UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24791
MASSACHUSETTS FINCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 04-3431804
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
70 Quincy Avenue, Quincy, Massachusetts 02169
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(Address of principal executive offices) (Zip Code)
(617) 825-5555
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(Issuer's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: the Issuer had
524,881 shares of common stock, par value $0.01 per share, outstanding as
of November 6, 2000.
<PAGE> 1
MASSACHUSETTS FINCORP, INC.
FORM 10-QSB
Index
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and use of proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE> 2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,322,962 $ 1,956,175
Federal funds sold 3,780,156 1,124,762
------------------------------
Total cash and cash equivalents 6,103,118 3,080,937
Securities available for sale 13,161,801 12,068,593
Securities held to maturity 515,595 523,851
Federal Home Loan Bank Stock, at cost 1,131,500 1,096,500
Mortgage loans held for sale 1,425,973 813,098
Loans 85,152,772 74,524,426
Less: allowance for loan losses (679,897) (595,676)
------------------------------
Loans, net 84,472,875 73,928,750
Banking premises and equipment, net 4,054,564 3,825,086
Accrued interest receivable 606,480 460,022
Due from Co-operative Central Bank 242,850 242,850
Other assets 243,626 371,469
------------------------------
$111,958,382 $ 96,411,156
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 86,106,766 $ 63,299,964
Federal Home Loan Bank borrowings 15,383,479 22,616,835
Mortgagor's escrow accounts 378,993 439,155
Accrued expenses and other liabilities 434,445 433,229
------------------------------
Total liabilities 102,303,683 86,789,183
------------------------------
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
Treasury stock at cost, 20,600 shares
at September 30, 2000 (287,494) -
Additional paid-in capital 5,129,472 5,129,472
Unallocated ESOP shares (349,104) (349,104)
Unearned stock awards (218,195) (255,236)
Retained earnings 5,573,852 5,406,346
Accumulated other comprehensive income (199,287) (314,960)
------------------------------
Total Shareholders' equity 9,654,699 9,621,973
------------------------------
$111,958,382 $ 96,411,156
==============================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 3
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,759,614 $1,339,296 $5,088,415 $3,756,365
Interest on investments 215,276 181,727 603,819 463,572
Dividends on investments 33,138 34,487 122,779 88,068
Interest on Federal funds sold 70,234 13,783 112,414 40,201
-------------------------------------------------------
Total interest and dividend income 2,078,262 1,569,293 5,927,427 4,348,206
-------------------------------------------------------
Interest expense:
Interest on deposit accounts 964,676 534,900 2,477,769 1,588,575
Interest on borrowed funds 279,213 267,025 919,778 502,933
-------------------------------------------------------
Total interest expense 1,243,889 801,925 3,397,547 2,091,508
-------------------------------------------------------
Net interest income 834,373 767,368 2,529,880 2,256,698
Provision for loan losses (41,255) (13,144) (19,958) (13,144)
-------------------------------------------------------
Net interest income, after provision for
loan losses 875,628 780,512 2,549,838 2,269,842
-------------------------------------------------------
Non-interest income:
Customer service fees 36,648 34,382 106,148 110,940
Loan fees and gain on sale of loans and loan
servicing rights 42,552 58,212 69,921 266,982
Net gain on sales of securities available
for sale - - - 5,993
Miscellaneous 30,603 10,516 68,258 54,028
-------------------------------------------------------
Total non-interest income 109,803 103,110 244,327 437,943
-------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 505,311 435,696 1,424,887 1,234,692
Occupancy and equipment 122,760 93,828 361,051 279,588
Data processing 38,741 42,285 134,706 146,594
Contributions 445 4,145 2,075 7,528
Other general and administrative 173,191 189,828 624,678 555,293
-------------------------------------------------------
Total non-interest expense 840,448 765,782 2,547,397 2,223,695
-------------------------------------------------------
Income before income tax provision 144,983 117,840 246,768 484,090
Income tax provision 39,522 43,278 79,263 143,987
-------------------------------------------------------
Net income $ 105,461 $ 74,562 $ 167,505 $ 340,103
=======================================================
Other comprehensive income, net of tax:
Unrealized gains (loss) on securities:
Unrealized holding gains (loss) arising
during the period 110,954 - 115,674 (136,574)
Less: reclassification adjustment for
(gains) included in net income - - - (3,903)
-------------------------------------------------------
Other comprehensive income (loss), net of tax 110,954 - 115,674 (140,477)
-------------------------------------------------------
Comprehensive income $ 216,415 $ 74,562 $ 283,179 $ 199,626
=======================================================
Earnings Per Share:
Basic $ 0.21 $ 0.15 $ 0.33 $ 0.67
Diluted $ 0.21 $ 0.15 $ 0.33 $ 0.67
Weighted Average Shares Outstanding:
Basic 502,999 508,934 505,341 507,843
Diluted 509,818 508,934 507,614 507,843
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 4
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Period Ended September 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Unallocated Unearned Other
Common Treasury Paid-in Retained ESOP Stock Comprehensive
Stock Stock Capital Earnings Shares Awards Income(Loss) Total
------ -------- ---------- -------- ----------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Net income for the period
ended September 30, 1999 - - - 340,103 - - - 340,103
Other comprehensive income,
net of tax - - - - - - (169,910) (169,910)
--------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $5,455 $ - $4,862,717 $5,343,448 $(392,742) $ - $(167,835) $9,651,043
=================================================================================================
Balance at December 31, 1999 $5,455 $ - $5,129,472 $5,406,346 $(349,104) $(255,236) $(314,960) $9,621,973
Stock awards amortization - - - - - 37,041 - 37,041
Purchase of treasury stock - (287,494) - - - - - (287,494)
Net income for the period
ended September 30, 2000 - - - 167,505 - - - 167,505
Other comprehensive income,
net of tax - - - - - - 115,674 115,674
--------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $5,455 $(287,494) $5,129,472 $5,573,851 $(349,104) $(218,195) $(199,286) $9,654,699
=================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 5
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Cash flow activities:
Net income $ 167,505 $ 340,103
Adjustment to reconcile net income to net cash
(used)provided by operating activities
Provision (credit) for loan losses (19,958) (13,144)
ESOP compensation expense (34,842) -
Stock awards expense 37,041 -
Depreciation and amortization expense 191,490 123,907
Net gain on sales of securities available for sale - (5,993)
Loans originated for sale (9,247,743) (22,874,545)
Principal balance on loans sold 8,634,868 28,535,010
Amortization of deferred loan fees 167,051 (23,886)
Amortization of investment securities,
net of accretion 17,184 25,617
Increase in accrued interest receivable (146,458) (109,612)
Decrease (increase) in other assets 127,843 (91,848)
Deferred tax provision (benefit) (84,187) -
Decrease in accrued expenses
and other liabilities 36,058 215,884
------------------------------
Net cash (used) provided by operating activities (154,148) 6,121,493
------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (1,685,779) (7,193,249)
Proceeds from maturities of securities available
for sale 370,000 -
Proceeds from maturities of securities held to maturity - 770,000
Proceeds from sales and calls of securities available
for sale - 1,655,993
Purchase of Federal Home Loan Bank stock (35,000) (315,500)
Principal payments received on mortgage-backed and
asset backed securities 413,503 221,818
Loan (originations)/ principal payments, net (10,691,217) (19,411,879)
Purchase of banking premises and equipment (420,968) (1,831,210)
------------------------------
Net cash used by investing activities (12,049,461) (26,104,027)
------------------------------
</TABLE>
<PAGE> 6
Massachusetts Fincorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONCLUDED
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 22,806,802 6,049,808
Net (decrease) increase in Federal Home Loan Bank
advances with maturities less than three months (687,000) 881,000
Federal Home Loan Bank advances with maturities
in excess of three months 18,200,000 46,027,563
Repayment of Federal Home Loan Bank advances
with maturities in excess of three months (24,746,356) (31,109,707)
Net (decrease) increase in mortgagor's escrow accounts (60,162) 124,404
Acquisition of treasury stock (287,494) -
IPO expenses - (22,360)
------------------------------
Net cash provided by financing activities 15,225,790 21,950,708
------------------------------
Net change in cash and cash equivalents 3,022,181 1,968,174
Cash and cash equivalents at beginning of year 3,080,937 2,469,736
------------------------------
Cash and cash equivalents at end of year $ 6,103,118 $ 4,437,910
==============================
Supplementary Information
Interest paid on deposit accounts $ 2,467,085 $ 1,587,868
Interest paid on borrowed funds 937,538 429,865
Income tax payments (refunds), net 80,912 53,868
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 7
MASSACHUSETTS FINCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements of Massachusetts
Fincorp, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with instructions to Form 10-QSB and of Regulation S-B. Accordingly,
the financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of a normal recurring nature) considered necessary for a fair
presentation have been included. Operating results for the nine months
ended September 30, 2000 are not necessarily indicative of the results that
may be expected for the current fiscal year.
For further information, refer to the consolidated financial
statements included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999, filed with the Securities and Exchange
Commission.
(2) REORGANIZATION AND STOCK OFFERING
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 (the "ESOP") Loan Subsidiary, which loaned funds to the ESOP
to purchase 8% of the stock issued in the Conversion.
<PAGE> 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Form 10-QSB 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
Massachusetts Fincorp, Inc. (the "Company") was incorporated under
Delaware law on July 10, 1998. On December 21, 1998, the Company acquired
The Massachusetts Co-operative Bank (the "Bank") as a part of the Bank's
conversion from a mutual to a stock Massachusetts-chartered co-operative
Bank (the "Conversion"). The Company is a savings and loan holding company
and is subject to regulation by the Office of Thrift Supervision (the
"OTS").
The Bank is a community-oriented co-operative bank, which was
originally organized in 1908 as The Massachusetts Co-operative Bank, a
Massachusetts-chartered mutual co-operative bank. The Bank's principal
business consists of the acceptance of retail deposits from the general
public in the areas surrounding its 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, to a lesser extent, multi-family and commercial
real estate loans, construction loans, home equity lines of credit and
consumer loans. However, in the future, the Bank intends to increase its
emphasis on multi-family, commercial real estate and construction lending.
The Bank operates through its three full-service banking offices located in
the greater Boston metropolitan area. The Bank originates loans both for
investment and sale in the secondary market, generally releasing the
servicing rights to all loans sold. The Bank also invests in mortgage-
backed securities, securities issued by the U.S. Government and other
investments permitted by applicable laws and regulations. The Bank's
revenues are derived principally from the generation of interest and fees
on loans originated and, to a lesser extent, interest and dividends on
investment securities. The Bank's primary sources of funds are retail
savings deposits and, to a lesser extent, principal and interest payments
on loans and investment securities, advances from the FHLB-Boston and
proceeds from the sale of loans.
As part of its repurchase programs, through September 30, 2000, the
Company had repurchased 20,600 shares of its common stock. 5,600 shares
are allocated to the Management incentive program and 15,000 shares are
being held as treasury stock. Up to an additional 28,490 shares may be
repurchased under the existing repurchase programs.
Operating Strategy
The Bank's operating strategy is to maintain profitability and manage
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 also originates multi-family and commercial real
estate loans, as well as construction loans. Management believes that
these loans provide additional yield and rate sensitivity to the loan
portfolio, while diversifying the credit risk inherent in the loan
portfolio. 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, and accordingly, has closed
loan origination centers in Norwell and Wakefield, Massachusetts. The Bank
has made substantial infrastructure investments recently, including
staffing, offices and technology, to
<PAGE> 9
support future growth. To increase the volume of originations, the Bank has
recently hired a number of on-the-road loan originators. Although it can not
be assured, management believes that with the investment now in the
origination staff and the establishment of the tools that they need to
efficiently originate loans the Bank has positioned itself to generate
additional earnings.
<PAGE> 10
Average Balance Sheet
Presented below are the average balance sheets for the periods
indicated.
<TABLE>
<CAPTION>
For the Nine Months Ended
(unaudited)
------------------------------------------------------------------------
September 30, 2000 September 30, 1999
--------------------------------- ---------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Federal funds sold and
short term investments $ 2,720 $ 122 5.98% $ 1,758 $ 52 3.94%
Securities 11,695 595 6.78% 9,908 452 6.08%
Mortgage loans, net 81,832 4,903 7.99% 61,609 3,718 8.05%
Other loans 2,508 185 9.84% 543 38 9.33%
-------------------- --------------------
Total interest earning asssets 98,755 5,805 7.84% 73,818 4,260 7.69%
Noninterest-earning assets 5,730 6,749
-------- --------
Equity securities 2,430 123 6.75% 1,999 88 5.87%
-------------------- --------------------
Total assets $106,915 $5,928 $ 82,566 $4,348
======== ----- ======== ------
Liabilities and Surplus:
Interest bearing liabilities:
Deposits:
Savings accounts $ 10,768 $ 164 2.03% $ 10,007 $ 147 1.96%
Money market accounts 99 2 2.69% 326 6 2.45%
Now accounts 19,792 603 4.06% 13,685 348 3.39%
Certificates of deposit 41,128 1,709 5.54% 28,337 1,088 5.12%
-------------------- --------------------
Total deposits 71,787 2,478 4.60% 52,355 1,589 4.05%
FHLB advances 19,530 920 6.28% 12,444 503 5.39%
-------------------- --------------------
Total interest bearing liabilities 91,317 3,398 4.96% 64,799 2,092 4.30%
-------------------- --------------------
Noninterest -bearing demand
checking accounts 4,551 5,019
Noninterest-bearing liabilities 1,322 2,148
-------- --------
Total liabilities 97,190 71,966
Total surplus 9,725 10,600
-------- --------
Total liabilities and surplus $106,915 $ 82,566
======== ========
Net interest income $2,530 $2,256
====== ======
Net interest income/interest
rate spread 2.88% 3.39%
====== ======
Net interest margin as a percent
of interest-earning assets 3.42% 4.07%
====== ======
Ratio of interest-earning assets
to interest-bearing liabilities 108.15% 113.92%
====== ======
</TABLE>
Comparison of Financial Condition at September 30, 2000
and December 31, 1999
The Company's total assets increased by $15.6 million, or 16.1%
during the reported period, increasing from $96.4 million at December 31,
1999 to $112.0 million at September 30, 2000. The increase was the result
<PAGE> 11
of the implementation of the Bank's growth strategy. The increase in total
assets was centered in the Bank's loan portfolio, which increased by $10.5
million or 14.3%. At September 30, 2000, loans represented 75.5% of total
assets, compared with 76.7% of assets at December 31, 1999. Federal funds
sold, used as a warehouse for funds until they are otherwise invested,
increased from $1.1 million at December 31, 1999 to $3.8 million at
September 30, 2000. Securities available for sale increased from $12.1
million at December 31, 1999 to $13.2 million at September 30, 2000. The
increase is primarily the result of reinvestment of investment interest and
dividends received. The investment portfolio, including federal funds sold
and Federal Home Loan Bank stock, represents 16.6% and 15.4%, of total
assets, respectively, at September 30, 2000, and December 31, 1999. All
other assets, as a group, increased by $615,000. The increase in the loan
portfolio primarily consisted of increases in one-to-four family, multi-
family and commercial real estate loans.
The asset growth described above was funded by deposit growth, as
total deposits increased from $63.3 million at December 31, 1999 to $86.1
million at September 30, 2000, an increase of 36.0%. The deposit growth
also funded the repayment of Federal Home Loan Bank ("FHLB") borrowings
totaling $7.2 million during the year.
The Bank's deposit growth is attributable to significant growth in
checking accounts, especially interest-bearing checking accounts. Total
checking and demand deposit accounts increased from $17.9 million at
December 31. 1999 to $28.2 million at September 30, 2000, or 57.0% while
term certificates of deposit increased from $35.1 million at December 31,
1999 to $45.6 million at September 30, 2000, or $29.6%. Savings accounts
increased from $9.7 million to $11.5 million or by 19.0% during the same
period. The Bank's marketing focus is currently to focus on gathering
additional checking, interest-bearing checking and savings deposits as a
lower-cost alternative to term certificates and borrowings.
The Bank carried no non-performing assets at September 30, 2000 as
compared to $92,000 at December 31, 1999. While it can give no assurance,
management believes that the allowance for loan loss is adequate to cover
losses inherent in the loan portfolio as of the balance sheet date.
Comparison of Operating Results for the
Three Months Ended September 30, 2000 and 1999
General
Net income for the three months ended September 30, 2000 totaled
$105,000, or $0.21 per share. For the three months ended September 30,
1999, net income was $75,000 or $0.15 per share. Net interest income for
the three months ended September 30, 2000 totaled $834,000, compared with
net interest income of $767,000 for the three months ended September 30,
1999, an increase of 8.7%. The increase is the result of the
implementation of the Bank's growth strategy in 2000. Management is
working to continue this growth in accordance with its strategic plan, when
opportunities to increase net interest income exist.
Interest and Dividend Income
Interest and dividend income for the three months ended September 30,
2000 was $2.1 million, compared with $1.6 million for the three months
ended September 30, 1999, an increase of $500,000 or 32.4%. This growth
was concentrated in the loan portfolio, in accordance with both
Management's strategic growth plan, and because interest rate and mortgage
market conditions forced a slowdown in loans originated for sale in late
1999 and early 2000. Management believes that the additional portfolio
loans, especially adjustable-rate loans, will add rate sensitivity to the
Bank's balance sheet, ultimately resulting in a more stable interest
margin. Interest on investment bonds increased from $182,000 for the three
months ended September 30, 1999 to $215,000 for the three months ended
September 30, 2000, an increase of $33,000 or 18.1%. This increase is the
result of increased levels of investment securities held, and the increase
in market interest rates. Dividend income remained relatively constant
while interest on federal funds sold increased from $14,000 to $70,000, the
result of increased market rates, and management's warehousing of excess
funds, which will eventually fund either loan originations or further
investment in the bond portfolio.
Interest Expense
Interest expense for the three months ended September 30, 2000 was
$1.2 million compared to $802,000 for the three months ended September 30,
1999, an increase of $442,000 or 55.1%. Interest on deposits
<PAGE> 12
increased from $535,000 for the three months ended September 30, 1999, to
$965,000 for the three months ended September 30, 2000. Management has
actively pursued deposits in accordance with its strategic growth plan, in
order to fund growth in the loan portfolio. Accordingly, premium-priced time
deposits were utilized to attract new depositors. In August 2000, the Bank
stopped offering such certificate rates, and is currently focusing its
marketing efforts toward lower-costing transaction accounts.
The Bank borrowed from the FHLB in order to fund increased loan
originations in the second half of 1999. Interest from borrowings
increased from $267,000 for the three months ended September 30, 1999 to
$279,000 for the three months ended September 30, 2000 because of those
borrowings. The Bank has utilized a portion of its deposit growth to fund
the repayment of maturing borrowings from the FHLB.
Provision for Loan Losses
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 non-performing 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.
Management periodically performs a loan loss allowance sufficiency
analysis based upon the loan portfolio composition, asset classifications,
loan-to-value ratios, potential impairments in the loan portfolio and other
factors. Management believes that, based on information available at
September 30, 2000, the Bank's allowance for loan losses was sufficient to
cover losses inherent in its loan portfolio at that time. Because of net
recoveries of $24,000 for the three months ended September 30, 2000, and a
reduction in the size of the loan portfolio, a reduction in the provision
for loan losses of $41,000 was recorded. For the three months ended
September 30, 1999, a reduction in the provision for loan losses of $13,000
was recorded. Management believes that continued reversals of the loan
loss reserve can not be sustained indefinitely, as factors outside the
Bank's control influence the size of the loan loss reserve. The allowance
for loan losses was $680,000 at September 30, 2000 and $596,000 at December
31, 1999, which is 0.80% of total loans at both dates. The Bank had no
loans in a non-performing status at September 30, 2000.
Net Interest Income
Net interest income (after the provision for loan losses) increased
$95,000, or 12.2%, to $876,000 for the three months ended September 30,
2000 from $781,000 for the same period in 1999. The increase is the result
of Management's planned growth of the Bank, in which increased levels of
deposits and, on a temporary basis, borrowings, funded loan growth. Excess
funds were used either to retire borrowings or to purchase investment
securities. The increase in earning assets was offset by a decline in the
interest rate spread, the result of increased market rates of interest and
higher rates paid on borrowings and paid to attract deposits. It is
Management's intent, as part of its strategic plan, to emphasize the growth
of so-called "core deposits", defined by Management to include savings,
checking, and money market accounts, and place less reliance on FHLB
borrowings as a funding vehicle for its loan growth. Management does
reserve the right to adjust this strategy, based on market and competitive
conditions.
<PAGE> 13
Non-Interest Income
Total non-interest income increased from $103,000 for the three
months ended September 30, 1999 to $110,000 for the three months ended
September 30, 2000, an increase of $7,000 or 6.8%. This increase may be
primarily attributed to a $20,000 increase in miscellaneous fee income,
generally prepayment penalties on commercial real estate loans. This
increase was partially offset by a decrease in gains on sales of real
estate loans of $16,000, or 26.9%. The decrease is the result of decreased
mortgage banking activity, caused by a rising interest rate environment in
late 1999 and early 2000. A greater number of portfolio loans were
written, including one-to-four family adjustable-rate loans, which added
rate sensitivity to the balance sheet. The increased percentage in
portfolio loans originated contributed to greater net interest income which
management expects will ultimately have a stabilizing effect on net income
in future periods. Customer service fees increased by $2,000 when
comparing the three months ended September 30, 2000 and 1999, the result of
a larger customer base, arising from the opening of the Quincy office.
Non-Interest Expenses
Non-interest expenses for the three months ended September 30, 2000
totaled $840,000, an increase of $74,000, or 9.8% when comparing to the
three months ended September 30, 1999. Salaries and benefits increased
from $436,000 to $505,000 because of the addition of the Quincy office
branch staff, a sales manager and mortgage originators. Although no
assurance can be given, management believes that the investment in
additional lending staff will result in increases in the levels of both
mortgage interest income and gains on sales of mortgage loans.
Occupancy and equipment expenses increased by $29,000, the result of
the addition of the new Quincy branch and headquarters. Data processing
expenses decreased by $3,000 which was the expected result of the upgrade
of automated teller machine systems in June 2000. The change in systems
provides an on-line, real-time recording of ATM transactions which,
management believes will also reduce the risk of losses from ATM fraud.
Other general and administrative expenses decreased from $190,000 for the
three months ended September 20, 1999 to $173,000 for the three months
ended September 30, 2000, a reduction of 8.8%. The reduction is the result
of Management's expense control program, which will be continued in 2001.
Income Tax Expense
Income tax expense differs from statutory tax rates due to the effect
of permanent differences, such as tax credits and dividends received
deductions.
Comparison of Operating Results for the Nine Months Ended September
30, 2000 and 1999
General
Net income for the nine months ended September 30, 2000 was $168,000,
compared with net income of $340,000 for the nine months ended September
30, 1999. The decline in net income was primarily the result of decreased
levels of gains on sales of mortgage loans and the investment in branch and
lending departments. Management believes that these investments will
ultimately contribute to the Bank's future success.
With the rise in interest rates in late 1999 and early 2000, the
volume of loans sold declined as a percentage of total loans originated.
The Bank originated adjustable rate portfolio loans to stabilize the
interest margin, further foregoing opportunities for loan sales.
Management has taken steps to rebuild the level of gains, including the
hiring of additional originators, which had the initial effect of
increasing salaries and employee benefits. Management has noted an
increase in gains on sales of loans since the hiring of these originators,
and although no assurance can be given, expects this increased level of
gains to continue, given a similar interest rate environment in future
periods, subject to a stabilization in market interest rates.
Net interest income (after the reduction in the provision for loan
losses) increased from $2.2 million for the nine months ended September 30,
1999 to $2.5 million for the nine months ended September 30, 2000, an
increase of 12.3%. This increase is the result of the Bank's growth
strategy. The net interest margin, however, decreased from 4.08% to 3.42%,
during the same period, as higher-costing term deposits and borrowings were
utilized to fund the growth plan. As previously stated, Management has
shifted its marketing focus to gathering "core" deposits, which will carry
a lower cost of funds than term certificates and FHLB borrowings.
<PAGE> 14
Interest and Dividend Income
Total interest and dividend income increased from $4.3 million for
the nine months ended September 30, 1999 to $5.9 million for the nine
months ended September 30, 2000, an increase of 36.3%. The increase is
primarily the result of increased originations of mortgage loans. Interest
from mortgage loans increased from $3.8 million for the nine months ended
September 30, 1999 to $5.1 million for the nine months ended September 30,
2000, or 35.5%. The income attributable to increased levels of mortgage
loans is partially offset by a decline in the net yield on mortgage loans
from 8.05% for the nine months ended September 30,1999 to 7.99% for the
nine months ended September 30, 2000. The decreased yield results from the
origination of a greater number of adjustable-rate loans, which have a
lower initial interest rate. These loans will reprice regularly, thereby
adding interest rate sensitivity to the loan portfolio.
Interest on investment securities increased from $464,000 to
$604,000, or 30.3% when comparing the nine month periods ended September
30, 1999 and 2000, respectively. The increase is attributable to rising
market interest rates, management's shift in the portfolio composition
toward high quality corporate securities and a slight increase in the
average balance of securities. Pursuant to management's investment
strategy, the yield on the bond portfolio increased from 6.08% for the nine
months ended September 30, 1999 to 6.78% for the nine months ended
September 20, 2000. Dividend income on investments also increased when
comparing the nine months ended September 30, 1999 and 2000, rising from
$88,000 in 1999, to $123,000 in 2000, an increase of 39.3%. Federal funds
increased by $72,000, the result of both higher market interest rates and
increased average balances.
Interest Expense
Total interest expense increased from $2.1 million for the nine
months ended September 30, 1999 to $3.4 million for the nine months ended
September 30, 2000. The Bank used both deposits and borrowings to fund its
growth strategy; accordingly, there was an increase in average deposit and
borrowing volume when comparing the two periods. Additionally, the
increase in market interest rates, and the Bank's rates in order to attract
new deposit customers impacted the cost of funds. Interest on deposits
increased from $1.6 million for the nine months ended September 30, 1999,
to $2.5 million for the nine months ended September 30, 2000, while for the
same periods interest on borrowings increased from $503,000 to $920,000.
Management has replaced FHLB borrowings with lower costing deposits, which,
subject to stabilization of market interest rates, management believes will
ultimately lower the Bank's cost of funds.
Net Interest Income
Net interest income (after the provision for loan losses) for the
nine months ended September 30, 2000 was $2.5 million, an increase of
$300,000 or 12.1%, from the nine months ended September 30, 1999, which was
$2.2 million. The increase was driven by the Bank's planned growth, the
result of which was an increase in average earning assets of $24.3 million.
The positive effect of this growth was partially offset by a decline in the
interest rate spread from 3.39% for the nine months ended September 30,
1999 to 2.88% for the nine months ended September 30, 2000. The interest
rate spread declined because of increased market interest rates,
competitors and FHLB interest rates. FHLB borrowings and premium rate term
certificates of deposit were utilized as temporary sources of funds in
order to fund the growth of adjustable-rate real estate loans. Deposits in
excess of net loan originations accumulated in 2000 were used either to
retire borrowings or to purchase investment securities.
Management has shifted its marketing focus in order to attract higher
levels of lower costing "core" deposits. Management believes that this
strategy will broaden its customer base.
<PAGE> 15
Provision for Loan Loss
The Bank recorded a reversal of its provision for loan losses
totaling $20,000 for the nine months ended September 30,2000, compared to a
reversal of its provision of $13,000 for the nine months ended September
30, 1999. The reversals of the provision are the result of net recoveries
of prior loan charge-offs totaling $104,000 for the nine months ended
September 30, 2000 and $60,000 for the nine months ended September 30,
1999. The recoveries were greater than the Bank's required provisions for
loan losses over both of the nine-month periods. Management believes that
the allowance for loan loss reported on the balance sheet at September 30,
2000 is adequate to absorb losses that are inherent in the loan portfolio.
Management believes that continued reversals of the loan loss reserve can
not be sustained indefinitely, as factors outside the Bank's control
influence the size of the loan loss reserve.
Non-interest Income
The Bank recorded total non-interest income of $244,000 for the nine
months ended September 30, 2000, compared with $438,000 for the nine months
ended September 30, 1999. This decrease is primarily attributed to a
reduced level of gains on sales of loans, which declined by $197,000 when
comparing the two periods. The decline is attributed to increasing
interest rates, a shift in customer demand away from fixed-rate loans
during this period of higher interest rates, and Management's decision to
originate a greater number of portfolio loans. Management has recently
expanded the loan origination staff, and, although no assurance can be
given, believes this investment will increase the Bank's mortgage banking
activity and ultimately increase the level of gains on sale of mortgage
loans.
All other fee income increased by a total of $9,000, from a total of
$165,000 for the nine months ended September 30, 1999, to $174,000 for the
nine months ended September 30, 2000. Gains on sales of securities
available for sale totaled $5,000 for the nine months ended September 30,
1999. No such gains have been recognized during 2000.
Non-interest Expenses
Total non-interest expense increased from $2.2 million for the nine
months ended September 30, 1999 to $2.5 million for the nine months ended
September 30, 2000, an increase of 14.6%. This increase can be attributed
to salaries and benefits, which increased by $190,000 because of hiring to
staff the new Quincy office. Additionally mortgage originators were added
to the loan staff to increase the origination of loans held for sale.
Management believes that the hiring of staff for the new banking office and
the additional originators together represent an investment into the future
success of the Bank, both in terms of deposit gathering and loan
origination.
Also contributing to the increase in non-interest expense was the
increase in occupancy expenses of $81,000 when comparing the nine months
ended September 30, 2000 and 1999. The increase is the result of the
opening of the Quincy office. Other general and administrative expenses
increased by $69,000, the result of expenses incurred in the 2000 proxy
contest, as well as additional marketing costs related to the opening of
the Quincy office.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and
interest payments on loans, proceeds from maturing securities and the sale
of loans and borrowings from the FHLB-Boston. While maturities and
scheduled amortization of loans and securities are predictable sources of
the funds, deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of
loans, primarily residential one-to-four family mortgage loans, and, to a
lesser extent, multi-family real estate loans, commercial real estate
loans, construction loans and home equity lines of credit. The Bank also
originates consumer loans and invests in mortgage-backed securities, U.S.
Government and agency obligations and corporate debt or equity securities.
These activities are funded primarily by the receipt of principal and
interest payments on loans, proceeds from the maturing of investment
securities, deposit growth and the utilization of FHLB advances. During
the nine months ended September 30, 2000 and 1999, the Bank's loan
originations totaled $40.3 million and $62.1 million, respectively. During
the nine months ended September 30, 2000 and 1999, the Bank's purchases of
U.S. Government and agency obligations and corporate equity securities and
debt obligations totaled $1.7 million
<PAGE> 16
and $7.2 million, respectively. The Bank experienced a net increase in total
deposits of $22.8 million or 36.0% for the nine months ended September 30,
2000, as compared to $6.0 million for the nine months ended September 30,
1999.
The overall levels of interest rates affect deposit flows, as do the
interest rates and products offered by the Bank and its local competitors.
The Bank closely monitors its liquidity position on a daily basis. In the
event that the Bank should require funds beyond its ability to generate
them internally, additional funds are available, principally through FHLB
advances. The Bank has total borrowing capacity of approximately $74.9
million at September 30, 2000 at which time the Bank had $15.4 million of
outstanding FHLB borrowings.
Outstanding commitments for all loans totaled $3.9 million at
September 30, 2000. 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 September 30, 2000, totaled $41.6 million. From September 30, 1999 to
September 30, 2000, the Bank experienced a 76.7% 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.
The Company, under its existing stock repurchase program, may acquire
up to 12,274 shares of treasury stock. Under the terms of the 1999 Stock-
Based Incentive Plan, the Company is required to purchase 4% of its shares,
a total of 21,815 shares, to fund awards to the Board of Directors and
certain officers. The Company has repurchased 5,600 shares, an amount in
excess of the amount required to fund scheduled vesting in 2000. At its
option, Management may purchase additional shares, up to a total of 21,815,
when, in its opinion, market conditions warrant such a purchase, or, as
vesting requires such a purchase.
At September 30, 2000, the Bank exceeded all of its regulatory
capital requirements with a leverage capital level of $8.0 million, or
11.1% of adjusted assets. This exceeds the required leverage capital level
of $2.9 million, or 4.0%, and the required risk-based capital of $8.6
million, or 12.1% of adjusted assets, which is above the required level of
$5.7 million, or 8.0%.
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.
<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of
business. Such routine legal proceedings, in the aggregate, are believed
by management to be immaterial to the Company's financial condition or
results of operation.
Item 2. Changes in Securities and use of proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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 Stock Certificate of Massachusetts Fincorp, Inc. (1)
11.0 Statement Re: Computation of Per Share Earnings
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.
(b) Reports on Form 8-K
* On July 20, 2000, the Company filed a Form 8-K announcing
the appointment of David C. Bojarczuk as Treasurer and
Chief Financial Officer. The press release making this
announcement was filed by exhibit.
* On July 26, 2000, the Company filed a Form 8-K announcing
the commencement of its initial stock purchase program to
fund the Company's Stock-Based Incentive Plan. The press
release making this announcement was filed by exhibit.
* On August 17, 2000, the Company filed a Form 8-K
announcing their intention to repurchase up to 5% of its
outstanding shares in the open market over the next six
months, commencing on or after August 21, 2000 and the
execution of a standstill agreement with a shareholder
group. The press release making this announcement was
filed by exhibit.
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MASSACHUSETTS FINCORP, INC.
Date: November 6, 2000 By: /s/Paul C. Green
-------------------------------
Paul C. Green
President, Chief Executive
Officer and Treasurer
(principal executive officer)
Date: November 6, 2000 By: /s/David C. Bojarczuk
-------------------------------
David C. Bojarczuk
Chief Financial Officer, and
Treasurer (accounting and
financial officer)
<PAGE> 19
