanding loans to such persons and affiliated entities,
the institution's total capital and surplus. Further, loans to directors,
executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to other
persons, except that such insiders may receive preferential loans made
pursuant to a benefit or compensation program that is widely available to
the Bank's employees and does not give preference to the insider over the
other employees. The law also establishes board of director approval
requirements for specified insider loans. Federal law places additional
limitations on loans to executive officers.
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 unsafe or unsound practices. The FDIC has
authority under Federal law to appoint a conservator or receiver for an
insured bank under certain circumstances.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. An
institution is assigned to one of three capital categories based on the
institution's capital position, and one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an
institution is assigned is based on an evaluation by the FDIC of
information which the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Assessment rates are
determined by the FDIC semi-annually and currently range from zero basis
points for the healthiest institution to 27 basis points for the riskiest.
In addition, Bank Insurance Fund institutions are required to make certain
payments toward bonds issued in the late 1980s by the financing Corporation
to recapitalize the insurance fund for savings and loan associations. The
Bank paid $6,789 in deposit insurance assessments for fiscal 1999. The
FDIC is authorized to raise the assessment rates in certain circumstances.
The FDIC has exercised this authority several times in the past and may
raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC.
The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Reserve System
Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts.
The regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for that portion of transaction
accounts aggregating $44.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
greater than $44.3 million, the reserve requirement is $1.329 million plus
10% (subject to adjustment by the Federal Reserve Board between 8% and 14%)
against that portion of total transaction accounts in excess of $44.3
million The first $5.0 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 the foregoing requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Bank, as a member of the FHLB, is required to
acquire and hold shares of capital stock in the FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or
1/20 of its advances (borrowings) from the FHLB, whichever is greater. The
Bank was in compliance with this requirement with an investment in FHLB
stock at December 31, 1999 of $1.1 million.
Holding Company Regulation
Federal law allows a state co-operative bank that qualifies as a
"qualified thrift to elect to be treated as a "savings association" for
purposes of the savings and loan holding company provisions of federal law.
Such election results in its holding company being regulated as a savings
and loan holding company by the OTS rather than as a bank holding company
by the Federal Reserve Board. The Bank has made such an election. The
Company is subject to OTS regulations, examinations, supervision and
reporting requirements. Among other things, this authority permits the OTS
to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings institution. Additionally, the Bank is required
to notify the OTS at least 30 days before declaring any dividend to the
Company.
As a unitary savings and loan holding company, the Company is
generally not restricted as to the types of business activities in which it
may engage. Upon any non-supervisory acquisition by the Company of another
savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company subject to extensive limitations
on the types of business activities in which it could engage. Federal law
limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank
Holding Company Act, as amended, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation. Multiple savings and
loan holding companies are prohibited from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary company engaged in
activities other than those permitted by federal law.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
association or savings and loan holding company or from acquiring such an
institution or company by merger, consolidation or purchase of its assets,
without prior written approval of the OTS. In evaluating applications by
holding companies to acquire savings associations, the OTS must consider
the financial and managerial resources and future prospects of the company
and institution involved, the effect of the acquisition on the risk to the
insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, except: (i) interstate supervisory
acquisitions by savings and loan holding companies; and (ii) the
acquisition of a savings institution in another state if the laws of the
state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions. In a savings and
loan holding company structure, the Bank is prohibited from extending
credit to affiliates not engaged exclusively in activities permissible for
a bank holding company and may not invest in the securities of an
affiliate, except a subsidiary.
In order to elect and continue to be regulated as a savings and loan
holding company by the OTS (rather than as a bank holding company by the
Federal Reserve Board), the Bank must continue to be a qualified thrift
lender. This requires the Bank either to maintain compliance with the test
for a "domestic building and loan association," as defined in the Internal
Revenue Code, or with a qualified thrift lender test. Under the qualified
thrift lender test, a savings institution is required to maintain at least
65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) in
at least 9 months out of each 12 month period. A holding company of a
savings institution that fails to qualify as a qualified thrift lender must
either convert to a bank holding company and thereby become subject to the
regulation and supervision of the Federal Reserve Board or operate under
certain restrictions. As of December 31, 1999, the Bank maintained in
excess of 65% of its portfolio assets in qualified thrift investments. The
Bank also met the qualified thrift lender test in each of the prior 12
months and, therefore, met the QTL test. Recent legislative amendments
have broadened the scope of "qualified thrift investments" that go toward
meeting the QTL test to fully include credit card loans, student loans and
small business loans.
Massachusetts Holding Company Regulation. In addition to the federal
holding company regulations, a bank holding company organized or doing
business in Massachusetts may be also subject to regulation under the
Massachusetts law. The term "bank holding company," for the purposes of
Massachusetts law, is defined generally to include any company which,
directly or indirectly, owns, controls or holds with power to vote more
than 25% of the voting stock of each of two or more banking institutions,
including commercial banks and state savings banks, co-operative banks and
savings and loan associations and national banks, federal savings banks and
federal savings and loan associations. In general, a holding company
controlling only one banking institution will not be deemed to be a bank
holding company for the purposes of Massachusetts law. Under Massachusetts
law, the prior approval of the Board of Bank Incorporation is required
before a company may become a bank holding company and before an existing
bank holding company may acquire additional institutions.
Thrift Rechartering
Both the Bank and the Company are subject to extensive regulations
and supervision. Such regulation, which affects the Bank on a daily basis,
may be changed at any time, and the interpretation of the relevant law and
regulations is also subject to change by the authorities who examine the
Bank and interpret those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by
the Commissioner, the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, and their operations.
The Gramm-Leach-Bliley Act of 1999 expands the authority of bank
holding companies to affiliate with other financial services companies such
as insurance companies and investment banking companies. The Gramm-Leach-
Bliley Act, however, provided that savings and loan holding companies may
only engage in activities permitted to financial holding companies under
that Act and those authorized for multiple savings and loan holding
companies. Unitary savings and loan holding companies existing prior to
May 4, 1999, such as the Company, were grandfathered as to the unrestricted
activities. Under the Act, however, even grandfathered savings and loan
holding companies may not be acquired by companies engaged in commercial
activities.
Federal Securities Laws
Upon completion of the Conversion in December 1998, the Company's
Common Stock became registered with the SEC under the Exchange Act. The
Company then became subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common
Stock to be issued in the Conversion does not cover the resale of such
shares. Shares of the Common Stock purchased by persons who are not
affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets
the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell
in the public market, without registration, a number of shares not to
exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in
the future by the Company to permit affiliates to have their shares
registered for sale under the Securities Act under certain circumstances.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank will report their income on a
consolidated basis, using a calendar year and the accrual method of
accounting and will be subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly
the Bank's treatment of its reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company. The IRS had last audited the Bank for the
five-year period ended 1984. The audit resulted in adjustments which were
immaterial to the Bank's financial statements.
Bad Debt Reserves. The Small Business Job Protection Act of 1996
(the "1996 Act"), which was enacted on August 20, 1996, made significant
changes to provisions of the Code relating to a savings institution's use
of bad debt reserves for federal income tax purposes and requires such
institutions to recapture (i.e. take into income) certain portions of their
accumulated bad debt reserves. The effect of the 1996 Act on the Bank is
discussed below. Prior to the enactment of the 1996 Act, the Bank was
permitted to establish tax reserves for bad debts and to make annual
additions thereto, which additions, within specified formula limits, were
deducted in arriving at the Bank's taxable income. The Bank's deduction
with respect to "qualifying loans," which are generally loans secured by
certain interests in real property, could be computed using an amount based
on a six-year moving average of the Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8% of the Bank's taxable
income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve. The Bank's deduction with
respect to non-qualifying loans was required to be computed under the
Experience Method.
The 1996 Act. Under the 1996 Act, for its current and future taxable
years, as a "Small Bank" the Bank is permitted to make additions to its tax
bad debt reserves under the Experience Method based on total loans.
However, the Bank is required to recapture (i.e. take into income) over a
six year period the excess of the balance of its tax bad debt reserves as
of December 31, 1995 over the balance of such reserves as of the base year,
December 31, 1987, which approximated $152,000. The recapture was
suspended for 1996 and 1997 because the bank met certain residential loan
requirements; recapture period began in 1998. The Bank's base year reserve
will not be recaptured unless the reserve is used for purposes other than
for loan losses, such as in a distribution in liquidation or otherwise.
Accordingly, the Bank has not recorded a deferred tax liability of
approximately $495,000 relating to approximately $1,200,000 of cumulative
tax deductions generated prior to December 31, 1987.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to
have been made from the Bank's unrecaptured tax bad debt reserves
(including the balance of its reserves as of December 31, 1987) to the
extent thereof, and an amount based on the amount distributed (but not in
excess of the amount of such reserves) will be included in the Bank's
income. The term "non-dividend distributions" is defined as distributions
in excess of the Bank's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends
paid out of the Bank's current or accumulated earnings and profits will not
cause this pre-1988 reserve to be included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such distribution (but
not in excess of the amount of such reserves) would be includable in income
for federal income tax purposes, assuming a 35% federal corporate income
tax rate. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of
AMTI can be offset by net operating loss carryforwards. The adjustment to
AMTI based on book income will be an amount equal to 75% of the amount by
which a corporation's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for
net operating losses). In addition, for taxable years beginning after
December 31, 1986 and before January 1, 1996, an environmental tax of .12%
of the excess of AMTI (with certain modifications) over $2 million, is
imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the
AMT.
Dividends Received Deduction and Other Matters. The Company may
exclude from its income 100% of dividends received from the Bank as a
member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Company and the Bank
will not file a consolidated tax return, except that if the Company and the
Bank own more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be excluded.
State Taxation
Massachusetts Commonwealth Taxation. Prior to July, 1995, the Bank
was subject to an annual Massachusetts excise (income) tax equal to 12.54%
of its pre-tax income. In 1995, legislation was enacted to reduce the
Massachusetts bank excise (income) tax rate and to allow Massachusetts-
based financial institutions to apportion income earned in other states.
Further, this legislation expands the applicability of the tax to non-bank
entities and out-of-state financial institutions. The Massachusetts excise
tax rate for co-operative banks is currently 10.50% of federal taxable
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,
carry forwards and carrybacks of net operating losses are not allowed.
A financial institution or business corporation is generally entitled
to special tax treatment as a "security corporation," provided that: (a)
its activities are limited to buying, selling, dealing in or holding
securities on its own behalf and not as a broker; and, (b) it has applied
for, and received, classification as a "security corporation" by the
Commissioner of the Massachusetts DOR. A security corporation that is also
a bank holding company under the Code is subject to a tax equal to 0.33% of
its gross income. A security corporation that is not a bank holding
company under the Code is subject to a tax equal to 1.32% of its gross
income.
The Bank's subsidiary, MSC, was established solely for the purpose of
acquiring and holding investments which are permissible for banks to hold
under Massachusetts law. MSC is classified with the Massachusetts DOR as a
"security corporation" under Massachusetts law, qualifying it to take
advantage of the 1.32% income tax rate on Massachusetts securities
corporations.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempted from Delaware Corporate income
tax but is required to file an annual report with and pay an annual
franchise tax to the State of Delaware.
Executive Officers of the Registrant Who Are Not Directors
The following table sets forth certain information regarding the
current executive officers who are not also directors.
<TABLE>
<CAPTION>
Name Age (1) Position(s) Held
- ---- ------- ----------------
<S> <C> <C>
Anthony A. Paciulli 50 Vice President of the Company and
Senior Vice President of the Bank
Kenneth R. Bordewieck 45 Vice President of the Bank
<FN>
- -------------------
<F1> As of December 31, 1999.
</FN>
</TABLE>
Anthony A. Paciulli has been Senior Vice President of the Bank since
March 1994. From 1988 to 1994, Mr. Paciulli held several senior officer
positions (including vice president, loan officer, sales manager and
regional manager) with several different mortgage companies and financial
institutions, all of which were located in the greater Boston metropolitan
area.
Kenneth R. Bordewieck has been Vice President of the Bank since
August 1998. Since 1976, Mr. Bordewieck has held various positions with
several different financial institutions located in the greater Boston
metropolitan area.
ITEM 2. DESCRIPTION OF PROPERTY.
The Bank currently conducts its business through its main office
located in the Dorchester section of Boston, Massachusetts and two other
full-service banking offices and one loan origination center, all of which
are located in the greater Boston metropolitan area. In December 1999, the
Bank moved its administrative and back office functions to a new office in
Quincy, Massachusetts. This building is currently held by the Bank's
subsidiary limited liability company which is leased to the Bank. The
total building and equipment costs for the new office were $2.1 million and
other moving related costs totaled approximately $4,000. The Company
believes that the Bank's facilities are adequate to meet the then present
and immediately foreseeable needs of the Bank and the Company. It is the
opinion of management that all the properties are adequately covered by
insurance.
<TABLE>
<CAPTION>
Net Book Value
of Property
or Leasehold
Leased or Original Year Date of Lease Improvements
Location Owned Leased or Acquired Expiration at December 31, 1999
- -------- --------- ------------------ ------------- --------------------
(In thousands)
<S> <C> <C> <C> <C>
Main Office:
1442 Dorchester Avenue (2) (2) (2) 201
Boston, MA 02122
Banking Offices:
70 Quincy Ave (1) Owned 1999 - $2,149
Quincy, MA 02169
561 Adams Street Owned 1996 - 728
East Milton, MA 02186
Loan Origination Center:
607 North Avenue, D-12 Leased 1997 June 2000 0
Wakefield, MA 01880
Total $3,078
======
<FN>
- -------------------
<F1> The Bank moved into the property and began retail operations in
December of 1999.
<F2> This property is comprised of two adjacent parcels of land. The Bank
owns one of the parcels, which it obtained in 1908, and leases the
other, which lease began in June 1986. With respect to the leased
parcel, the Bank is currently in the second year of the second of
three five-year renewal options. The current option period will
expire in May 2003.
</FN>
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business.
Such routine legal proceedings, in the aggregate, are believed by
management to be immaterial to the financial condition and results of
operations of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Massachusetts Fincorp, Inc.'s common stock is traded over-the-counter
through the National Daily Quotation Service "Pink Sheet" published by the
National Quotation Bureau, Inc. The stock began trading on December 23,
1998. The high and low bid for the common stock for 1999 and 1998 by
quarter are detailed in the following table. The quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. Massachusetts Fincorp, Inc. has
approximately 329 holders of record as of December 31, 1999.
<TABLE>
<CAPTION>
For the quarters ended
------------------------------------------------------------------
12/31/1999 09/30/1999 06/30/1999 03/31/1999 12/31/1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
High bid $12.750 $13.625 $11.875 $10.875 $10.560
Low bid $ 9.125 $11.750 $ 8.125 $ 9.500 $10.000
</TABLE>
To date, the Company has not issued any cash dividends. Any
declarations or payments of dividends are subject to a determination by the
Company's Board of Directors, which takes into account the Company's
financial condition, results of operations, tax considerations, capital
requirements, industry standards, economic conditions and other factors,
including the regulatory restrictions which affect the payment of dividends
by the Bank to the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Form 10-K contains forward-looking statements within the meaning
of the federal securities laws. These statements are not historical facts,
rather the statements are based on the Company's current expectations
regarding its business strategies and their intended results and its future
performance. Forward-looking statements are preceded by terms such as
"expects," "believes," "anticipates," "intends" and similar expressions.
Forward-looking statements are not guarantees of future performance.
Numerous risks and uncertainties could cause or contribute to the Company's
actual results, performance and achievements to be materially different
from those expressed or implied by the forward-looking statements. Factors
that may cause or contribute to these differences include, without
limitation, general economic conditions, including changes in market
interest rates and changes in monetary and fiscal policies of the federal
government; legislative and regulatory changes; and other factors disclosed
periodically in the Company's filings with the Securities and Exchange
Commission.
Because of the risks and uncertainties inherent in forward-looking
statements, readers are cautioned not to place undue reliance on them,
whether included in this report or made elsewhere from time to time by the
Company or on its behalf. The Company assumes no obligation to update any
forward-looking statements.
General
The Company became operational on December 21, 1998 and, accordingly,
had no significant operations during 1998. The Company's results of
operations primarily depend on its investment of net conversion proceeds in
securities, interests on deposits and dividends received from the Bank.
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on the
Bank's interest-earning assets, such as loans and investments, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Bank also generates non-interest income through service
charges and other fees. The Bank's non-interest expenses primarily consist
of employee compensation and benefits, depreciation and repairs, data
processing fees, office building expenses and other operating expenses.
The Bank's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory agencies.
The Bank exceeded all of its regulatory capital requirements at December
31, 1999.
Management 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, however,
has begun to retain certain one-to-four family fixed-rate loans for its
portfolio, based on various factors, including its asset/liability position
and market interest rates. The Bank has also pursued a growth strategy to
broaden the Bank's lending and deposit base through the establishment of
two de novo branch offices in the Boston metropolitan area in 1996 and
1999. The Bank has used the opportunity of the additional space provided by
the new location in Quincy to consolidate operations. The Bank has closed
the loan origination center in Norwell, Massachusetts. The Bank has made
substantial infrastructure investments recently, including staffing,
offices and technology, to support future growth.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on
them.
Average Balance Sheet The following table sets forth certain
information relating to the Bank for the years ended December 31, 1999,
1998 and 1997. The average yields and costs are derived by dividing income
or expense by the average balance of interest-earning assets or interest-
bearing liabilities, respectively, for the periods shown and reflect
annualized yields and costs. Average balances are derived from average
monthly balances. The yields and costs include fees which are considered
adjustments to yields. Loans on non-accrual status are included in the
average balances of loans shown in the table. Interest earned on loans is
net of reserves for uncollected interest.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Federal funds sold and
short term investments $ 1,669 $ 60 3.59% $ 1,719 $ 93 5.41% $ 2,299 $ 126 5.48%
Securities 10,662 658 6.17% 7,251 445 6.14% 4,624 295 6.38%
Mortgage loans, net 64,622 5,185 8.02% 50,041 3,999 7.99% 40,507 3,342 8.25%
Other loans. 548 50 9.12% 708 72 10.17% 925 66 7.14%
----------------- ----------------- -----------------
Total interest earning asssets 77,501 5,953 7.68% 59,719 4,609 7.72% 48,355 3,829 7.92%
Noninterest-earning assets 7,149 3,553 2,625
------- ------- -------
Equity securities 2,070 116 5.60% 1,387 69 4.97% 368 27 7.34%
----------------- ----------------- -----------------
Total assets $86,720 $6,069 $64,659 $4,678 $51,348 $3,856
======= ------ ======= ------ ======= ------
Liabilities and Surplus:
Interest bearing liabilities:
Deposits:
Savings accounts $10,032 $ 197 1.96% $ 9,685 $ 191 1.97% $10,328 $ 244 2.36%
Money market accounts 266 6 2.26% 808 21 2.60% 1,079 28 2.59%
Now accounts 13,971 477 3.41% 11,963 488 4.08% 5,377 173 3.20%
Certificates of deposit 29,869 1,528 5.12% 26,585 1,481 5.57% 20,471 1,138 5.56%
----------------- ----------------- -----------------
Total deposits 54,138 2,208 4.08% 49,041 2,181 4.45% 37,255 1,583 4.25%
FHLB advances 14,542 798 5.49% 4,267 259 6.07% 6,402 373 5.83%
----------------- ----------------- -----------------
Total interest bearing
liabilities 68,680 3,006 4.38% 53,308 2,440 4.58% 43,657 1,956 4.48%
----------------- ----------------- -----------------
Noninterest -bearing demand
checking accounts 5,156 4,486 2,255
Noninterest-bearing liabilities 2,503 644 653
------- ------- -------
Total liabilities 76,339 58,438 46,565
Total surplus 10,381 5,487 4,783
------- ------- -------
Total liabilities and surplus $86,720 $63,925 $51,348
======= ======= =======
Net interest income $3,063 $2,238 $1,900
====== ====== ======
Net interest income/interest
rate spread 3.30% 3.14% 3.44%
====== ====== ======
Net interest margin as a percent
of interest-earning assets 3.95% 3.75% 3.93%
====== ====== ======
Ratio of interest-earning assets
to interest-bearing liabilities 112.84% 112.03% 110.76%
====== ====== ======
</TABLE>
Rate/Volume Analysis The following table presents the extent to
which changes in interest rates and changes in the volume of interest-
earning assets and interest-bearing liabilities have affected the Bank's
interest income and interest expense during the periods indicated.
Information is provided in each category with respect to: (i) changes
attributable to changes in volume (changes in volume multiplied by prior
rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Compared to Compared to
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------------------- ---------------------------
Increase(Decrease) Increase(Decrease)
Due to Due to
----------------- ------------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and short-term
investments $ (2) $ (30) $ (32) $ (31) $ (2) $ (33)
Investment securities 208 3 211 161 (11) 150
Mortgage loans, net 1,170 16 1,186 765 (108) 657
Other loans (13) (8) (21) (18) 24 6
Equity securities 40 7 47 53 (11) 42
---------------------------------------------------------------
Total interest-earning assets 1,403 (12) 1,391 930 (108) 822
---------------------------------------------------------------
Interest-bearing liabilities:
Savings accounts 7 (1) 6 (17) (36) (53)
Money market accounts (11) (4) (15) (7) - (7)
NOW accounts 75 (86) (11) 285 30 315
Certificates of deposit 174 (127) 47 341 2 343
FHLB advances 565 (26) 539 (129) 15 (114)
---------------------------------------------------------------
Total interest-bearing liabilities 810 (244) 566 473 11 484
---------------------------------------------------------------
Net change in net interest income $ 593 $ 232 $ 825 $ 457 $(119) $ 338
===============================================================
</TABLE>
Comparison of Financial Condition at December 31, 1999
and December 31, 1998
Total assets increased $24.7 million, or 34.6% from $71.6 million at
December 31, 1998 to $96.4 million at December 31, 1999, primarily due to a
$17.2 million increase in loans, as the result of continued strong
originations of one-four family mortgage loans, an increase in commercial
real estate and multi family loans and the Bank's determination to retain a
greater portion of loans originated. Management's determination to retain
a greater portion of loans originated was directly influenced by a change
in interest rates, which caused an increase in consumer demand for the
types of loans determined by management to be desirable to retain. The
increased percentage in portfolio loans orginated contributed to greater
net interest income, which management also believes will have a stabilizing
effect on net income in future periods. The Bank has demonstrated
consistent loan growth for the past four years in varying economic
environments. Loan growth for the one-year periods ending 1998 and 1999
were 24.6% and 43.9% respectively. The increase in total assets was also
the result of a $4.7 million increase in securities available for sale, due
to the purchase of a $5.0 million U.S. Government mortgage-backed security.
Banking premises and equipment increased $2.6 million, of which $2.2
million was attributable to the new building in Quincy which opened in
December 1999 which houses a new branch office and the Company's
administrative offices. In connection with the construction of the Quincy
property, management intends to consolidate its Norwell office with the new
administrative office. Return on average assets was .5% for 1999 as
compared to .1% for 1998.
Total liabilities increased $24.7 million, or 39.7% from $62.1
million at December 31,1998 to $86.8 million at December 31,1999. A $6.3
million, or 11.1% increase in deposits, as well as an $18.4 million or
437.1% increase in federal home loan bank borrowings primarily funded the
increase in total assets. The Bank's total deposits increased from $57.0
million at December 31, 1998 to $63.3 million at December 31, 1999,
primarily due to a $6.6 million increase in term certificates of deposit as
the result of a promotion of new certificates of deposit products.
Non-performing loans decreased $81,000, or 46.8%, from $173,000 at
December 31, 1998 to $92,000 at December 31, 1999. The decrease in non-
performing loans was the result of the complete repayment of one loan and
all other non-performing loans as of December 31, 1998 being brought to a
current status offset by the addition of one new commercial real estate
loan of $92,000 being placed on non-performing status.
Equity increased $119,000 from $9.5 million at December 31, 1998 to
$9.6 million at December 31, 1999, mainly as the result of $403,000 in net
income during 1999 which was partially offset with a decrease in
accumulated other comprehensive income. Return on average equity increased
to 3.9% in 1999 from 1.2% in 1998. Average equity to average assets also
increased from 9.4% in 1998 to 12.0% in 1999.
Comparison of Financial Condition at December 31, 1998
and December 31, 1997
The Bank's total assets increased $17.0 million, to $71.6 million at
December 31, 1998 from $54.6 million at December 31, 1997. The increase in
total assets was primarily attributed to increases in federal funds sold
and in the loan and securities portfolios. Federal funds increased $1.6
million, or 920.7% to $1.8 million at December 31, 1998 from $173,000 at
December 31, 1997. Loans and loans held for sale, net, increased $13.6
million, or 30.6% to $58.0 million at December 31, 1998 from $44.4 million
at December 31, 1997. The increase in loans resulted from the increase of
$6.9 million, or 18.3%, in fixed rate one-to-four family mortgage loans, a
$5.8 million, or 269.3% increase in advanced construction loans and a $3.2
million, or 98.9% increase in loans available for sale. The increase in
loans primarily reflects the opening of a new loan origination office in
Norwell, Massachusetts, an increase in the number of loan originators,
increased marketing efforts of the Bank to generate these types of loans as
well as a favorable interest rate environment. The securities portfolio
increased $2.7 million, or 45%, to $8.7 million at December 31, 1998 from
$6.0 million at December 31, 1997. This increase was primarily the result
of an increase in available for sale corporate bonds.
The increase in assets was funded by a $7.6 million increase in
interest bearing checking and demand deposit accounts and a $6.9 million
increase in certificate of deposit accounts. The Bank's total deposits
increased $14.3 million, or 34.0%, to $57.0 million at December 31, 1998
from $42.7 million at December 31, 1997. The increase in deposit accounts
resulted from the promotion of new competitively priced deposit products as
well as continued deposit growth from the branch office that opened in
1996.
Non-performing assets totaled $173,000 at December 31, 1998 as
compared to $115,000, an increase of $58,000. A portion of the non-
performing assets were part of a workout agreement and $79,000 of the
balance was paid off in January 1999.
Equity increased $4.5 million, or 90.6%, to $9.5 million at December
31, 1998 compared to $5.0 million at December 31, 1997. This increase in
equity was the result of net conversion proceeds of $4.9 million from the
conversion of the Bank from a mutual co-operative bank to a capital stock
co-operative bank. Net conversion proceeds were used to fund loan
production and reduce borrowings from FHLB-Boston, which decreased $2.2
million, or 34.4%, to $4.2 million at December 31, 1998 from $6.4 million
at December 31, 1997.
Comparison of Operating Results for the Years Ended
December 31, 1999 and 1998
General
Net income increased $332,000, or 471.6%, to $403,000 for the year
ended December 31, 1999 from $71,000 for the year ended December 31, 1998.
As part of the Bank's stock conversion in December 1998, the Bank incurred
a one time expense of $259,000 as the result of the formation of the
Massachusetts Co-operative Charitable Foundation. Excluding the effect of
such one time expense, net income would have totaled $253,000 for 1998.
The increase in net income was primarily the result of increased interest
income due to an increase in interest income from higher average balances
of interest earning assets and a $213,000 increase in interest on
investments. These increases in income were partially offset by a decrease
in non-interest income of $190,000, which was mainly attributed to lower
gains on the sale of loans for 1999, as the result of a decrease in loan
sales due to management's determination to portfolio more one-four family
loans, a $566,000 increase in interest expense as the result of increased
federal home loan bank borrowings and a $215,000 increase in non-interest
expense.
Interest Income
Interest income for the year ended December 31, 1999 increased $1.4
million, or 29.7%, to $6.1 million as compared to $4.7 million for the year
ended December 31, 1998. The increase in interest income was primarily due
to a $17.7 million increase in average earning assets from $60.7 million at
December 31, 1998 as compared to $78.4 million at December 31, 1999. This
increase in average earning assets was mainly attributed to the increase in
the average balance of loans, as the result of increased retention of
originated one-to-four family mortgage loans, and due to increases in the
origination of multi family and commercial real estate loans. Interest on
securities investments also increased $213,000 as the result of a $4.7
million increase in available for sale securities, due to the purchase of a
$5.0 million U.S. government agency mortgage-backed security.
Interest Expense
Interest expense for the year ended December 31, 1999 increased
$600,000, or 23.2%, to $3.0 million as compared to $2.4 million for the
year ended December 31, 1998. The increase was primarily due to a $15.3
million increase in average interest bearing liabilities, from $53.3
million at December 31, 1998 as compared to $68.7 million at December 31,
1999. The increase in average interest bearing liabilities was mainly
attributed to a $10.2 million increase in the average balance of Federal
Home Loan Bank borrowings, as well as a $3.3 million increase in average
certificates of deposits. The increase in certificates of deposits was the
result of the promotion of new competitively priced deposit products. This
increase was partially offset with a 20 basis point decrease in average
cost of funds, from 4.58% at December 31, 1998 as compared to 4.38% at
December 31, 1999. The increase in borrowings at a lower rate of interest
in 1999 contributed to the 20 basis point decrease in cost of funds. The
increases in borrowings and deposits were used primarily to fund loans and,
to a lesser extent, to purchase securities.
Net interest Income
Net interest income increased $900,000 from $2.2 million for the year
ended December 31, 1998 as compared to $3.1 million for the year ended
December 31, 1999. This increase was due to a combination of an increase
in average interest earning assets in excess of interest bearing
liabilities of $2.4 million, as well as a 19 basis point increase in the
interest rate spread from 3.10% to 3.29%.
Provision (Credit) for Loan Losses
The bank's provision for loan losses for the year ended December 31,
1999 decreased $106,000 to a credit balance of $19,000, as compared to
$87,000 for the year ended December 31, 1998. This decrease in loan loss
provision was mainly attributed to $89,000 in recoveries on previously
charged-off loans and a decrease in non-performing loans of $81,000, or
46.8%, to $92,000 for the year ended December 31, 1999 from $173,000 for
the year ended December 31, 1998 as the result of the previous years non-
performing loans either being repaid or being brought current and one new
commercial real estate loan of $92,000 was placed on non-performing status.
At December 31, 1999 and 1998, the allowance for loan losses was
$596,000 and $525,000, respectively, which represented 647.8% of
nonperforming loans and .79% of total loans at December 31, 1999 compared
to 303.5% of nonperforming loans and .90% of total loans at December
31,1998.
The Bank's management assesses the adequacy of the allowance for loan
losses based on known and inherent risks in the loan portfolio and upon
management's continuing analysis of the quality of the loan portfolio.
While management believes that, based on information currently available,
the Bank's allowance for loan losses is sufficient to cover probable losses
inherent in its loan portfolio at this time, no assurances can be given
that the Bank's level of allowance for loan losses will be sufficient to
cover loan losses incurred by the Bank or that future adjustments to the
allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used
by management to determine the current level of the allowance for loan
losses. Management may increase its level of allowance for loan losses as
a percentage of total loans and nonperforming loans if the level of multi-
family, construction or consumer lending as a percentage of its total loan
portfolio increases. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. These agencies may require the Bank to provide
additions to the allowance based on judgments different from management.
Non-Interest Income
Non-interest income decreased $190,000 to $543,000 for the year ended
December 31, 1999 from $733,000 for the year ended December 31, 1998. This
decrease in non-interest income was mainly attributed to a $123,000
decrease in gain on sale of loans. The decrease in gains on sold loans
resulted from managements determination to portfolio a greater portion of
its originated one-four family loans and as a result of an increase in
consumer demand for adjustable rate loans. The increased percentage in
portfolio loans originated contributed to greater net interest income which
management believes will have a stabilizing effect on net income in future
periods. Additionally the bank realized a $27,000 decrease in gain on sale
of securities available for sale, a $10,000 decrease in customer service
fees and $11,000 decrease in the Co-operative Central Bank Share Insurance
Fund special dividend. Miscellaneous income also decreased $19,000
resulting from the bank receiving $28,000 in October of 1998 for the
settlement of a legal action.
Non-Interest Expense
Non-interest expense increased $200,000, or 7.7%, to $3.0 million for
the year ended December 31, 1999 from $2.8 million for the year ended
December 31, 1998. This increase was primarily due to a $239,000 increase
in salaries and benefits as the result of addition to staff based on
growth, annual merit increases and increased benefits administration fees.
Occupancy and equipment increased $60,000 as the result of the opening of
our new Quincy Office, data processing increased $41,000 which was
partially attributed to a $21,000 one time expense related to the
conversion of our data servicer in connection with Y2K. Other general and
administrative expenses increased $135,000, of which $29,000 was related
to examinations and audits and $55,000 was attributed to legal fees, which
are related to the increased expense of being a public company. These
increases were partially offset with a $261,000 decrease in contributions
as the result of last year's $259,000 contribution relating to the funding
and formation of The Massachusetts Co-Operative Charitable Foundation.
Income Tax Expense
Income tax expense increased $194,000 to $224,000 for the year ended
December 31, 1999 as compared to $30,000 for the year ended December 31,
1998. This increase was primarily the result of a $527,000 increase in
pre-tax income. The effective tax rate for the year ended December 31,
1999 approximated the statutory rate of 34%. In 1998 the effective tax
rate was below the statutory rate due substantially to the dividend
received deduction being a larger percentage of taxable income. The bank
also utilized its security corporations to hold its investments, which
resulted in a lower state tax rate.
Comparison of Operating Results for the Years Ended
December 31, 1998 and 1997
General
Net income decreased $296,000, or 80.7% to $71,000 for the year ended
December 31, 1998 from $367,000 for the year ended December 31, 1997. The
decrease in net income was primarily attributed to non-interest expense
increasing $800,000, or 41.2% to $2.8 million for the year ended December
31, 1998 as compared to $2.0 million for the year ended December 31, 1997.
The increase in non-interest expense was primarily the result of addition
to staff based on growth and a one-time non-occurring expense due to the
formation of the Massachusetts Co-operative Charitable Foundation. Not
including these one-time expenses, net income would have been $253,000.
Interest Income
Interest income for the year ended December 31, 1998 increased
$800,000, or 21.3%, to $4.7 million as compared to $3.9 million for the
year ended December 31, 1997. The increase in interest income was
primarily the result of a $13.6 million increase in loans, due to increased
originations in fixed one-to-four family mortgage loans, construction loans
and mortgage loans held for sale, as well as, a $144,000 increase in
interest and dividend income on investments. The effect of higher average
balances in interest earning assets was offset, in part, by lower average
yield on interest earning assets. The average yield on interest earning
assets decreased 20 basis points to 7.7% during the year ended December 31,
1998 as compared to an average yield of 7.9% for the year ended December
31, 1997. The decline was caused by falling interest rates that stimulated
consumer mortgage refinancing activity.
Interest Expense
Interest expense for the year ended December 31, 1998 was $2.5
million compared to $2.0 million for the same period in 1997, an increase
of $500,000 or 25%. The increase reflects both an increase in average
interest bearing liabilities of $9.6 million and an increase in average
rates paid. The increase in average interest bearing liabilities was
primarily due to an increase in interest bearing checking accounts and term
certificates of deposit. Average interest bearing checking accounts
increased $6.6 million, or 122.2%, to $12.0 million for the year ended
December 31, 1998 as compared to $5.4 for year ended December 31, 1997.
Average term certificates of deposit increased $6.1 million, or 29.8%, to
$26.6 million for the year ended December 31, 1998 as compared to $20.5
million for the same period in 1997. The increase in interest bearing
checking accounts was primarily the result of the Bank's promotion of a
tiered interest bearing checking accounts for retail customers to attract
new deposit relationships. These increases were partially offset by a
lower expense on borrowed funds.
Net Interest Income
Net interest income increased $200,000, or 15.8%, to $2.2 million for
the year ended December 31, 1998 from $2.0 million for the same period in
1997. The increase was due to a combination of an increase in average
interest earning assets in excess of interest bearing liabilities of $7.4
million, offset by the effect of a 34 basis point decline in interest rate
spread which decreased to 3.10% from 3.44%.
Provision (Credit) for Loan Losses
The Bank's provision for loan losses increased $177,000 to $87,000
for the year ended December 31, 1998 compared to a credit of $90,000 for
the same period in 1997. The increase in the provision primarily reflected
the increase in the Bank's overall loan portfolio weighted by loan product
and management's ongoing review and analysis of the general loan loss
reserve. The allowance for loan losses as a percent of loans was 0.89% for
year ended December 31, 1998 as compared to 0.79% for the same period in
1997. Non-performing loans increased $58,000 to $173,000 for year ended
December 31, 1998 compared to $115,000 for year ended December 31, 1997.
The increase was attributable to a workout agreement under which $79,000 of
these loans were paid in January 1999. The workout agreement required no
additional reserve.
Non-Interest Income
Non-interest income increased $200,000, to $700,000, for the year
ended December 31, 1998 from $500,000 for the year ended December 31, 1997.
The increase was primarily attributed to a $211,000 increase in the gain on
sale of loans for the year ended December 31, 1998, due to the increased
originations of fixed rate loans originated for sale. Additionally, the
Bank recognized an increase of $65,000 in miscellaneous income.
Non-Interest Expense
Non-interest expense increased $800,000, or 40%, to $2.8 million for
the year ended December 31, 1998 from $2.0 million for the year ended
December 31, 1997. The increase was primarily due to an increase in
salaries and benefits of $300,000 of which $224,000 was the result of
addition to staff based on growth and $76,000 was the result of
discretionary payments to ESOP and bonuses. A $259,000 one time non-
recurring expense related to the funding of the Massachusetts Co-operative
Charitable Foundation and an additional $44,000 increase in advertising and
marketing costs as the result of expenses associated with the Bank's
promotional activities regarding its deposit products, contributed to the
increase in non-interest expense.
Income Tax Expense
Income tax expense decreased $107,000, or 78.1%, to $30,000 for the
year ended December 31, 1998 from $137,000 for the year ended December 31,
1997. This decrease was primarily due to the decrease of $400,000 in pre-
tax income. In 1998 the effective tax rate was below the statutory rate
due substantially to the dividend received deduction being a larger
percentage of taxable income. In 1997 the effective tax rate was below the
statutory rate due substantially to the utilization of previously reserved
capital loss carry forwards and tax credits. In 1998, the bank formed a
securities corporation for investments which resulted in a lower state tax
rate.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, principal and
interest payments on loans and proceeds from maturing securities and
borrowings from the FHLB-Boston. While maturities and scheduled
amortization of loans and securities are predictable sources of funds,
deposit outflows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of
primarily residential one-to four-family mortgage loans, multi-family and
commercial real estate loans, and, to a lesser extent, 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, maturing of
investment securities, deposit growth and the utilization of FHLB advances.
During the years ended December 31, 1999 and 1998, the Bank's loan
originations totaled $76.1 million, and $81.0 million, respectively. For
the years ended December 31, 1999 and 1998, the Bank's investments in U.S.
Government and agency obligations and corporate equity securities and debt
obligations totaled $12.6 million and $8.7 million, respectively. The Bank
experienced a net increase in total deposits of $6.3 million and $14.0
million for the years ended December 31, 1999 and 1998, respectively.
Deposit flows are affected by the overall level of interest rates, the
interest rates and products offered by the Bank and its local competitors
and other factors. The Bank closely monitors its liquidity position on a
daily basis. In the event the Bank should require funds beyond its ability
to generate them internally, additional sources of funds are available
through FHLB advances. At December 31, 1999, the Bank had $22.6 million of
outstanding FHLB borrowings and a borrowing capacity of $52.3 million.
Outstanding commitments for all loans totaled $5.1 million at
December 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 December 31, 1999 totaled $28.1 million. From December 31, 1998 to
December 31, 1999, the Bank experienced a 78.6% 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 December 31, 1999, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $7.7 million, or 12.3% of
adjusted assets, which is above the required level of $2.5 million, or
4.00%, and risk-based capital of $8.2 million, or 13.3% of adjusted assets,
which is above the required level of $5.0 million, or 8.00%.
The capital injection from the Conversion significantly increased
liquidity and capital resources. Over time, the initial level of liquidity
will be reduced as net proceeds are utilized for general corporate
purposes, including the funding of lending activities and the expansion of
facilities.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with GAAP, which generally require
the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations.
Unlike industrial companies, nearly all of the assets and liabilities of
the Bank are monetary in nature. As a result, interest rates have a
greater impact on the Bank's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement, which became effective for fiscal years
beginning after June 15, 1999, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. This
Statement must be adopted prospectively and retroactive application is not
permitted. It requires that an entity recognize all derivatives as either
assets or liabilities in its balance sheet and measure those instruments at
fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting
designation. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. The Company expects to adopt SFAS No.
133 on January 1, 2001 and does not believe the effect of adopting SFAS No.
133 will have any material effect on its consolidated financial position or
results of operations.
Year 2000 Matters
Throughout 1999 and 1998, the Company carried out a comprehensive
process to minimize the possibility of problems arising in data processing
and other date-sensitive systems, a problem known as the Year 2000 or Y2K
dilemma. The Company's efforts were monitored by its banking regulators.
The Company did not encounter any significant problems in connection with
processing of transactions subsequent to December 31, 1999.
Form of accountant letterhead
Report of Independent Certified Public Accountants
Board of Directors
Massachusetts Fincorp, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Massachusetts
Fincorp, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income and comprehensive income, changes
in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of Massachusetts Co-operative Bank
for the year ended December 31, 1997, were audited by other auditors whose
report dated March 6, 1998, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 1999 and 1998 consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Massachusetts Fincorp, Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the consolidated results
of their operations and their consolidated cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Boston, Massachusetts
January 27, 2000
INDEPENDENT AUDITORS' REPORT
The Finance Committee
Massachusetts Co-operative Bank
Quincy, Massachusetts
We have audited the accompanying statements of income and comprehensive
income, changes in surplus and cash flows for the year ended December 31,
1997 of Massachusetts Co-operative Bank. These financial statements are
the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows for the
year ended December 31, 1997 of Massachusetts Co-operative Bank in
conformity with generally accepted accounting principles.
/s/WOLF & COMPANY, P.C.
Boston, Massachusetts
March 6, 1998
ITEM 7. FINANCIAL STATEMENTS
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,956,175 $ 708,827
Federal funds sold 1,124,762 1,760,909
----------------------------
Total cash and cash equivalents 3,080,937 2,469,736
Securities available for sale 12,068,593 7,403,857
Securities held to maturity 523,851 1,308,286
Federal Home Loan Bank Stock, at cost 1,096,500 762,800
Mortgages loans held for sale 813,098 6,335,665
Loans 74,524,426 51,801,597
Less: allowance for loan losses (595,676) (524,924)
----------------------------
Loans, net 73,928,750 51,276,673
Banking premises and equipment, net 3,825,086 1,206,459
Accrued interest receivable 460,022 350,054
Due from Co-operative Central Bank 242,850 242,850
Other assets 371,469 276,740
----------------------------
$96,411,156 $71,633,120
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $63,299,964 $56,992,800
Federal Home Loan Bank borrowings 22,616,835 4,210,889
Mortgagor's escrow accounts 439,155 292,944
Accrued expenses and other liabilities 433,229 633,277
----------------------------
Total liabilities 86,789,183 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 5,129,472 4,885,077
Unallocated ESOP shares (349,104) (392,742)
Unearned stock awards (255,236) --
Retained earnings 5,406,346 5,003,345
Accumulated other comprehensive income (314,960) 2,075
Total Shareholders' equity 9,621,973 9,503,210
----------------------------
$96,411,156 $71,633,120
============================
</TABLE>
The accompanying notes are an intregral part of these consolidated
financial statements.
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $5,234,966 $4,070,807 $3,359,390
Interest on investments 658,117 445,330 311,261
Dividends on investments 115,654 69,222 59,379
Interest on short-term investments -- 20,367 81,666
Interest on Federal funds sold 60,479 72,704 44,585
------------------------------------------
Total interest and dividend income 6,069,216 4,678,430 3,856,281
------------------------------------------
Interest expense:
Interest on deposit accounts 2,207,757 2,181,351 1,583,437
Interest on borrowed funds 798,357 259,189 372,583
------------------------------------------
Total interest expense 3,006,114 2,440,540 1,956,020
------------------------------------------
Net interest income 3,063,102 2,237,890 1,900,261
Provision for loan lossses (18,810) 87,413 (90,000)
------------------------------------------
Net interest income, after provision for
loan losses 3,081,912 2,150,477 1,990,261
------------------------------------------
Non-interest income:
Customer service fees 145,529 155,275 176,794
Loan fees and gain on sale of loans and
loan servicing rights 299,237 422,539 211,724
Net gain on sales of securities available
for sale 8,616 35,446 42,439
Co-operative Central Bank Share Insurance
Fund special dividend 24,600 36,075 34,816
Miscellaneous 64,887 83,557 19,316
------------------------------------------
Total non-interest income 542,869 732,892 485,089
------------------------------------------
Non-interest expense:
Salaries and employee benefits 1,674,385 1,435,175 1,115,585
Occupancy and equipment 380,803 320,715 286,250
Data processing 189,977 148,595 135,727
Forclosed real estate, net -- -- (24,991)
Contributions 7,653 268,436 6,475
Other general and administrative 744,966 610,222 451,770
------------------------------------------
Total non-interest expense 2,997,784 2,783,143 1,970,816
------------------------------------------
Income before income tax provision 626,997 100,226 504,534
Income tax provision 223,996 29,719 137,000
------------------------------------------
Net income $ 403,001 $ 70,507 $ 367,534
==========================================
Other comprehensive income, net of tax:
Unrealized gains (loss) on securities:
Unrealized holding gains (loss) arising
during the period (310,969) (26,651) 49,842
Less: reclassification adjustment for (gains)
included in net income (6,066) (24,954) (25,463)
------------------------------------------
Other comprehensive income (loss), net of tax (317,035) (51,605) 24,379
------------------------------------------
Comprehensive income $ 85,966 $ 18,902 $ 391,913
==========================================
Basic and diluted earnings per share $ 0.79 NM NM
Weighted average common shares outstanding
--basic and diluted 508,389 NM NM
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Additional Unallocated Unearned Other
Common Paid-in Retained ESOP Stock Comprehensive
Stock Capital Earnings Shares Awards Income(Loss) Total
------ ---------- -------- ----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ -- $ -- $4,565,304 $ -- $ -- $ 29,301 $4,594,605
Net income for the year ended
December 31, 1997 -- -- 367,534 -- -- -- 367,534
Other comprehensive income, net of tax -- -- -- -- -- 24,379 24,379
---------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 4,932,838 -- -- 53,680 4,986,518
Stock issued pursant to initial
common stock offering 4,759 4,753,921 -- -- -- -- 4,758,680
Issuance of 25,975 shares of
common stock to the Massachusetts
Charitable Foundation 260 259,490 -- -- -- -- 259,750
Common Stock accquired by ESOP 436 435,944 -- (436,380) -- -- --
Allocation of ESOP shares -- -- -- 43,638 -- -- 43,638
Expenses incurred for initial public
offering -- (564,278) -- -- -- -- (564,278)
Net income for the year ended
December 31, 1998 -- -- 70,507 -- -- -- 70,507
Other comprehensive income, net of tax -- -- -- -- -- (51,605) (51,605)
---------------------------------------------------------------------------------------
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 -- (22,360) -- -- -- -- (22,360)
Unearned stock awards (21,815 shares -- 261,780 -- -- (261,780) -- --
Stock awards amortization -- -- -- -- 6,544 -- 6,544
Allocation of ESOP shares -- 4,975 -- 43,638 -- -- 48,613
Net income for the year ended
December 31, 1999 -- -- 403,001 -- -- -- 403,001
Other comprehensive income, net of tax -- -- -- -- -- (317,035) (317,035)
---------------------------------------------------------------------------------------
Balance at December 31, 1999 $5,455 $5,129,472 $5,406,346 $(349,104) $(255,236) $(314,960) $9,621,973
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flow activities:
Net income $ 403,001 $ 70,507 $ 367,534
Adjustment to reconcile net income to net cash
(used)provided by operating activities
Provision (credit) for loan losses (18,810) 87,413 (90,000)
ESOP compensation expense. 48,613 - -
Stock awards expense. 6,544 - -
Depreciation and amortization 173,690 133,847 139,357
Net gain on sales of securities available for sale (8,616) (35,446) (42,439)
Net gain on sale of foreclosed real estate - - (41,366)
Loans originated for sale (26,141,543) (45,782,028) (23,307,569)
Principal balance on loans sold 31,664,110 45,877,138 21,520,021
Amortization of deferred loan fees (86,185) (36,127) (21,244)
Amortization of investment securities, net of accretion 36,821 27,547 13,977
Increase in accrued interest receivable (109,968) (27,798) (35,384)
Increase in other assets 11,271 (120,191) (11,116)
Deferred tax provision (benefit) 124,000 (102,000) (34,000)
Increase (decrease) in accrued expenses and other
liabilities (200,048) (356,123) (76,607)
------------------------------------------------
Net cash (used) provided by operating activities 5,902,880 (263,261) (1,618,836)
------------------------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (7,256,972) (7,452,433) (1,307,210)
Purchase of securities held to maturity - (860,041) (3,989,706)
Proceeds from maturities of securities available for sale - 500,000 2,077,469
Proceeds from maturities of securities held to maturity 770,000 1,504,749 1,000,938
Proceeds from sales and calls of securities available
for sale 1,744,817 2,480,076 1,048,085
Proceeds from calls of securities held to maturity - 1,000,000 -
Purchase of Federal Home Loan Bank stock (333,700) - -
Principal payments received on mortgage-backed and
asset backed securities 286,614 - 94,910
Loan (originations)/ principal payments, net (22,547,082) (6,941,651) (2,487,633)
Proceeds from sales of foreclosed real estate - - 581,330
Purchase of banking premises and (2,792,317) (146,215) (57,549)
------------------------------------------------
Net cash used by investing activities (30,128,640) (9,915,515) (3,039,366)
------------------------------------------------
</TABLE>
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONCLUDED
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from sale of stock, net expenses - 4,890,532 -
Net increase in deposits 6,307,164 14,325,058 8,793,273
Net increase in Federal Home Loan Bank
advances with maturities less than three months 68,000 619,000 837,000
Federal Home Loan Bank advances with maturities
in excess of three months 51,027,563 1,592,483 2,500,000
Repayment of Federal Home Loan Bank advances
with maturities in excess of three months (32,689,617) (10,241,818) (8,506,559)
Net increase (decrease) in mortgagor's escrow accounts. 146,211 (29,576) (86,293)
IPO expenses (22,360) - -
------------------------------------------------
Net cash provided by financing activities 24,836,961 11,155,679 3,537,421
------------------------------------------------
Net change in cash and cash equivalents 611,201 976,903 (1,120,781)
Cash and cash equivalents at beginning of year 2,469,736 1,492,833 2,613,614
------------------------------------------------
Cash and cash equivalents at end of year $ 3,080,937 $ 2,469,736 $ 1,492,833
================================================
Supplementary Information
Interest paid on deposit accounts $ 2,207,757 $ 2,181,351 $ 1,583,437
Interest paid on borrowed funds 711,170 256,721 409,133
Income tax payments (refunds), net 112,500 153,542 91,269
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Conversion to Stock Form of Ownership
Massachusetts Fincorp, Inc. (the "Company") was incorporated under Delaware
law on July 10, 1998 for the purpose of acquiring the stock of
Massachusetts Co-operative Bank (the "Bank") upon the Bank's conversion
from a mutual co-operative bank to a stock Massachusetts-chartered co-
operative Bank (the "Conversion") on December 21, 1998. Prior to that date
the company had minimal assets and liabilities. The Company also has an
ESOP funding subsidiary, MCB Funding.
The Bank is a community-oriented co-operative bank organized in 1908 as The
Massachusetts Co-operative Bank. The Bank's principal business consists of
accepting deposits from the general public in the areas surrounding its
three full-service banking offices and generating mortgage loans secured by
one-to-four family residences and multi-family and commercial real estate.
The bank also originates fixed rate residential mortgage loans for sale on
the secondary market. The Bank operates through three full-service banking
offices and one loan origination office located in the greater Boston
metropolitan area.
In connection with the conversion, the Company established a charitable
foundation ("Foundation") with a contribution of 5% of the common stock of
the company sold in the conversion. The Foundation will be dedicated to
charitable purposes within the community in which the Bank maintained a
banking office at the time of the conversion, including community
development activities.
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of Massachusetts
Fincorp, Inc., and its wholly owned subsidiaries, Massachusetts Co-
operative Bank and MCB Funding. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the
balance sheet and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan
losses, the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans and the deferred tax asset
valuation reserve.
Reclassifications
Certain amounts in the prior consolidated financial statements have been
reclassified to conform to the current presentation.
Cash and Cash Equivalents
Cash and cash equivalents include amounts due from banks and Federal funds
sold.
Securities
Securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and reflected at amortized
cost. Securities classified as "available for sale" are reflected at fair
value, with unrealized gains and losses excluded from earnings and reported
in determining comprehensive income and accumulated other comprehensive
income/(loss) as a component of stockholders equity, net of tax effects.
Federal Home Loan Bank stock is reflected at cost.
Purchase premiums and discounts are recognized in interest income using a
method that approximates the interest method over the terms of the
investments. Declines in the value of held to maturity and available for
sale securities that are deemed to be other than temporary are reflected in
earnings when identified. Gains and losses on the sale of securities are
recorded on the trade date and determined using the specific identification
method.
Mortgage Loans Held for Sale
Mortgage loans originated for sale are carried at the lower of cost or
aggregate fair value. Changes in valuation are charged against gain or loss
on sale of mortgage loans. Gains or losses on sale of mortgage loans are
recognized at the time of sale.
Loans
The loan portfolio consists of mortgage and other loans to the Company's
customers located primarily in eastern Massachusetts. The ability of the
Company's debtors to honor their contracts is dependent upon the economy in
general and the real estate and construction economic sectors.
Loans are reported at the amount of unpaid principal less net deferred loan
fees, unadvanced loan funds, and the allowance for loan losses.
Interest on loans is included in income as earned based on rates applied to
the principal amounts outstanding. Interest is not accrued on loans that
are ninety days or more past due unless the loan is well secured and in the
process of collection. Interest income previously accrued on such loans is
reversed against current period interest income. Interest income on all
non-accrual loans is recognized only to the extent of interest payments
received.
Loan origination and commitment fees and certain direct loan origination
costs, applicable to mortgage loans, are deferred and the net amount is
amortized to interest income over the contractual lives of the loans by the
interest method. Fees and costs applicable to other loans are not material
and are recognized in income as received or incurred.
Allowance for Loan Losses
The allowance for loan losses is established by a provision for loan losses
charged to earnings and is maintained at a level considered adequate by
management to provide for reasonably foreseeable loan losses. Loan losses
are charged against the allowance when management believes the
collectibility of the loan is unlikely. Subsequent recoveries, if any, are
credited to the allowance.
The allowance 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 known and inherent risks in the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant change. Ultimately, losses
may vary from current estimates and future additions to the allowance may
be necessary. Additionally, regulatory agencies review the allowance for
loan losses as part of their examination process. Such agencies may require
the recognition of additions to the allowance based on judgements, which
may be different from those of management.
A loan is considered impaired if based on current information and events,
it is probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis by the fair value of the collateral.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual loans held for sale and consumer loans for impairment
disclosures.
Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and
property which the Company has taken physical possession of without formal
foreclosure proceedings. Foreclosed real estate is initially recorded at
fair value at the date of acquisition. Costs relating to the development
and improvement of property are capitalized, whereas costs relating to
holding property are expensed.
Management periodically performs valuations, and an allowance for losses is
established through a charge to earnings if the carrying value of a
property exceeds its fair value less estimated costs to sell.
Banking Premises and Equipment
Land is carried at cost. Buildings, 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 term of the lease if shorter. Estimated useful lives of bank
buildings are 10-40 years and equipment is 3-10 years.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for betterments are capitalized
and depreciated.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
accordingly through the provision for income taxes. The Bank's base amount
of its Federal income tax reserve for loan losses 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 in excess
of the tax reserve over the base is a temporary difference with allowable
recognition of a related deferred tax asset, if it is deemed realizable.
Employee Benefit Plans
The Company has a Multi-employer defined benefit plan and a defined
contribution plan covering substantially all employees. It is the Company's
policy to fund pension plan costs in the year of accrual. The Company has
an Employee Stock Ownership Plan (ESOP), covering eligible employees as
defined by the ESOP. The Company records compensation expense in an amount
equal to the fair value of shares committed to be released from the ESOP to
employees. The Company sponsors a Supplemental Executive Retirement Plan
(SERP). The SERP is a nonqualified deferred compensation plan designed to
make up lost ESOP benefits to designated participants.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", establishes a fair
value based method of accounting for stock-based compensation arrangements
with employees, rather than the intrinsic value based method that is
contained ion Accounting Principles Board Opinion No. 25 ("Opinion 25").
However, SFAS No. 123 did not require an entity to adopt the new fair value
based method for purposes of preparing its basic financial statements.
Entities are allowed (1) to continue to use the intrinsic value based
method under Opinion 25 or (2) to adopt the SFAS No. 123 fair value based
method. SFAS No. 123 applies to all transactions in which an entity
acquires goods or services by issuing equity instruments or by incurring
liabilities where the payment amounts are based on the entity's common
stock price, except for employee stock ownership plans. For entities not
adopting the SFAS No. 123 fair value based method, SFAS No. 123 requires
the entity to display in the footnotes to the financial statements proforma
net earnings and earnings per share information as if the fair value based
method had been adopted. The Company accounts for stock-based compensation
under the intrinsic value based method under Opinion 25, as allowed by SFAS
No. 123, and includes presentation of the required proforma disclosures in
the notes to the consolidated financial statements.
Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding for the period. ESOP
shares committed to be released are considered outstanding while
unallocated ESOP shares are not considered outstanding (see Note J).
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company. Options to purchase 51,537
shares of common stock outstanding at December 31, 1999 were not included
in the computation of common shares outstanding for purposes of computing
diluted earnings per share because the effect would have been anti-
dilutive.
Other Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for reporting comprehensive income and its
components (revenues, expenses, gains and losses). Components of
comprehensive income are net earnings and all other all other non-owner
changes in equity. SFAS No. 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income (loss) separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company's accumulated other
comprehensive income (loss) included in stockholders' equity is comprised
exclusively of net unrealized gains (losses) on securities available for
sale, net of related tax effects.
Segment Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for the
Company's 1998 financial statements. This statement establishes standards
for reporting information about operating segments. An operating segment is
defined as a component of a business for which separate financial
information is available that is regularly evaluated by the chief operating
decision maker in deciding how to allocate resources and evaluate
performance. The Company has determined that its business is comprised of a
single operating segment and that SFAS 131 has no material impact on its
financial statements.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement established accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities on its balance sheet and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting designation. The
Company expects to adopt this Statement effective January 1, 2001. Through
December 31, 1999 the Company's use of derivatives has not been material.
NOTE B - SECURITIES
The amortized cost and estimated fair value of securities, with gross
unrealized gains and losses, follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities Available for Sale
Debt securities:
U.S. Government and Federal agency $ 898,550 $ - $ (24,204) $ 874,346
Corporate 4,572,878 - (87,034) 4,485,844
Mortgage-backed 5,828,683 16,680 (248,078) 5,597,285
---------------------------------------------------------
Total debt securitites 11,300,111 16,680 (359,316) 10,957,475
Marketable equity securities 1,311,938 27,548 (228,368) 1,111,118
---------------------------------------------------------
Total securities available for sale $12,612,049 $ 44,228 $(587,684) $12,068,593
=========================================================
Securitites Held to Maturity
U.S. Government and Federal agency $ - $ - $ - $ -
Corporate 523,851 - (10,311) 513,540
---------------------------------------------------------
Total securities held to maturity $ 523,851 $ - $ (10,311) $ 513,540
=========================================================
December 31, 1998
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities Available for Sale
Debt securities:
U.S. Government and Federal agency $ 1,842,629 $ 18,685 $ - $ 1,861,314
Corporate 3,556,798 702 (63,284) 3,494,216
Mortgage-backed 988,164 38,399 - 1,026,563
---------------------------------------------------------
Total debt securitites 6,387,591 57,786 (63,284) 6,382,093
Marketable equity securities 1,012,688 47,303 (38,227) 1,021,764
---------------------------------------------------------
Total securities available for sale $ 7,400,279 $105,089 $(101,511) $ 7,403,857
=========================================================
Securitites Held to Maturity
U.S. Government and Federal agency $ - $ - $ - $ -
Corporate 1,308,286 5,402 (48) 1,313,640
---------------------------------------------------------
Total securities held to maturity $ 1,308,286 $ 5,402 $ (48) $ 1,313,640
=========================================================
</TABLE>
The amortized cost and estimated fair value of debt securities by
contractual maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------
Available for Sale Held to Maturity
---------------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- --------- --------
<S> <C> <C> <C> <C>
Within 1 year $ 1,187,386 $ 1,179,113 $ - $ -
Over 1 year through 5 years 1,455,556 1,431,444 523,851 513,450
After 5 years through 10 years 398,550 387,394 - -
After 10 years 2,429,936 2,362,239 - -
--------------------------------------------------------
5,471,428 5,360,190 523,851 513,450
Mortgage-backed securities 5,828,683 5,597,285 - -
--------------------------------------------------------
Total Securities $11,300,111 $10,957,475 $523,851 $513,450
========================================================
</TABLE>
Sales and calls of securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds from sales and calls $1,744,817 $4,756,639 $1,048,085
Gross gains from sales and calls 8,616 75,733 67,259
Gross losses from sales and calls - 40,288 24,820
</TABLE>
As a member of the Federal Home Loan Bank of Boston ("FHLBB") the Bank is
required to invest in $100 par value stock of the FHLBB in an amount equal
to 1% of its outstanding loans secured by residential housing, or 1% of 30%
of total assets, or 5% of its outstanding advances from the FHLBB,
whichever is higher. When such stock is redeemed, the Bank would receive
from the FHLBB an amount equal to the par value of the stock. As of
December 31, 1999 and 1998 the bank had investments in FHLBB stock of
$1,096,500 and $762,800 respectively. Such investment is reflected
separately in the Consolidated Balance Sheets.
NOTE C - LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Real estate mortgage loans:
Adjustable rate $43,315,837 $27,328,448
Fixed rate 22,338,500 22,382,582
Construction loans 11,787,987 11,079,041
Equity lines of credit 260,139 403,994
----------------------------
77,702,463 61,194,065
Less: Net deferred loan fees 35,547 (145,973)
Unadvanced loan funds (2,674,271) (3,068,151)
----------------------------
Net real estate mortgage loans 75,063,739 57,979,941
----------------------------
Other loans:
Personal 208,672 82,752
Unsecured 23,712 36,447
Collateral 41,401 38,122
----------------------------
Total other loans 273,785 157,321
----------------------------
Toal loans 75,337,524 58,137,262
Less: allowance for loan losses (595,676) (524,924)
mortgage loans held for sale (813,098) (6,335,665)
----------------------------
Loans, net $73,928,750 $51,276,673
============================
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal of mortgage loans
serviced for others was $3,716,965 and $3,761,875 at December 31, 1999 and
1998, respectively. All loans serviced for others were sold without
recourse provisions.
An analysis of the allowance for loan losses for the years indicated
follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $524,924 $349,404 $322,497
Provision (credit) for loan losses (18,810) 87,413 (90,000)
Recoveries 89,775 89,121 127,830
Loans charged-off (213) (1,014) (10,923)
------------------------------------
Balance at end of year $595,676 $524,924 $349,404
====================================
</TABLE>
At December 31, 1999 and 1998, the recorded investment in impaired loans
totaled $540,408 and $355,870 respectively, for which there was no
valuation allowance.
No additional funds are committed to be advanced in connection with
impaired loans.
For the years ended December 31, 1999, 1998, and 1997 the average recorded
investment in impaired loans amounted to $535,352, $214,890, and $182,896,
respectively. Interest income recognized on impaired loans was $57,298,
$19,978, and $4,912 for the years ended December 31, 1999, 1998 and 1997,
respectively. Note that all impaired loans are real estate mortgages.
Non-accrual loans totaled $91,729 and $172,736 at December 31, 1999 and
1998, respectively. If interest payments on all non-accrual loans for the
years ended December 31, 1999, 1998 and 1997 had been made in accordance
with original loan agreements, interest income of approximately $3,000,
$8,000 and $9,000 would have been recognized on loans compared to interest
income actually recognized of approximately $0, $0, and $8,000,
respectively.
NOTE D - FORECLOSED REAL ESTATE
Foreclosed real estate expenses (income) include the following:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1999 1998 1997
---- ---- --------
<S> <C> <C> <C>
Gain on sale of foreclosed real estate, net $ - $ - $(41,366)
Operating expenses, net of rental income - - 16,375
--------------------------
Net expense (recovery) from foreclosed real estate $ - $ - $(24,991)
==========================
</TABLE>
NOTE E - BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises, leasehold improvements and equipment and their estimated
useful lives is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------- Estimated
1999 1998 Useful Lives
---------- ---------- ------------
<S> <C> <C> <C>
Banking Premises:
Land $ 867,374 $ 170,000
Building and leasehold improvements 2,502,143 1,030,073 10 - 40 years
Equipment 1,430,824 807,951 3 - 10 years
--------------------------
4,800,341 2,008,024
Less: accumulated depreciation
and amortization (975,255) (801,565)
--------------------------
Net banking premises $3,825,086 $1,206,459
==========================
</TABLE>
Total depreciation and amortization expense amounted to $173,690, $133,847
and $139,357 for the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE F - DEPOSITS
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Demand $ 4,014,324 $ 4,100,588
NOW 14,315,846 13,815,457
Money market accounts 90,891 752,167
Regular and other savings 9,690,659 9,700,906
----------------------------
Total non-certificate accounts 28,111,720 28,369,118
----------------------------
Term certificates of $100,000 or more 11,717,423 8,554,978
Term certificates less than $100,000 23,470,821 20,068,704
----------------------------
Total term certificates 35,188,244 28,623,682
----------------------------
Total deposits $63,299,964 $56,992,800
============================
</TABLE>
Interest expense on deposit balances is summarized as follows.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Regular and other savings $ 196,951 $ 191,062 $ 244,032
NOW 476,758 488,038 173,104
Money market accounts 6,433 21,175 27,864
Term certificates 1,527,615 1,481,076 1,138,437
------------------------------------------
$2,207,757 $2,181,351 $1,583,437
==========================================
</TABLE>
A summary of term certificates by maturity is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1999 1998
----------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Within 1 year $28,490,759 5.1% $24,520,449 5.5%
Over 1 year to 2 years 6,584,863 5.6% 3,799,189 5.3%
Over 2 years to 3 years 46,241 5.2% 216,173 5.2%
Over 3 years to 4 years. 66,381 4.8% 24,492 5.7%
Over 4 years - - 63,379 4.8%
----------- -----------
Total Term Certificates $35,188,244 5.2% $28,623,682 5.5%
=========== ===========
</TABLE>
The Federal Reserve Bank requires that the Bank maintain average reserve
balances. The average amount of these reserve balances for the year ended
December 31, 1999 was approximately $544,000.
NOTE G - FEDERAL HOME LOAN BANK BORROWINGS
A summary of borrowed funds consisting of advances from the Federal Home
Loan Bank of Boston, by maturity, is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1999 1998
----------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Within 1 year $14,000,000 5.63% $2,000,000 5.56%
Over 1 year to 3 years 2,345,045 6.69% 1,000,000 8.11%
Over 3 years to 5 years - - 500,000 5.60%
Over 5 years 5,584,790 5.09% 91,889 4.00%
Overnight line of credit 687,000 5.29% 619,000 5.40%
----------- ----------
Total borrowings $22,616,835 $4,210,889
=========== ==========
</TABLE>
All borrowings from the Federal Home Loan Bank of Boston are secured by a
blanket lien on qualified collateral, defined principally as 75% of the
carrying value of first mortgage loans on owner-occupied residential
property and 90% of the market value of U.S. Government and Federal agency
securities. Borrowings under the variable rate overnight line of credit are
limited to $4,300,000 as of December 31, 1999 and 1998.
NOTE H - INCOME TAXES
Allocation of Federal and state income taxes between current and deferred
portions, is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Current tax provision:
Federal $ 83,000 $ 105,000 $116,000
State 17,000 27,000 55,000
-------------------------------------
100,000 132,000 171,000
-------------------------------------
Deferred tax provision (benefit):
Federal 121,000 (82,000) 61,000
State 13,000 (20,000) -
Change in valuation reserve (10,000) - (95,000)
-------------------------------------
124,000 (102,000) (34,000)
-------------------------------------
$224,000 $ 30,000 $137,000
=====================================
</TABLE>
The reasons for the differences between the effective tax rates and the
statutory Federal income tax rate are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax provision at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of Federal tax benefit 2.9 4.9 7.2
Change in valuation reserve. (1.6) - (7.4)
Dividend received deduction. (2.1) (11.0) (0.5)
Tax credits - - (11.3)
Other, net 2.5 1.8 5.2
--------------------------
Effective tax rates 35.7% 29.7% 27.2%
==========================
</TABLE>
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax asset:
Allowance for loan losses. $ 29,000 $168,000
Net unrealized loss on securities available for sale. 223,000 -
Depreciation. - 6,000
Net deferred loan fees. - 8,000
Other tax loss carryovers. 99,000 110,000
----------------------
351,000 292,000
Valuation reserve. (99,000) (109,000)
----------------------
Total deferred tax asset. 252,000 183,000
Deferred tax liability:
Environmental expenditures. (67,000) -
Net deferred loan costs. (27,000) -
Depreciation. (3,000) -
Net unrealized gain on securities available for sale - (1,000)
Other. (7,000) (3,000)
----------------------
Total deferred tax liability. (104,000) (4,000)
Net deferred tax asset $148,000 $179,000
======================
</TABLE>
The valuation reserve decreased by $10,000 and by $122,000 for the years
ended December 31, 1999, and 1997, respectively. The decreases were the
result of the utilization of previously unrecorded tax benefits that were
used to offset current year's taxable income. In addition, included in the
1997 decrease is a $27,000 benefit that was the result of the expiration of
capital loss carry forwards.
The Federal income tax reserve for loan losses at the Bank's base year
amounted to approximately $1,208,000. 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 it is
used. As the Company intends to use the reserve only to absorb loan losses,
a deferred income tax liability of approximately $495,000 has not been
provided.
For the years ended December 31, 1999, 1998, and 1997, the tax expense
(benefit) allocated to the components of comprehensive income amounted to
$(228,498), $(12,542), and $49,792, respectively, for unrealized holding
gains arising during the period and $2,550, $10,492, and $(16,976),
respectively, for the reclassification adjustment for gains (losses)
realized in net income.
During 1999, certain amounts accrued in prior years as current tax
liability have been reclassified as deferred taxes. This reclassification
has no effect on net tax expense for any period shown.
NOTE I - MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company and 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 Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital
guidelines that involve quantitative measures of its 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.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set
forth in the following tables) of total and Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1999
and 1998, that the Company met all capital adequacy requirements to which
they are subject.
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, it must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the following tables. There are no conditions or
events since the notification that management believes have changed the
Bank's category. The Company and Bank's actual capital amounts and ratios
as of December 31, 1999 and 1998 are also presented in the tables.
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under
Minumum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Total Capital to Risk
Weighted Assets
Bank. $ 8,245 13.3% $4,972 >= 8% $6,215 >= 10%
Consolidated. $10,533 16.9% $4,972 >= 8% NA
Tier 1 Capital to Risk
Weighted Assets
Bank $ 7,650 12.3% $2,486 >= 4% $3,729 >= 6%
Consolidated. $ 9,937 7.9% $2,486 >= 4% NA
Tier 1 Capital to
Average Assets
Bank. $ 7,650 7.9% $3,896 >= 4% $4,870 >= 5%
Consolidated $ 9,937 10.0% $3,962 >= 4% NA
December 31, 1998
Total Capital to Risk
Weighted Assets
Bank. $ 8,019 17.0% $3,774 >= 8% $4,717 >= 10%
Consolidated $10,026 21.7% $3,774 >= 8% NA
Tier 1 Capital to Risk
Weighted Assets
Bank $ 7,494 15.9% $1,887 >= 4% $2,830 >= 6%
Consolidated $ 9,501 20.5% $1,887 >= 4% NA
Tier 1 Capital to
Average Assets
Bank. $ 7,494 11.7% $2,564 >= 4% $3,205 >= 5%
Consolidated. $ 9,501 14.8% $2,564 >= 4% NA
</TABLE>
NOTE J - EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company provides pension benefits for its eligible employees through
membership in the Co-operative Bank's Employees Retirement Association
defined benefit pension plan. Each full time employee reaching the age of
21 and having completed six months of service automatically becomes a
participant in the retirement plan. Part-time employees must complete 1,000
hours of service in one consecutive twelve-month period beginning with such
employee's date of employment to automatically become a participant in the
retirement plan. Participants become fully vested when credited with five
years of service measured from their date of participation.
The plan is a multiemployer plan whereby the contributions by each Company
are not restricted to provide benefits for employees of the contributing
Company. Total pension expense amounted to $111,551, $136,360 and $62,041
for the years ended December 31, 1999,1998,and 1997, respectively.
In addition to the defined benefit plan, the Company adopted a Section
401(k) plan that provides for voluntary contributions by participating
employees ranging from one percent to twelve percent of their compensation,
subject to certain limitations. The Company matched the employee's
voluntary contribution up to five percent of their compensation during 1998
and 1997 and made no contributions in 1999. Contributions made by the
Company amounted to $52,165 and $34,754 for the years ended December 31,
1998 and 1997, respectively.
Employee Stock Ownership Plan
On December 22, 1998, the Company's ESOP purchased 43,638 shares of common
stock for $436,380. These funds were obtained by the ESOP through a loan
from MCB Funding. Annual payments are approximately $59,803 including
interest at 7.5%. The Company's contributions are the primary source of
funds for repayment of the loan. Interest expense incurred on the ESOP debt
totaled $29,249 and $834 for 1999 and 1998 respectively. Compensation
expenses related to the ESOP amounted to $48,613 and $43,638 for 1999 and
1998 respectively. This included contributions in excess of amounts
required to service the ESOP debt of $4,975 and $16,000 for 1999 and 1998
respectively. There were no dividend payments on unallocated shares. The
shares held by the ESOP are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Allocated shares. 8,728 4,364
Unallocated shares. 34,910 39,274
------------------
Total ESOP Shares 43,638 43,638
==================
</TABLE>
The fair value of unallocated shares at December 31, 1999 and 1998 was
$392,738 and $392,740 respectively.
Stock - Based Incentive Plan
On December 21, 1999 the Company established a Stock-Based Incentive Plan
which may grant Non-Statutory Stock Options, Incentive Stock Options, and
Stock Awards to eligible individuals. All employees and outside directors
are eligible under the Plan. The maximum number of shares reserved for
awards under the Plan is 76,367 of which 54,548 is reserved for the
exercise of options and 21,819 is reserved for stock awards. During 1999
the Company awarded 21,815 shares with an estimated market value of
$267,780 which will vest over a five year period. The Company recorded
$6,545 in compensation expense in 1999 in connection with the stock awards.
Stock options entitle the holder to purchase one share of the Company's
common stock at the exercise price of $12, which is the value on the date
of the grant ($12.00). Options granted to certain employees and directors
of the Company in 1999 have a five year vesting period and will expire ten
years from the date of grant. During 1999 the Company granted 51,537
options to acquire the same number of shares at a price of $12.00.
In accordance with SFAS No. 123, The Company used the Black-Scholes option
pricing model with the following weighted average assumptions to value the
options granted: expected volatility of 24.27%, a risk-free interest rate
of 5.97%and expected option lives of 5 years for directors and 7 years for
employees.
On a proforma basis, had compensation expense for the Company's stock-based
compensation plan been determined based on the fair value at the grant date
for awards made under the plan, consistent with SFAS No. 123, the Company's
net income and earnings per share for the year ended December 31, 1999
would have been reduced as follows:
<TABLE>
<S> <C>
Net income
As reported $403,001
Proforma 389,289
Basic and diluted earnings per share
As reported $ 0.79
Proforma 0.77
</TABLE>
NOTE K - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies that are not reflected in the financial statements.
Loan Commitments
The Company 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. Such commitments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the balance
sheets.
The Company's exposure to credit loss is represented by the contractual
amount of these commitments. The Company uses the same credit policies in
making commitments as it does for on-balance-sheet instruments.
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Commitments to grant loans $5,071,000 $8,784,000
Unadvanced funds on equity lines of credit 347,000 260,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The commitments for equity lines
of credit may expire without being drawn upon. Therefore, the total
commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. Funds disbursed under these financial instruments are collateralized
by real estate. Commitments to sell loans require the Company to make
delivery at a specific future date of a specified amount, at a specified
price or yield. At December 31, 1999 and 1998, the Company had commitments
to sell loans of $813,098 and $6,335,665, respectively. Failure to fulfill
delivery requirements of commitments may result in payment of certain fees
to the investors. Loans are sold without recourse and, accordingly, risks
arise principally from movements in interest rates.
Operating Lease Commitments
The Company's future minimum rent commitments pursuant to the terms of
noncancelable lease agreements in effect at December 31, 1999 are not
significant. Rent expense was $52,269, $43,193, and $23,590 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Other Commitments and Contingencies
The Company entered into employment agreements with two senior executives.
The agreements include provisions for minimum annual compensation and
certain lump-sum severance payments in the event of a "change in control."
Effective January 1, 1998 the Company established a supplemental retirement
plan that provides certain key management employees with an additional
benefit if they retire prior to the final scheduled payment of the ESOP
loan as discussed in Note J. Since the inception of this plan and up to
December 31, 1999 none of the participating employees have retired.
Various legal claims also 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 financial position.
NOTE L - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to
principal officers and directors and their affiliates, generally at the
same prevailing terms as those of other borrowers. A summary of related
party activity follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Balance at beginning of year $ 336,128 $ 403,000
Loans made/advanced - 66,200
Repayments (217,120) (133,072)
------------------------
Balance at end of year $ 119,008 $ 336,128
========================
</TABLE>
All Related Party transactions are performing as agreed.
NOTE M - DIVIDEND PAYMENT AND RETAINED EARNINGS RESTRICTIONS
The Company and the Bank may not declare or pay dividends on and the
Company may not repurchase, any of its shares of common stock if the effect
thereof would cause shareholders' equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration, payment
or repurchase would otherwise violate regulatory requirements
The Company created a special "liquidation account" for the benefit of
account holders in an amount equal to the shareholder's equity of the Bank
as of the date of its latest balance sheet contained in the final
prospectus in connection with the conversion. Each account holder
continuing to maintain a deposit account at the Bank would be entitled, in
a complete liquidation of the Bank, to an interest in the liquidation
account prior to any payment to the shareholders of the Bank. As a result,
the Company's shareholder's equity is substantially restricted with respect
to payment of dividends to shareholders.
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying values and estimated fair values
of the Company's significant financial and non-financial instruments as of
the dates indicated:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assest
Cash and due from banks $ 1,956,175 $ 1,956,175 $ 708,827 $ 708,827
Federal funds sold 1,124,762 1,124,762 1,760,909 1,760,909
Securities 13,135,902 12,592,444 8,708,564 9,480,295
Loans, net 74,741,848 74,243,000 57,612,338 58,159,480
Accrued interest receivable 460,022 460,022 350,054 350,054
Financial Liabilities:
Demand, NOW, savings and money
market deposit accounts 28,111,720 28,111,720 28,369,118 28,369,118
Term certificates of deposit 35,188,244 35,315,068 28,623,682 28,835,059
Borrowed funds 22,616,835 21,988,810 4,211,483 4,177,668
</TABLE>
SFAS No. 107 requires disclosures about fair values of financial
instruments for which it is practicable to estimate fair value. Fair value
is defined in SFAS No. 107 as the amount that a financial instrument could
be exchanged in a current transaction between willing parties, other than
in a forced liquidation sale. Quoted market prices are used to estimate
fair values when those prices are available. However, active markets do not
exist for many types of financial instruments. Consequently, fair values
for these instruments must be estimated by management using techniques such
as discounted cash flow analysis and comparison to similar instruments.
These instruments are highly subjective and require judgments regarding
significant matters such as the amount and timing of future cash flows and
the selection of discount rates that may appropriately reflect market and
credit risks. Changes in these judgments often have a material impact on
the fair value estimates. In addition, since these estimates are as of a
specific point in time, they are susceptible to material near-term changes.
Fair values disclosed in accordance with SFAS No. 107 do not reflect any
premium or discount that could result from the sale of a large volume of a
particular financial instrument, nor do they reflect the possible tax
ramifications or estimated transaction costs.
The following is a description of the principal valuation methods used by
the Company to estimate the fair values of its financial instruments:
Securities
The fair values of securities were based principally on market prices and
dealer quotes. Certain fair values were estimated using pricing models or
were based on comparisons to market prices of similar securities. The fair
value of stock in the FHLB equals its carrying amount since such stock is
only redeemable as its par value.
Loans
The fair value of performing loans is estimated by discounting the
contractual cash flows using interest rates currently being offered for
loans with similar terms to borrowers of similar quality. For non-
performing loans where the credit quality of the borrower has deteriorated
significantly, fair values are estimated based on recent appraised values.
In the event appraisal is not available, values are estimated by
discounting cash flows at a rate commensurate with the risk associated with
those cash flows.
Deposit Liabilities
In accordance with SFAS No. 107, the fair values of deposit liabilities
with no stated maturity (demand, NOW, savings and money market savings
accounts) are equal to the carrying amounts payable on demand. The fair
value of time deposits represents contractual cash flows discounted using
interest rates currently offered on deposits with similar characteristics
and remaining maturities. The fair value estimates for deposits do not
include the benefit that results from the low-cost funding provided by the
deposit liabilities compared to the cost of alternative forms of funding
("deposit based intangibles").
Borrowed Funds
The fair value of borrowings from the FHLB represent contractual repayments
discounted using interest rates currently available for borrowings with
similar characteristics and remaining maturities.
Other Financial Assets and Liabilities
Cash and due from banks, short-term investments and accrued interest
receivable have fair values which approximate the respective carrying
values because the instruments are payable on demand or have short-term
maturities and present relatively low credit risk and interest rate risk.
Off-Balance Sheet Financial Instruments
In the course of originating loans and extending credit, the Company will
charge fees in exchange for its commitment. While these commitment fees
have value, the Company has not estimated their value due to the short-term
nature of the underlying commitments and their immateriality.
NOTE O - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
Condensed parent company financial statements for the year ended December
31, 1999 and for the period from December 22, 1998 (the date the Company
commenced significant operations) through December 31, 1998 are as follows:
Massachusetts Fincorp, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Assets:
Cash and due from banks $1,668,183 $1,878,270
Investment in subsidiaries, at equity 8,141,756 7,948,562
Other assets 6,562 -
--------------------------
Total assets $9,816,501 $9,826,832
==========================
Liabilities and stockholders' equity:
Accrued taxes $ (162,357) $ (85,351)
Accounts payable 7,780 16,231
--------------------------
Total liabilities (154,577) (69,120)
--------------------------
Total shareholders' equity. 9,971,078 9,895,952
--------------------------
Total liabilities and shareholders' equity $9,816,501 $9,826,832
==========================
</TABLE>
The Company's consolidated shareholders' equity is less than amounts presented
above because of the elimination effect of the ESOP shares.
Massachusetts Fincorp, Inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating expenses:
Directors fees $ 18,000 $ 9,000
Salaries 23,000 -
Other general and administrative 88,873 -
Contributions. - 259,490
Miscellaneous expense. 15,322 7,231
-------------------------
Total operating expenses 145,195 275,721
-------------------------
Income before income tax provision and equity
in earnings of subsidiaries (145,195) (275,721)
Income tax provisions. (31,550) (85,351)
Equity in earnings of subsidiaries. 516,646 260,877
-------------------------
Net Income $ 403,001 $ 70,507
=========================
</TABLE>
Massachusetts Fincorp, Inc.
STATEMENTS OF CASHFLOW
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 403,001 $ 70,507
Adjustments to reconcile net income to net
cash provided by operating activities:
Stock awards expense 6,545 -
Increase in other assets. (6,562) (2,756,972)
Decrease in other liabilities. (85,457) (69,120)
Equity in undistributed earnings of subsidiaries (516,646) (260,877)
--------------------------
Net cash provided from operating activities. (199,119) (3,016,462)
--------------------------
Cash flows from financing activities:
Proceeds from IPO offering - 5,454,810
Payments for IPO cost (10,968) (560,078)
--------------------------
Net cash used for investing activities (10,968) 4,894,732
--------------------------
Net increase (decrease) in cash equivalents (210,087) 1,878,270
--------------------------
Cash and cash equilivalents at beginning of year 1,878,270 -
--------------------------
Cash and cash equivalents at end of year. $1,668,183 $1,878,270
==========================
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Wolf & Company, P.C. resigned as of April 22, 1998, and Grant
Thornton LLP was engaged and continues as the independent auditors of the
Bank. The decision to change auditors was approved by the Board of
Directors. The balance sheet as of December 31, 1997 and related
statements of income and comprehensive income, surplus and cash flows for
the year ended December 31, 1997 were audited by Wolf & Company, P.C.
For the year ended December 31, 1997 and up to the date of
replacement of Wolf & Company, P.C., there were no disagreements with Wolf
& Company, P.C. on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of Wolf & Company, P.C., would have caused
them to make reference to the subject matter of the disagreement in
connection with their report. The independent auditors' report on the
financial statements for the year ended December 31, 1997 did not contain
an adverse opinion or a disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26,
2000, on pages 4 through 8 and 12. Information concerning Executive
Officers who are not directors is contained in Part I of this report.
ITEM 10. EXECUTIVE COMPENSATION
The information relating to director and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on April 26, 2000 on pages 8
through 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on April 26, 2000, on pages 3 and 5 through 6.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26,
2000, on page 12.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of the Company and
its subsidiaries are filed as part of this document under Item 7:
- Independent Auditors' Reports
- Consolidated Balance Sheets as of December 31, 1999 and 1998
- Consolidated Statements of Income and Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997
- Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
- Consolidated Statements of Cash Flows for the Years Ended December
31, 1999, 1998 and 1997
- Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1999
None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
2.1 Plan of Conversion of The Massachusetts Co-operative Bank (1)
3.1 Certificate of Incorporation of Massachusetts Fincorp, Inc. (1)
3.2 Bylaws of Massachusetts Fincorp, Inc. (2)
4.0 Draft Stock Certificate of Massachusetts Fincorp, Inc. (1)
10.1 Employment Agreement between Massachusetts Fincorp, Inc. and
Paul C. Green (3)
10.2 Employment Agreement between Massachusetts Fincorp, Inc. and
Anthony A. Paciulli (3)
10.3 Form of The Massachusetts Co-operative Bank Employee Severance
Compensation Plan (1)
10.4 Form of The Massachusetts Co-operative Bank Supplemental
Executive Retirement Plan (1)
10.5 Form of The Mass Co-operative Bank Management Supplemental
Executive Retirement Plan (1)
10.6 Massachusetts Fincorp, Inc. 1999 Stock - Based Incentive
Plan (4)
11.0 Statement Re: Computation of Per Share Earnings
16.1 Letter re: change in Certifying Accountant
21.0 Subsidiaries Information Incorporated Herein By Reference to
Part 1 - Subsidiary Activity
27.0 Financial Data Schedule
- -------------------
(1) Incorporated by reference into this document from the Exhibits filed
with the Registration Statement on Form SB-2, and any amendments
thereto, Registration No. 333-60237.
(2) Incorporated by reference into this document from the Form 8-K as
filed on February 3, 2000.
(3) Incorporated by reference into this document from the Exhibits filed
with the Annual Report on Form 10-K for the year ended December 31,
1998, as filed on March 31, 1999.
(4) Incorporated by reference into this document from the Definitive
Proxy Statement for the 1999 Annual Meeting of Stockholders dated
June 16, 1999.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Massachusetts Fincorp, Inc.
By: /s/ Paul C. Green
--------------------------------
Paul C. Green
President, Chief Executive Officer
and Director
In accordance with the requirements of the Exchange Act, this Report
has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Paul C. Green President, Chief Executive March 14, 2000
Paul C. Green Officer, Chief Financial Officer
and Director (principal executive,
accounting and financial officer)
/s/ John R. Byrne Director March 14, 2000
John R. Byrne
/s/ Richard F. Cahill Director March 14, 2000
Richard F. Cahill
/s/ W. Craig Dolan Director March 14, 2000
W. Craig Dolan
/s/ John E. Hurley, Jr. Director March 14, 2000
John E. Hurley, Jr.
/s/ Robert E. McGovern Director March 14, 2000
Robert E. McGovern
/s/ Joseph P. O'Hearn, Jr. Director March 14, 2000
John P. O'Hearn, Jr.
/s/ Robert H. Quinn Director March 14, 2000
Robert H. Quinn
/s/ Joseph W. Sullivan Director March 14, 2000
Joseph W. Sullivan
/s/ Diane Valle Director March 14, 2000
Diane Valle
</TABLE>
Exhibit 11
Statement Re: Computation of Per Share Earnings
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding for the period. ESOP
shares released or committed to be released are considered outstanding
while unallocated ESOP shares are not considered outstanding. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company. Options to purchase
51,537 shares of common stock outstanding at December 31, 1999 were not
included in the computation of common shares outstanding for purposes of
computing diluted earnings per share because the exercise price of the
options exceeded the market price and thus the effect would have been anti-
dilutive. The following table presents the basic and diluted earnings per
share computation for the year ended December 31, 1999. The earnings per
share for the year ended December 31, 1998 is not considered material,
since the Company's stock only began trading on December 21, 1998, and
therefor is not shown.
<TABLE>
<S> <C>
Basic and Diluted
Net income $403,001
Weighted-average shares outstanding 545,481
Less net effect of unallocated ESOP shares (37,092)
--------
Weighted average shares outstanding as adjusted 508,389
========
Earnings per share - basic and diluted. $ 0.79
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,939
<INT-BEARING-DEPOSITS> 17
<FED-FUNDS-SOLD> 1,125
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,069
<INVESTMENTS-CARRYING> 524
<INVESTMENTS-MARKET> 514
<LOANS> 74,524
<ALLOWANCE> (596)
<TOTAL-ASSETS> 96,411
<DEPOSITS> 63,300
<SHORT-TERM> 0
<LIABILITIES-OTHER> 872
<LONG-TERM> 22,617
0
0
<COMMON> 6
<OTHER-SE> 9,616
<TOTAL-LIABILITIES-AND-EQUITY> 96,411
<INTEREST-LOAN> 5,235
<INTEREST-INVEST> 774
<INTEREST-OTHER> 60
<INTEREST-TOTAL> 6,069
<INTEREST-DEPOSIT> 2,208
<INTEREST-EXPENSE> 3,006
<INTEREST-INCOME-NET> 3,063
<LOAN-LOSSES> (19)
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 2,998
<INCOME-PRETAX> 627
<INCOME-PRE-EXTRAORDINARY> 627
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 403
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.79
<YIELD-ACTUAL> 7.67
<LOANS-NON> 92
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 525
<CHARGE-OFFS> 0
<RECOVERIES> 90
<ALLOWANCE-CLOSE> 596
<ALLOWANCE-DOMESTIC> 596
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
