-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gd/f235o5sruYR4NK6f3s8hHXpL9LGyv01hk4fxoiE7DcfKfEhwFwyPJsmpu9f7r rR5ccQt+NgkyU4U32g8/0w== 0000927016-01-502366.txt : 20010814 0000927016-01-502366.hdr.sgml : 20010814 ACCESSION NUMBER: 0000927016-01-502366 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASSBANK CORP CENTRAL INDEX KEY: 0000799166 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042930382 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15137 FILM NUMBER: 1705581 BUSINESS ADDRESS: STREET 1: 123 HAVEN STREET CITY: READING STATE: MA ZIP: 01867 BUSINESS PHONE: 6179428192 MAIL ADDRESS: STREET 1: 123 HAVEN STREET CITY: READING STATE: PA ZIP: 01867 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________to____________ Commission File Number 0-15137 MASSBANK Corp. (Exact name of registrant as specified in its charter) Delaware 04-2930382 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 123 HAVEN STREET Reading, Massachusetts 01867 (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (781) 662-0100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date is: Class: Common stock $1.00 per share. Outstanding at July 31, 2001: 3,135,675 shares. MASSBANK CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page ------ ITEM 1. Financial Statements Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000 3 Consolidated Statements of Income (unaudited) for the three months ended June 30, 2001 and 2000 4 and for the six months ended June 30, 2001 and 2000 5 Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2001 (unaudited) and the year ended December 31, 2000 6 - 7 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2001 and 2000 8 - 9 Condensed Notes to the Consolidated Financial Statements 10 - 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 31 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 31 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 32 ITEM 2. Changes in Securities 32 ITEM 3. Defaults Upon Senior Securities 32 ITEM 4. Submission of Matters to a Vote of Security Holders 32 ITEM 5. Other Information 32 ITEM 6. Exhibits and Reports on Form 8-K 32 Signature Page 33 2 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share data)
June 30, December 31, 2001 2000 Assets: (unaudited) Cash and due from banks $ 10,740 $ 9,179 Short-term investments (Note 3) 228,502 112,842 - --------------------------------------------------------------------------------------- Total cash and cash equivalents 239,242 122,021 Term federal funds sold -- 30,000 Interest-bearing deposits in banks 4,869 1,678 Securities held to maturity, at amortized cost (market value of $230 in 2000) -- 230 Securities available for sale, at market value (amortized cost of $371,307 in 2001 and $432,567 in 2000) 381,959 442,552 Trading securities, at market value 3 19,794 Loans: (Note 4) Mortgage loans 282,570 272,951 Other loans 35,861 37,196 Allowance for loan losses (2,616) (2,594) - --------------------------------------------------------------------------------------- Net loans 315,815 307,553 Premises and equipment 5,755 3,932 Accrued interest receivable 4,330 5,755 Goodwill 1,140 1,189 Current income tax asset, net 426 284 Other assets 3,315 3,714 - --------------------------------------------------------------------------------------- Total assets $956,854 $938,702 Liabilities and Stockholders' Equity: Deposits $839,001 $823,625 Escrow deposits of borrowers 1,316 1,387 Employee stock ownership plan liability 312 312 Deferred income taxes 2,520 2,418 Other liabilities 2,490 2,717 - --------------------------------------------------------------------------------------- Total liabilities 845,639 830,459 Stockholders' Equity: Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued -- -- Common stock, par value $1.00 per share; 10,000,000 shares authorized, 7,466,164 and 7,447,982 shares issued, respectively 7,466 7,448 Additional paid-in capital 62,148 61,674 Retained earnings 96,634 93,165 - --------------------------------------------------------------------------------------- 166,248 162,287 Accumulated other comprehensive income: (Note 6) Net unrealized gains on securities available for sale, net of tax effect 6,424 5,972 Treasury stock at cost, 4,345,589 and 4,300,489 shares, respectively (Note 5) (61,145) (59,704) Common stock acquired by ESOP (312) (312) - --------------------------------------------------------------------------------------- Total stockholders' equity 111,215 108,243 - --------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $956,854 $938,702
See accompanying condensed notes to consolidated financial statements. 3 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended June 30, (In thousands except share data) 2001 2000 - ------------------------------------------------------------------------------- Interest and dividend income: Mortgage Loans $ 4,807 $ 4,914 Other loans 613 741 Securities available for sale: Mortgage-backed securities 4,696 4,748 Other securities 1,443 2,380 Trading securities 32 12 Federal funds sold 2,186 2,002 Other investments 328 118 - ------------------------------------------------------------------------------- Total interest and dividend income 14,105 14,915 - ------------------------------------------------------------------------------- Interest expense: Deposits 8,476 8,621 - ------------------------------------------------------------------------------- Total interest expense 8,476 8,621 - ------------------------------------------------------------------------------- Net interest income 5,629 6,294 Provision for loan losses 12 15 - ------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,617 6,279 - ------------------------------------------------------------------------------- Non-interest income: Deposit account service fees 159 172 Gains on securities, net 1,140 886 Other 253 235 - ------------------------------------------------------------------------------- Total non-interest income 1,552 1,293 - ------------------------------------------------------------------------------- Non-interest expense: Salaries and employee benefits 1,695 1,649 Occupancy and equipment 513 501 Data processing 122 117 Professional services 147 498 Advertising and marketing 54 63 Amortization of intangibles 80 83 Other 380 414 - ------------------------------------------------------------------------------- Total non-interest expense 2,991 3,325 - ------------------------------------------------------------------------------- Income before income taxes 4,178 4,247 Income tax expense 1,490 1,530 - ------------------------------------------------------------------------------- Net income $ 2,688 $ 2,717 - ------------------------------------------------------------------------------- Weighted average common shares outstanding: Basic 3,115,920 3,229,032 Diluted 3,196,908 3,304,904 Earnings per share (in dollars): Basic $0.86 $0.84 Diluted 0.84 0.82
See accompanying condensed notes to consolidated financial statements. 4
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six months ended June 30, (In thousands except share data) 2001 2000 - ------------------------------------------------------------------------------- Interest and dividend income: Mortgage Loans $ 9,595 $ 9,924 Other loans 1,322 1,457 Securities available for sale: Mortgage-backed securities 9,483 9,558 Other securities 3,279 4,785 Trading securities 145 53 Federal funds sold 4,555 3,502 Other investments 619 346 - ------------------------------------------------------------------------------- Total interest and dividend income 28,998 29,625 - ------------------------------------------------------------------------------- Interest expense: Deposits 17,388 17,042 - ------------------------------------------------------------------------------- Total interest expense 17,388 17,042 - ------------------------------------------------------------------------------- Net interest income 11,610 12,583 Provision for loan losses 24 30 - ------------------------------------------------------------------------------- Net interest income after provision for loan losses 11,586 12,553 - ------------------------------------------------------------------------------- Non-interest income: Deposit account service fees 320 346 Gains on securities, net 1,997 1,853 Other 406 406 - ------------------------------------------------------------------------------- Total non-interest income 2,723 2,605 - ------------------------------------------------------------------------------- Non-interest expense: Salaries and employee benefits 3,283 3,469 Occupancy and equipment 1,091 1,073 Data processing 251 245 Professional services 249 666 Advertising and marketing 96 118 Amortization of intangibles 162 165 Other 726 769 - ------------------------------------------------------------------------------- Total non-interest expense 5,858 6,505 - ------------------------------------------------------------------------------- Income before income taxes 8,451 8,653 Income tax expense 3,018 3,108 - ------------------------------------------------------------------------------- Net income $ 5,433 $ 5,545 - ------------------------------------------------------------------------------- Weighted average common shares outstanding: Basic 3,124,198 3,246,078 Diluted 3,201,623 3,321,132 Earnings per share (in dollars): Basic $1.74 $1.71 Diluted 1.70 1.67
See accompanying condensed notes to consolidated financial statements. 5 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Six Months Ended June 30, 2001 (unaudited) (In thousands except share data)
ACCUMULATED ADDITIONAL OTHER COMMON STOCK COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) BY ESOP TOTAL ------ ------- -------- --------- -------------- --------- -------- Balance at December 31, 2000 $7,448 $61,674 $93,165 $(59,704) $5,972 $(312) $108,243 Net Income -- -- 5,433 -- -- -- 5,433 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 6) -- -- -- -- 452 -- 452 -------- Comprehensive income 5,885 Cash dividends declared and paid ($0.63 per share) -- -- (1,968) -- -- -- (1,968) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 4 -- -- -- 4 Amortization of ESOP shares committed to be released -- 67 -- -- -- -- 67 Purchase of Company stock for deferred compensation plan (Note 5) -- 30 -- (30) -- -- -- Purchase of treasury stock -- -- -- (1,411) -- -- (1,411) Exercise of stock options and related tax benefits 18 377 -- -- -- -- 395 ________________________________________________________________________ Balance at June 30, 2001 $7,466 $62,148 $96,634 $(61,145) $6,424 $(312) $111,215
See accompanying condensed notes to consolidated financial statements. 6 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands except share data)
ACCUMULATED COMMON ADDITIONAL OTHER STOCK COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) BY ESOP TOTAL ------ ------- -------- --------- -------------- --------- -------- Balance at December 31, 1999 $7,407 $60,591 $85,873 $(53,890) $1,966 $(468) $101,479 Net income -- -- 11,111 -- -- -- 11,111 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 6) -- -- -- -- 4,006 -- 4,006 ------ ------- -------- -------- ------------- -------- -------- Comprehensive income 15,117 Cash dividends declared and paid ($1.185 per share) -- -- (3,829) -- -- -- (3,829) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 10 -- -- -- 10 Net decrease in liability to ESOP -- -- -- -- -- 156 156 Amortization of ESOP shares committed to be released -- 93 -- -- -- -- 93 Purchase of treasury stock -- -- -- (5,448) -- -- (5,448) Purchase of company stock for deferred compensation plan (Note 5) -- 366 -- (366) -- -- -- Exercise of stock options and related tax benefits 41 624 -- -- -- -- 665 ________________________________________________________________________________ Balance at December 31, 2000 $7,448 $61,674 $93,165 $(59,704) $ 5,972 $(312) $108,243
See accompanying condensed notes to consolidated financial statements. 7 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, 2001 2000 -------- ------ (In thousands) Cash flows from operating activities: Net income $ 5,433 $ 5,545 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 423 447 Loan interest capitalized (20) (22) Amortization of ESOP shares committed to be released 67 45 Decrease in accrued interest receivable 1,425 232 Decrease in other liabilities (227) (363) (Increase) decrease in current income tax asset, net (142) 175 Accretion of discounts on securities, net of amortization of premiums (407) (422) Net trading securities activity 20,442 6,559 Gains on securities available for sale, net (1,894) (1,544) Gains on trading securities, net (103) (309) Decrease in deferred mortgage loan origination fees, net of amortization (65) (70) Deferred income tax benefit (113) (42) Decrease in other assets 1,126 113 Provision for loan losses 24 30 Gains on sales of real estate acquired through foreclosure -- (8) Gains on sales of premises and equipment (4) -- Decrease in escrow deposits of borrowers (71) (128) - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 25,894 10,238 - ----------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of term federal funds (10,000) -- Proceeds from maturities of term federal funds 40,000 -- Net (increase) decrease in interest bearing bank deposits (3,191) 2,345 Proceeds from sales of investment securities available for sale 15,473 22,122 Proceeds from maturities of investment securities available for sale 52,230 25,000 Purchases of investment securities available for sale (8,326) (44,000) Purchases of mortgage-backed securities (30,167) (13,748) Principal repayments of mortgage-backed securities 33,304 23,650 Principal repayments of investment securities available for sale 2 2 Loans originated (43,901) (14,749) Loan principal payments received 35,673 22,535 Purchases of premises & equipment (2,058) (162) Proceeds from sales of premises and equipment 4 -- Proceeds from sales of real estate acquired through foreclosure -- 70 - ----------------------------------------------------------------------------------------------- Net cash provided by investing activities 79,043 23,065 - -----------------------------------------------------------------------------------------------
8 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited)
Six Months Ended June 30, 2001 2000 -------- -------- (In thousands) Cash flows from financing activities: Net increase in deposits 15,264 1,640 Payments to acquire treasury stock (1,441) (2,084) Purchase of Company stock for deferred compensation plan 30 346 Issuance of common stock under stock option plan 317 63 Tax benefit resulting from stock options exercised 78 4 Cash dividends paid on common stock (1,968) (1,903) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 4 5 - ------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 12,284 (1,929) - ------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 117,221 31,374 Cash and cash equivalents at beginning of period 122,021 121,404 - ------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $239,242 $152,778 - ------------------------------------------------------------------------------------------ Supplemental cash flow disclosures: Cash transactions: Cash paid during the period for interest $ 17,440 $ 17,047 Cash paid during the period for taxes, net of refunds 3,195 2,965 Purchases of securities executed but not settled at beginning of period which settled during the period 60 117 Sales of securities executed but not settled at beginning of period which settled during the period 573 202 Non-cash transactions: SFAS 115: Increase (decrease) in accumulated other comprehensive income 452 (2,647) Increase (decrease) in deferred tax liabilities 215 (1,853) Purchases of securities executed but not settled at end of period 272 100 Sales of securities executed but not settled at end of period 1,511 701 - ------------------------------------------------------------------------------------------
See accompanying condensed notes to consolidated financial statements. 9 MASSBANK CORP. CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation The financial condition and results of operations of MASSBANK Corp. (the "Company") essentially reflect the operations of its subsidiary, MASSBANK (the "Bank"). All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles, and in the opinion of management, include all adjustments of a normal recurring nature necessary for the fair presentation of the financial condition of the Company as of June 30, 2001 and December 31, 2000, and its operating results for the three and six months ended June 30, 2001 and 2000. The results of operations for any interim period are not necessarily indicative of the results to be expected for the entire year. The information in this report should be read in conjunction with the financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2000. (2) Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents consist of cash and due from banks, and short-term investments with original maturities of less than 90 days. (3) Short-Term Investments Short-term investments consist of the following:
- ------------------------------------------------------------------------------------------------------------------- At At (In thousands) June 30, 2001 December 31, 2000 - ------------------------------------------------------------------------------------------------------------------- Federal funds sold (overnight) $203,854 $112,711 Money market funds 24,648 131 - ------------------------------------------------------------------------------------------------------------------- Total short-term investments $228,502 $112,842 - -------------------------------------------------------------------------------------------------------------------
The investments above are stated at cost which approximates market value and have original maturities of less than 90 days. (4) Commitments At June 30, 2001, the Company had outstanding commitments to originate mortgage loans and to advance funds for construction loans amounting to $11,294,000 and commitments under existing home equity lines of credit and other loans of approximately $34,459,000 which are not reflected on the consolidated balance sheet. In addition, as of June 30, 2001, the Company had a performance standby letter of credit conveyed to others in the amount of $312,000 which is also not reflected on the consolidated balance sheet. (5) Directors Deferred Compensation Plan In 1988, the Company established a deferred compensation plan for its directors. The plan allows the Company's directors to defer receipt of all or a portion of their compensation until the earlier of: (1) their attaining the age of 72, or (2) their termination as a director of the Company. In 2000, the plan was amended to allow the directors' compensation to be invested in Company stock held in an irrevocable trust. At June 30, 2001 the trust held 14,100 shares of MASSBANK Corp. stock that the Company has classified as treasury stock. The treasury shares are considered outstanding in the computation of earnings per share and book value per share. 10 CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) (6) Comprehensive Income Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." It includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. The term "comprehensive income" describes the total of all components of comprehensive income including net income. The Company's other comprehensive income and related tax effect for the six months ended June 30, 2001 and the year ended December 31, 2000 is as follows:
For the Six Months Ended June 30, 2001 - -------------------------------------------------------------------------------------- Tax Before-Tax (Expense) Net-of-Tax (In thousands) Amount or Benefit Amount ---------- ---------- ---------- Unrealized gains on securities: Unrealized holding gains arising during period $2,561 $(1,006) $1,555 Less: reclassification adjustment for gains realized in net income 1,894 (791) 1,103 ------ ------- ------ Net unrealized gains 667 (215) 452 ------ ------- ------ Other comprehensive income $ 667 $ (215) $ 452 ------ ------- ------ For the Year Ended December 31, 2000 - -------------------------------------------------------------------------------------- Tax Before-Tax (Expense) Net-of-Tax (In thousands) Amount or Benefit Amount ---------- ---------- ---------- Unrealized gains on securities: Unrealized holding gains arising during period $9,377 $(3,613) $5,764 Less: reclassification adjustment for gains realized in net income 3,049 (1,291) 1,758 ------ ------- ------ Net unrealized gains 6,328 (2,322) 4,006 ------ ------- ------ Other comprehensive income $6,328 $(2,322) $4,006 ------ ------- ------
11 MASSBANK CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 2001 Cautionary Statement. Certain statements contained in this report or incorporated herein by reference are "forward-looking statements." We may also make forward-looking statements in other written documents we file with the Securities and Exchange Commission, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume" and other similar expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward- looking statements. Some of the factors that might cause these differences include the following: fluctuations in interest rates, price volatility in the stock and bond markets, inflation, government regulations and economic conditions and competition in the geographic and business areas in which the Company conducts its operations; and increases in loan defaults. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Results of Operations for the three months ended June 30, 2001 GENERAL For the quarter ended June 30, 2001, MASSBANK Corp. reported net income of $2,688,000 or $0.84 in diluted earnings per share compared to net income of $2,717,000, or $0.82 in diluted earnings per share in the second quarter of 2000. Basic earnings per share in the recent quarter increased to $0.86 from $0.84 per share in the second quarter of the prior year. The Company's net income in the second quarter 2001 compared to the same quarter of 2000 reflects an increase in non-interest income of $259,000, a reduction in non-interest expense of $334,000 and a decrease in the provision for loan losses of $3,000. These improvements were offset by a decrease in net interest income of $665,000 resulting primarily from a decline in net interest margin partially offset by an increase in average earning assets. In addition, the Company's favorable earnings per share performance in the recent quarter was positively affected by the reduced number of average common shares outstanding as a result of the Company's repurchase of 173,300 shares of its common stock in the last twelve months, pursuant to its stock repurchase program. 12 AVERAGE BALANCE SHEETS Three Months Ended
June 30, 2001 2000 --------------------------- -------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (In thousands) Balance Expense Rate Balance Expense Rate (4) (4) (4) (4) - --------------------------------------------------------------------------------------- Assets: Earning assets: Federal funds sold $202,492 $ 2,186 4.33% $128,287 $ 2,002 6.26% Short-term investments (2) 28,597 328 4.60 7,703 115 6.01 Investment securities 110,687 1,461 5.28 173,306 2,409 5.56 Mortgage-backed securities 280,677 4,696 6.69 270,231 4,748 7.03 Trading securities 2,460 32 5.15 860 12 5.32 Mortgage loans (1) 274,804 4,807 7.00 282,942 4,914 6.95 Other loans (1) 36,239 613 6.75 36,545 741 8.10 - --------------------------------------------------------------------------------------- Total earning assets 935,956 $14,123 6.04% 899,874 $14,941 6.64% Allowance for loan losses (2,609) (2,573) - --------------------------------------------------------------------------------------- Total earning assets less allowance for loan losses 933,347 897,301 Other assets 20,469 21,949 - --------------------------------------------------------------------------------------- Total assets $953,816 $ 919,250
13 AVERAGE BALANCE SHEETS - (continued) Three Months Ended June 30,
2001 2000 --------------------------- --------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (In thousands) Balance Expense Rate Balance Expense Rate (4) (4) (4) (4) - ------------------------------------------------------------------------------------------ Liabilities: Deposits: Demand and NOW $ 81,907 $ 125 0.61% $ 76,842 $ 124 0.65% Savings 345,425 2,886 3.35 345,497 2,929 3.40 Time certificates of deposit 408,568 5,465 5.37 394,686 5,568 5.66 - ------------------------------------------------------------------------------------------ Total deposits 835,900 8,476 4.07 817,025 8,621 4.23 Other liabilities 6,326 3,108 - ------------------------------------------------------------------------------------------ Total liabilities 842,226 820,133 Stockholders' equity 111,590 99,117 - ------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $953,816 $919,250 - ------------------------------------------------------------------------------------------ Net interest income (tax-equivalent basis) 5,647 6,320 Less adjustment of tax-exempt interest income 18 26 - ------------------------------------------------------------------------------------------ Net interest income $5,629 $ 6,294 - ------------------------------------------------------------------------------------------ Interest rate spread 1.97% 2.41% - ------------------------------------------------------------------------------------------ Net interest margin (3) 2.41% 2.81% - ------------------------------------------------------------------------------------------
(1) Loans on non-accrual status are included in the average balance. (2) Short-term investments consist of interest-bearing deposits in banks and investments in money market funds. (3) Net interest income (tax equivalent basis) before provision for loan losses divided by average interest-earning assets. (4) Includes average net unrealized gains or losses on securities available for sale. 14 Net Interest Income Net interest income totaled $5,629,000 in the second quarter of 2001, a decrease of $665,000 from the same quarter a year ago. This decrease was principally attributable to a decline in net interest margin partially offset by the positive effect of average earning asset growth. The Company's net interest margin for the three months ended June 30, 2001 was 2.41%, a decline from 2.81% reported in the second quarter of 2000. The Company's average earning assets increased $36.1 million to $936.0 million in the recent quarter, from $899.9 million in the same quarter last year. Interest and Dividend Income Interest and dividend income on a fully taxable equivalent basis for the three months ended June 30, 2001, decreased to $14,123,000 from $14,941,000 for the three months ended June 30, 2000. The decrease in interest and dividend income resulted from a decrease in yield on the Company's average earning assets, partially offset by an increase of $36.1 million in average earning assets. As reflected in the table on page 13 of this report, the yield on the Company's average earning assets in the second quarter of 2001 was 6.04%, down from 6.64% in the same quarter of 2000. The Federal Reserve Bank has cut the Federal Funds rate six times in the last twelve months, reducing the rate from 6.50% to 3.75%. This decrease, because of the Bank's high volume of Federal Funds sold, reduced the overall yield on MASSBANK's earning assets. The yield on the Bank's other earning assets, except mortgage loans, also decreased due primarily to a decrease in market interest rates in the last twelve months. Interest Expense Total interest expense for the three months ended June 30, 2001 decreased $145,000, or 1.7% to $8,476,000 from $8,621,000 for the three months ended June 30, 2000. This decrease is due to a decrease in the Company's average cost of funds partially offset by an increase in average deposits. The Company's average cost of funds for the recent quarter was 4.07%, down from 4.23% for the comparable quarter in 2000. The Company's average deposits, as shown in the table on page 14, increased $18.9 million to $835.9 million in the second quarter of 2001, from $817.0 million in the second quarter of 2000. Provision for Loan Losses The provision for loan losses represents a charge against current earnings and an addition to the allowance for loan losses. The provision for loan losses in the second quarter of 2001 was $12,000 compared to $15,000 in the second quarter of last year. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114, general loss allocations for various loan types based on loss experience factors and an unallocated allowance which is maintained based on management's assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. At June 30, 2001, the allowance for loan losses was $2,616,000 representing 554.2% of nonaccrual loans. The Bank's nonaccrual loans totaled $472,000 at June 30, 2001 down from $953,000 a year earlier. The Bank had net loan charge-offs of $3,000 in the recent quarter compared to net charge-offs of $20,000 in the same quarter last year. Management believes that the allowance for loan losses as of June 30, 2001 is adequate to cover the risks inherent in the loan portfolio under current conditions. 15 Non-Interest Income Non-interest income consists of deposit account service fees, net gains on securities and other non-interest income. Non-interest income increased by $259,000 to $1,552,000 for the recent quarter, from $1,293,000 for the comparable quarter of the prior year. This increase is due essentially to higher net securities gains in the second quarter of 2001. Net gains on securities totaled $1,140,000 in the second quarter of this year compared to $886,000 in the second quarter of last year. Realized gains on the sale of equity securities and debt securities totaled $1,130,000 and $11,000, respectively for the three months ended June 30, 2001. The Bank also recorded a mark-to-market loss of $1,000 on its trading account during this same period. The Bank's deposit account service fees and other non-interest income totaled $159,000 and $253,000, respectively, in the second quarter of 2001 compared to $172,000 and $235,000, respectively, in the second quarter of 2000. Non-Interest Expense Non-interest expense decreased $334,000 or 10.0% to $2,991,000 in the second quarter of 2001, from $3,325,000 in the second quarter of 2000. The decrease in non-interest expense is primarily due to a decrease in professional services expenses. Professional services expenses decreased $351,000 or 70.5% to $147,000 in the second quarter of 2001 from $498,000 in the second quarter last year. The decrease is due primarily to legal fees and other expenses the Company incurred in the second quarter last year in defending the Company's registered trademarks against infringement. All other non-interest expenses combined, consisting of salaries and employee benefits, occupancy and equipment, data processing, advertising and marketing, amortization of intangibles and other expenses, increased $17,000 to $2,844,000 for the three months ended June 30, 2001 from $2,827,000 for the three months ended June 30, 2000. Income Tax Expense The Company, the Bank and its subsidiaries file a consolidated federal income tax return. The Parent Company is subject to a State of Delaware Franchise Tax and a State of Massachusetts Bank Excise Tax and the Bank's subsidiaries are subject to a State of Massachusetts Corporate Excise Tax. The Company recorded income tax expense of $1,490,000 in the second quarter of 2001, a decrease of $40,000 when compared to the same quarter last year. The decrease in income tax expense is due primarily to a decrease in income before income taxes. The Company's income before income taxes was $4,178,000 in the recent quarter compared to $4,247,000 for the same quarter a year ago. The effective income tax rate for the three months ended June 30, 2001 and 2000 was 35.7% and 36.0%, respectively. 16 Results of Operations for the six months ended June 30, 2001 General For the six months ended June 30, 2001, the Company reported net income of $5,433,000 or $1.70 in diluted earnings per share ($1.74 in basic earnings per share) compared to net income of $5,545,000 or $1.67 in diluted earnings per share ($1.71 in basic earnings per share) earned in the first half of 2000. The Company's financial performance in the first six months of 2001 reflects an increase in non-interest income of $118,000 and decreases in non- interest expense and provision for loan losses of $647,000 and $6,000, respectively. These improvements were offset by a decrease in net interest income of $973,000 resulting primarily from a decline in net interest margin partially offset by an increase in average earning assets. Additionally, the earnings per share results for the first half of 2001 were positively affected by the reduced number of average common shares outstanding as a result of the Company's repurchase of 173,300 shares of its common stock, in the last twelve months, pursuant to its stock repurchase program. Net Interest Income Net interest income totaled $11,610,000 for the six months ended June 30, 2001, compared to $12,583,000 for the same period in 2000. The $973,000 decrease is primarily attributable to a decrease in the Company's net interest margin, partially offset by an increase in average earning assets. The Company's net interest margin for the first six months of 2001 was 2.50% compared to 2.81% for the same period last year. Average earning assets for the six months ended June 30, 2001 increased $29.9 million to $930.9 million from $901.0 million for the corresponding period in 2000. The Company's interest rate spread for the first half of 2001 decreased to 2.02% from 2.40% for the first six months of last year. The yield on the Company's average earning assets in the first half of 2001 decreased 35 basis points to 6.24% from 6.59% in the corresponding period of 2000. The Company's average cost of funds for the first half of 2001 increased 3 basis points to 4.22% from 4.19% for the six months ended June 30, 2000. 17 AVERAGE BALANCE SHEETS Six Months Ended June 30,
2001 2000 --------------------------- -------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (In thousands) Balance Expense Rate Balance Expense Rate (4) (4) (4) (4) - --------------------------------------------------------------------------------------- Assets: Earning assets: Federal funds sold $185,356 $ 4,555 4.96% $116,839 $ 3,502 6.03% Short-term investments (2) 25,055 616 4.96 11,982 341 5.71 Investment securities 123,139 3,324 5.40 175,164 4,848 5.54 Mortgage-backed securities 282,641 9,483 6.71 273,404 9,558 6.99 Trading securities 4,956 145 5.93 2,069 53 5.10 Mortgage loans (1) 273,208 9,595 7.02 284,926 9,924 6.97 Other loans (1) 36,499 1,322 7.27 36,601 1,457 7.95 - --------------------------------------------------------------------------------------- Total earning assets 930,854 $29,040 6.24% 900,985 $29,683 6.59% Allowance for loan losses (2,605) (2,566) - --------------------------------------------------------------------------------------- Total earning assets less allowance for loan losses 928,249 898,419 Other assets 20,092 21,260 - --------------------------------------------------------------------------------------- Total assets $948,341 $ 919,679
18 AVERAGE BALANCE SHEETS - (continued) Six Months Ended June 30,
2001 2000 --------------------------- -------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (In thousands) Balance Expense Rate Balance Expense Rate (4) (4) (4) (4) - ------------------------------------------------------------------------------------------ Liabilities: Deposits: Demand and NOW $ 80,126 $ 244 0.61% $ 74,946 $ 242 0.65% Savings 341,751 5,728 3.38 347,957 5,906 3.41 Time certificates of deposit 409,253 11,416 5.63 394,348 10,894 5.56 - ------------------------------------------------------------------------------------------ Total deposits 831,130 17,388 4.22% 817,251 17,042 4.19% Other liabilities 6,294 3,205 - ------------------------------------------------------------------------------------------ Total liabilities 837,424 820,456 Stockholders' equity 110,917 99,223 - ------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $948,341 $919,679 - ------------------------------------------------------------------------------------------ Net interest income (tax-equivalent basis) 11,652 12,641 Less adjustment of tax-exempt interest income 42 58 - ------------------------------------------------------------------------------------------ Net interest income $11,610 $12,583 - ------------------------------------------------------------------------------------------ Interest rate spread 2.02% 2.40% - ------------------------------------------------------------------------------------------ Net interest margin (3) 2.50% 2.81% - ------------------------------------------------------------------------------------------
(1) Loans on non-accrual status are included in the average balance. (2) Short-term investments consist of interest-bearing deposits in banks and investments in money market funds. (3) Net interest income (tax equivalent basis) before provision for loan losses divided by average interest-earning assets. (4) Includes the effects of SFAS No. 115. 19 Provision for Loan Losses The provision for loan losses for the first half of 2001 was $24,000 compared to $30,000 for the same period in 2000. This decrease is essentially due to a decrease in the Bank's net loan charge-offs. Loan charge-offs net of recoveries for the six months ended June 30, 2001 and 2000 were $2,000 and $21,000, respectively. Non-Interest Income Non-interest income consists of deposit account service fees, net gains on securities and other non-interest income. Non-interest income for the first six months of 2001 increased $118,000 to $2,723,000 from $2,605,000 for the same period last year. This improvement is due to an increase in net securities gains. Net securities gains totaled $1,997,000 for the six months ended June 30, 2001 compared to $1,853,000 for the six months ended June 30, 2000. Deposit account service fees and other non-interest income combined decreased $26,000 to $726,000 for the first half of 2001, from $752,000 for the first half of 2000. Non-Interest Expense Non-interest expense for the first half of 2001 decreased $647,000 or 9.9% to $5,858,000 from $6,505,000 for the same period last year. This decrease is due primarily to decreases in salaries and employee benefits and professional services expenses. Salaries and employee benefits, the largest component of non-interest expense decreased $186,000 or 5.4% to $3,283,000 in the first half of 2001, from $3,469,000 in the comparable period of 2000. This reduction is due in part to a decrease in salaries and lower expenses associated with various employee benefits, including profit sharing and incentive compensation bonus payments. The bank has operated with fewer people than in the prior year resulting in a reduction in personnel-related expenses. Professional services expenses decreased $417,000 or 62.6% to $249,000 in the first half of 2001, from $666,000 in the first half of last year. This decrease is due principally to legal fees and other expenses the Company incurred in the first six months of last year in defending the Company's registered trademarks against infringement. All other non-interest expenses combined, consisting of occupancy and equipment, data processing, advertising and marketing, amortization of intangibles and other expenses, decreased $44,000 to $2,326,000 for the six months ended June 30, 2001 from $2,370,000 for the six months ended June 30, 2000. Income Tax Expense The provision for federal and state income taxes decreased to $3,018,000 for the six months ended June 30, 2001 from $3,108,000 for the same period in 2000. This decrease is due primarily to a decrease in income before income taxes for the first half of 2001 and a reduction in the Company's effective income tax rate. The Company's combined effective income tax rate for the first half of 2001 is 35.7% compared to 35.9% for the same period a year ago. 20 Financial Condition The Company's total assets increased $18.2 million to $956.9 million as of June 30, 2001 from $938.7 million as of December 31, 2000. The growth in total assets reflects an increase in total investments of $8.2 million and an increase in the bank's loan portfolio, net of allowance for loan losses, of $8.3 million. Other assets increased $1.7 million since year-end 2000. The Company's total investments consisting of investment securities and other short-term investments, including term federal funds sold and interest- bearing bank deposits increased $8.2 million from $607.1 million at December 31, 2000 to $615.3 million at June 30, 2001. The mix of the Company's investments at June 30, 2001 compared to year-end 2000 reflects an increase in short-term investments. This provides the Company with the flexibility to invest some of these funds for a longer duration as the interest rate curve steepens. The higher yields on long-term investments would increase the Company's net interest margin. The loan portfolio at June 30, 2001, net of allowance for loan losses, amounted to $315.8 million compared to $307.5 million at December 31, 2000, an increase of $8.3 million. The growth in the loan portfolio reflects an increase in mortgage loans of $9.6 million, partially offset by a decrease of $1.3 million in the bank's consumer loan portfolio. The decline in mortgage interest rates in the first half of 2001 compared to the same period in 2000 has sparked the demand for mortgage refinancings. As a result, total loan originations for the first half of 2001 increased by $29.2 million to $43.9 million from $14.7 million for the first six months of last year. Total deposits were $839.0 million at June 30, 2001 reflecting an increase of $15.4 million or 1.9% from $823.6 million at year-end 2000. Total stockholders' equity increased $3.0 million to $111.2 million at June 30, 2001 representing a book value of $35.48 per share, from $108.2 million representing a book value of $34.25 per share at December 31, 2000. Contributing to the increase in total stockholders' equity was the Company's net income of $5.4 million in the first half of 2001, an increase in net unrealized gains, net of tax, on the Company's securities available for sale of $0.5 million and the issuance of common stock under the Company's stock option plan. These were partially offset by the payment of $2.0 million in dividends to stockholders and the cost of shares of treasury stock repurchased during the first six months of 2001 in the amount of $1.4 million. The Company's book value per share was also positively affected by the Company's repurchase of 44,200 shares of its common stock, at less than current book value, during the first half of 2001 pursuant to its stock repurchase program. 21 Investments As previously noted, total investments consisting of investment securities, short-term investments, term federal funds sold, and interest-bearing bank deposits equaled $615.3 million at June 30, 2001, up $8.2 million from $607.1 million at year-end 2000. These investments are principally in federal funds sold, short-term U.S. Treasury and government agency obligations and government agency fifteen year mortgage-backed securities. The Bank also maintains an equity securities portfolio, valued at $18.8 million as of June 30, 2001, that has yielded substantial realized and unrealized gains in recent years. Nearly all of the Bank's investment securities are classified as available for sale or trading securities. Management evaluates its investment alternatives in order to properly manage the mix of assets on its balance sheet. Investment securities available for sale and trading securities provide liquidity, facilitate interest rate sensitivity management and enhance the Bank's ability to respond to customers' needs should loan demand increase and/or deposits decline. The Bank continues to maintain a large proportion of its securities portfolio in government agency mortgage-backed securities. These represent an attractive investment with minimal credit risk, no servicing responsibilities, and no delinquencies. The Bank's investment in mortgage-backed securities totaled $286.1 million at June 30, 2001 versus $287.2 million at year-end 2000. The Bank also maintains a portfolio of trading securities which consisted of the following as of the dates shown:
June 30, December 31, (In thousands) 2001 2000 ----- ------- U.S. Treasury obligations $ -- $19,791 Investments in mutual funds 3 3 ----- ------- Total $ 3 $19,794
22 FINANCIAL CONDITION INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities at June 30, 2001 with gross unrealized gains and losses, follows:
- ---------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (In thousands) At June 30, 2001 Cost Gains Losses Value - ---------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations $ 74,795 $ 1,162 $ -- $ 75,957 U.S. Government agency obligations 1,144 1 (4) 1,141 - ---------------------------------------------------------------------------------------- Total 75,939 1,163 (4) 77,098 - ---------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 26,946 860 -- 27,806 Federal Home Loan Mortgage Corporation 249,918 4,653 (41) 254,530 Federal National Mortgage Association 1,724 44 (9) 1,759 Collateralized mortgage obligations 1,981 27 -- 2,008 - ---------------------------------------------------------------------------------------- Total mortgage-backed securities 280,569 5,584 (50) 286,103 - ---------------------------------------------------------------------------------------- Total debt securities 356,508 6,747 (54) 363,201 - ---------------------------------------------------------------------------------------- Equity securities 14,799 6,757 (2,798) 18,758 - ---------------------------------------------------------------------------------------- Total securities available for sale 371,307 $13,504 $(2,852) $381,959 - ---------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 10,652 ________________________________________________________________________________ Total securities available for sale, net 381,959 ________________________________________________________________________________ Total investment securities, net $381,959 ________________________________________________________________________________ Trading securities $ 2 $ 3 ________________________________________________________________________________
23 FINANCIAL CONDITION INVESTMENT SECURITIES (continued) The amortized cost and estimated market value of investment securities at December 31, 2000 with gross unrealized gains and losses, follows:
- ---------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (In thousands) At December 31, 2000 Cost Gains Losses Value - ---------------------------------------------------------------------------------------- Securities held to maturity: Other bonds and obligations $ 230 $ -- $ -- $ 230 - ---------------------------------------------------------------------------------------- Total securities held to maturity $ 230 $ -- $ -- $ 230 - ---------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations $125,630 $ 827 $ (1) $126,456 U.S. Government agency obligations 9,147 -- (14) 9,133 - ---------------------------------------------------------------------------------------- Total 134,777 827 (15) 135,589 - ---------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 30,847 543 (3) 31,387 Federal Home Loan Mortgage Corporation 247,925 3,322 (125) 251,122 Federal National Mortgage Association 2,230 43 (9) 2,264 Collateralized mortgage obligations 2,465 12 (37) 2,440 - ---------------------------------------------------------------------------------------- Total mortgage-backed securities 283,467 3,920 (174) 287,213 - ---------------------------------------------------------------------------------------- Total debt securities 418,244 4,747 (189) 422,802 - ---------------------------------------------------------------------------------------- Equity securities 14,323 7,132 (1,705) 19,750 - ---------------------------------------------------------------------------------------- Total securities available for sale 432,567 $11,879 $(1,894) $442,552 - ---------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 9,985 - ---------------------------------------------------------------------------------------- Total securities available for sale, net 442,552 - ---------------------------------------------------------------------------------------- Total investment securities, net $ 442,782 - ---------------------------------------------------------------------------------------- Trading securities $ 19,786 $ 19,794 - ----------------------------------------------------------------------------------------
24 Investments (continued) The amortized cost and estimated market value of debt securities held to maturity and debt securities available for sale by contractual maturity at June 30, 2001 and December 31, 2000 are as follows:
June 30, 2001 --------------------------------------------- Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 52,989 $ 53,522 $ -- $ -- After 1 year but within 5 years 22,805 23,436 -- -- After 15 years 145 140 -- -- -------- -------- ---------------- ------ 75,939 77,098 -- -- Mortgage-backed securities 280,569 286,103 -- -- -------- -------- ---------------- ------ $356,508 $363,201 $ -- $ -- December 31, 2000 --------------------------------------------- Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 90,841 $ 91,025 $ -- $ -- After 1 year but within 5 years 43,789 44,420 230 230 After 15 years 147 144 -- -- -------- -------- ---------------- ------ 134,777 135,589 230 230 Mortgage-backed securities 283,467 287,213 -- -- -------- -------- ---------------- ------ $418,244 $422,802 $230 $230
25 LOANS The composition of the Bank's loan portfolio is summarized as follows:
- ----------------------------------------------------------------------------- At At (In thousands) June 30, 2001 December 31, 2000 - ----------------------------------------------------------------------------- Mortgage loans: Residential $279,891 $270,330 Commercial 2,805 3,117 Construction 1,015 683 - ----------------------------------------------------------------------------- 283,711 274,130 Premium on loans 78 105 Deferred mortgage loan origination fees (1,219) (1,284) - ----------------------------------------------------------------------------- Total mortgage loans 282,570 272,951 Other loans: Consumer: Installment 1,705 1,829 Guaranteed education 5,728 6,266 Other secured 1,047 1,169 Home equity lines of credit 12,114 12,624 Unsecured 197 224 - ----------------------------------------------------------------------------- Total consumer loans 20,791 22,112 Commercial 15,070 15,084 - ----------------------------------------------------------------------------- Total other loans 35,861 37,196 - ----------------------------------------------------------------------------- Total loans $318,431 $310,147 - -----------------------------------------------------------------------------
The Bank's loan portfolio increased $8.3 million during the first six months of 2001, from $310.1 million at December 31, 2000 to $318.4 million at June 30, 2001. Mortgage loans increased $9.6 million and consumer loans decreased $1.3 million. Loan originations increased by $29.2 million to $43.9 million in the first six months of 2001 compared to $14.7 million in the first six months of last year. 26 NON-PERFORMING ASSETS The following table shows the composition of the Bank's non-performing assets at June 30, 2001 and 2000, and December 31, 2000:
At At At June 30, December 31, June 30, (In thousands) 2001 2000 2000 - ------------------------------------------------------------------------------- Non-Performing Assets: Non-accrual loans $ 472 $ 565 $ 953 Real estate acquired through foreclosure -- -- -- - ------------------------------------------------------------------------------- Total non-performing assets $ 472 $ 565 $ 953 - ------------------------------------------------------------------------------- Allowance for loan losses $ 2,616 $ 2,594 $ 2,564 Allowance as a percent of non-accrual loans 554.2 % 459.1 % 269.0 % Allowance as a percent of non-performing assets 554.2 % 459.1 % 269.0 % Non-accrual loans as a percent of total loans 0.15% 0.18% 0.30% Non-performing assets as a percent of total assets 0.05% 0.06% 0.10% - -------------------------------------------------------------------------------
The Bank generally does not accrue interest on loans which are 90 days or more past due. It is the Bank's policy to place such loans on non-accrual status and to reverse from income all interest previously accrued but not collected and to discontinue all amortization of deferred loan fees. Non-performing assets decreased from December 31, 2000 to June 30, 2001 as noted in the table above. The principal balance of non-accrual loans was down to $472,000, or approximately 0.15% of total loans at June 30, 2001. The Bank did not have any impaired loans as of June 30, 2001. 27 ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows:
Six Months Ended June 30, 2001 2000 - ---------------------------------------------------------------- (In thousands) Balance at beginning of period $2,594 $2,555 Provision for loan losses 24 30 Recoveries of loans previously charged-off 1 2 Less: Charge-offs (3) (23) - ---------------------------------------------------------------- Balance at end of period $2,616 $2,564 - ----------------------------------------------------------------
The Company maintains an allowance for probable losses that are inherent in the Company's loan portfolio. The allowance for loan losses is increased by provisions charged to operations based on the estimated loan loss exposure inherent in the portfolio. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired in accordance with the terms of Statement of Financial Accounting Standard No. 114, general loss allocations for various loan types based on loss experience factors and an unallocated allowance which is maintained based on management's assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the information available in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. At June 30, 2001 the balance of the allowance for loan losses was $2,616,000 representing 554.2% of non-accrual loans. Management believes that the allowance for loan losses is adequate to cover the risks inherent in the portfolio under current conditions. 28 DEPOSITS Deposit accounts of all types have traditionally been the primary source of funds for the Bank's lending and investment activities. The Bank's deposit flows are influenced by prevailing interest rates, competition and other market conditions. The Bank's management attempts to manage its deposits through selective pricing and marketing. The Bank's total deposits increased by $15.4 million to $839.0 million at June 30, 2001 from $823.6 million at December 31, 2000. The composition of the Bank's total deposits as of the dates shown are summarized as follows:
June 30, December 31, 2001 2000 - ------------------------------------------------------------- (In thousands) Demand and NOW $ 84,388 $ 79,952 Savings and money market accounts 348,681 334,948 Time certificates of deposit 406,076 408,981 Deposit acquisition premium, net of amortization (144) (256) - ------------------------------------------------------------- Total deposits $839,001 $823,625 - -------------------------------------------------------------
Recent Accounting Developments "Accounting for Derivative Instruments and Hedging Activities" In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These Statements establish comprehensive accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair market value. Under these Statements, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The Company adopted these Statements on January 1, 2001. The adoption of these Statements did not have a material effect on the Company's consolidated financial statements. 29 Recent Accounting Developments (continued) "Goodwill and Other Intangible Assets" In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.142, "Goodwill and Other Intangible Assets." SFAS 142 requires that upon adoption of the Statement, any goodwill recorded on an entity's balance sheet would no longer be amortized. This would include existing goodwill (i.e., recorded goodwill at the date the financial statement is issued), as well as goodwill arising subsequent to the effective date of the Statement. Goodwill will not be amortized but will be reviewed for impairment periodically or upon the occurrence of certain triggering events. This Statement is effective for fiscal years beginning after December 15, 2001. At June 30, 2001, the Company had $1,140,000 of goodwill on its balance sheet that is being amortized at a rate of $99,000 annually. The Company also had $144,000 of other intangible assets being amortized at a rate of $230,000 annually. Liquidity and Capital Resources The Bank must maintain a sufficient amount of cash and assets which can readily be converted into cash in order to meet cash outflows from normal depositor requirements and loan demands. The Bank's primary sources of funds are deposits, loan amortization and prepayments, sales or maturities of investment securities and income on earning assets. In addition to loan payments and maturing investment securities, which are relatively predictable sources of funds, the Bank maintains a high percentage of its assets invested in short-term investments (overnight federal funds sold and money market funds), which can be immediately converted into cash, and United States Treasury and Government agency securities, which can be sold or pledged to raise funds. At June 30, 2001 the Bank had $228.5 million or 23.9% of total assets and $77.1 million or 8.1% of total assets invested, respectively, in short-term investments and United States obligations. The Bank is a Federal Deposit Insurance Corporation ("FDIC") insured institution subject to the FDIC regulatory capital requirements. The FDIC regulations require all FDIC insured institutions to maintain minimum levels of Tier 1 capital. Highly rated banks (i.e., those with a composite rating of 1 under the CAMELS rating system) are required to maintain a minimum leverage ratio of Tier 1 capital to total assets of at least 3.00%. An additional 100 to 200 basis points are required for all but these most highly rated institutions. The Bank is also required to maintain a minimum level of risk-based capital. Under the risk-based capital standards, FDIC insured institutions must maintain a Tier 1 capital to risk-weighted assets ratio of 4.00% and are generally expected to meet a minimum total qualifying capital to risk-weighted assets ratio of 8.00%. The risk-based capital guidelines take into consideration risk factors, as defined by the regulators, associated with various categories of assets, both on and off the balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk adjusted assets to determine the risk-based capital ratios. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses, qualifying subordinated debt and up to 45 percent of the pre-tax net unrealized holding gains on certain available for sale equity securities. Tier I capital plus the Tier II capital components are referred to as total qualifying capital. The capital ratios of the Bank and the Company currently exceed the minimum regulatory requirements. At June 30, 2001, the Bank had a leverage Tier I capital to total assets ratio of 10.75%, a Tier I capital to risk-weighted assets ratio of 30.22% and a total capital to risk-weighted assets ratio of 31.52%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to total assets of 10.95%, Tier I capital to risk-weighted assets of 30.76% and total capital to risk-weighted assets of 32.07% at June 30, 2001. 30 Impact Of Inflation And Changing Prices MASSBANK Corp.'s financial statements presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time, due to the fact that substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Sensitivity and Liquidity See discussion and analysis of interest rate sensitivity and liquidity provided in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2000. There have been no material changes in reported market risks faced by the Corporation since the filing of the Corporation's 2000 Annual Report on Form 10-K. 31 PART II - OTHER INFORMATION Item 1. Legal Proceedings From time to time, MASSBANK Corp. and/or the Bank are involved as a plaintiff or defendant in various legal actions incident to their business. As of June 30, 2001, none of these actions individually or in the aggregate is believed by management to be material to the financial condition of MASSBANK Corp. or the Bank. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders of MASSBANK Corp. held on April 17, 2001, stockholders voted affirmatively on the following proposal: 1.) To elect four Directors to serve until the 2002 Annual Meeting of Stockholders, three Directors to serve until the 2003 Annual Meeting of Stockholders and four Directors to serve until the 2004 Annual Meeting of Stockholders. Elected at Meeting Term Mathias B. Bedell 3 Years Gerard H. Brandi 1 Year Allan S. Bufferd 2 Years Peter W. Carr 1 Year Alexander S. Costello 3 Years Robert S. Cummings 1 Year Leonard Lapidus 3 Years Stephen E. Marshall 3 Years Nancy L. Pettinelli 2 Years Herbert G. Schurian 1 Year Dr. Donald B. Stackhouse 2 Years Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a. Exhibits: 1. Exhibit No. 11.1: Statement regarding computation of per share earnings. b. Reports on Form 8-K None. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MASSBANK Corp. & Subsidiaries _____________________________ (Registrant) Date: August 13, 2001 /s/Gerard H. Brandi ___________________________ (Signature) Gerard H. Brandi President and CEO Date: August 13, 2001 /s/Reginald E. Cormier ___________________________ (Signature) Reginald E. Cormier Sr. V.P., Treasurer and CFO 33 EX-11.1 3 dex111.txt EARNINGS PER SHARE EXHIBIT 11.1 MASSBANK CORP. Earnings Per Share The following is a calculation of earnings per share for the three and six months ended June 30, 200 six months ended June 30, 2001 and 2000.
Three Months Ended Six Months Ended Calculation of Basic June 30, June 30, Earnings Per Share 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------- Net Income $2,688,000 $2,717,000 $5,433,000 $5,545,000 Average common shares outstanding 3,133,520 3,255,432 3,141,798 3,272,478 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (17,600) (26,400) (17,600) (26,400) Weighted average shares outstanding 3,115,920 3,229,032 3,124,198 3,246,078 Earnings per share (in dollars) $ 0.86 $ 0.84 $ 1.74 $ 1.71 ---------- ---------- ---------- ---------- Three Months Ended Six Months Ended Calculation of Diluted June 30, June 30, Earnings Per Share 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------- Net Income $2,688,000 $2,717,000 $5,433,000 $5,545,000 Average common shares outstanding 3,133,520 3,255,432 3,141,798 3,272,478 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (17,600) (26,400) (17,600) (26,400) Diluted stock options 80,988 75,872 77,425 75,054 ---------- ---------- ---------- ---------- Weighted average shares outstanding 3,196,908 3,304,904 3,201,623 3,321,132 ---------- ---------- ---------- ---------- Earnings per share (in dollars) $ 0.84 $ 0.82 $ 1.70 $ 1.67 ---------- ---------- ---------- ----------
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