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 March 31, 2002 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 April 30, 2002: 4,763,625 shares. MASSBANK CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION
Page ITEM 1. Financial Statements Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001 3 Consolidated Statements of Income (unaudited) for the three months ended March 31, 2002 and 2001 4 Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2002 (unaudited) and the year ended December 31, 2001 5 - 6 Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2002 and 2001 7 - 8 Condensed Notes to the Consolidated Financial Statements 9 - 10 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 28 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 28 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 29 ITEM 2. Changes in Securities 29 ITEM 3. Defaults Upon Senior Securities 29 ITEM 4. Submission of Matters to a Vote of Security Holders 29 ITEM 5. Other Information 29 ITEM 6. Exhibits and Reports on Form 8-K 29 Signature Page 30
2 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share data)
March 31, December 31, 2002 2001 (unaudited) Assets: Cash and due from banks $ 10,374 $ 8,945 Short-term investments (Note 3) 179,802 236,382 ---------------------------------------------------------------------------------- Total cash and cash equivalents 190,176 245,327 Interest-bearing deposits in banks 6,050 6,490 Securities available for sale, at market value (amortized cost of $381,745 in 2002 and $362,076 in 2001) 389,508 372,584 Trading securities, at market value 38,743 3,089 Loans: (Note 4) Mortgage loans 311,806 296,469 Other loans 34,069 34,548 Allowance for loan losses (2,643) (2,643) ---------------------------------------------------------------------------------- Net loans 343,232 328,374 Premises and equipment 6,831 6,927 Accrued interest receivable 4,785 3,950 Goodwill 1,090 1,090 Current income tax asset, net -- 208 Other assets 8,440 3,129 ---------------------------------------------------------------------------------- Total assets $988,855 $971,168 Liabilities and Stockholders' Equity: Deposits $867,482 $849,684 Escrow deposits of borrowers 1,428 1,403 Employee stock ownership plan liability 156 156 Current income taxes 1,152 -- Deferred income taxes 1,152 2,275 Other liabilities 2,739 2,746 ---------------------------------------------------------------------------------- Total liabilities 874,109 856,264 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, 7,525,104 and 7,494,980 shares issued, respectively 7,525 7,495 Additional paid-in capital 63,557 62,875 Retained earnings 101,603 99,996 ---------------------------------------------------------------------------------- 172,685 170,366 Accumulated other comprehensive income: (Note 6) Net unrealized gains on securities available for sale, net of tax effect 4,761 6,443 Treasury stock at cost, 4,380,589 and 4,362,289 shares, respectively (Note 5) (62,544) (61,749) Common stock acquired by ESOP (156) (156) ---------------------------------------------------------------------------------- Total stockholders' equity 114,746 114,904 ---------------------------------------------------------------------------------- Total liabilities and stockholders' equity $988,855 $971,168
See accompanying condensed notes to consolidated financial statements. 3 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended March 31, (In thousands except share data) 2002 2001 ------------------------------------------------------------------------------- Interest and dividend income: Mortgage Loans $ 5,182 $ 4,788 Other loans 401 709 Securities available for sale: Mortgage-backed securities 4,145 4,787 Other securities 1,231 1,836 Trading securities 128 113 Federal funds sold 725 2,369 Other investments 228 291 ------------------------------------------------------------------------------- Total interest and dividend income 12,040 14,893 ------------------------------------------------------------------------------- Interest expense: Deposits 6,094 8,912 ------------------------------------------------------------------------------- Total interest expense 6,094 8,912 ------------------------------------------------------------------------------- Net interest income 5,946 5,981 Provision for loan losses -- 12 ------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,946 5,969 ------------------------------------------------------------------------------- Non-interest income: Deposit account service fees 146 161 Gains on securities available for sale, net 999 773 Gains (losses) on trading securities, net (66) 84 Other 177 153 ------------------------------------------------------------------------------- Total non-interest income 1,256 1,171 ------------------------------------------------------------------------------- Non-interest expense: Salaries and employee benefits 1,826 1,588 Occupancy and equipment 521 578 Data processing 128 129 Professional services 144 102 Advertising and marketing 41 42 Amortization of intangibles 29 82 Deposit insurance 46 45 Other 300 301 ------------------------------------------------------------------------------- Total non-interest expense 3,035 2,867 ------------------------------------------------------------------------------- Income before income taxes 4,167 4,273 Income tax expense 1,517 1,528 ------------------------------------------------------------------------------- Net income $ 2,650 $ 2,745 ------------------------------------------------------------------------------- Weighted average common shares outstanding: Basic 3,155,854 3,132,567 Diluted 3,241,076 3,206,390 Earnings per share (in dollars): Basic $ 0.84 $ 0.88 Diluted 0.82 0.86
See accompanying condensed notes to consolidated financial statements. 4 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Three Months Ended March 31, 2002 (unaudited) (In thousands except share data)
ACCUMULATED COMMON ADDITIONAL OTHER STOCK COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL -------- ---------- --------- ---------- ---------- --------- --------- Balance at December 31, 2001 $7,495 $62,875 $99,996 $(61,749) $ 6,443 $(156) $114,904 Net Income -- -- 2,650 -- -- -- 2,650 Other comprehensive income, net of tax: Unrealized losses on securities, net of reclassification adjustment (Note 6) -- -- -- -- (1,682) -- (1,682) ----- Comprehensive income 968 Cash dividends paid ($0.33 per share) -- -- (1,044) -- -- -- (1,044) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 1 -- -- -- 1 Amortization of ESOP shares committed to be released -- 54 -- -- -- -- 54 Purchase of treasury stock -- -- -- (795) -- -- (795) Exercise of stock options and related tax benefits 30 628 -- -- -- -- 658 ------------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 2002 $7,525 $63,557 $101,603 $(62,544) $ 4,761 $(156) $114,746
See accompanying condensed notes to consolidated financial statements. 5 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Year Ended December 31, 2001 (In thousands except share data)
ACCUMULATED COMMON ADDITIONAL OTHER STOCK COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL -------- ---------- --------- ---------- ---------- --------- -------- Balance at December 31, 2000 $7,448 $61,674 $93,165 $(59,704) $5,972 $(312) $108,243 Net income -- -- 10,759 -- -- -- 10,759 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 6) -- -- -- -- 471 -- 471 -------- Comprehensive income 11,230 Cash dividends paid ($1.26 per share) -- -- (3,935) -- -- -- (3,935) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 7 -- -- -- 7 Net decrease in liability to ESOP -- -- -- -- -- 156 156 Amortization of ESOP shares committed to be released -- 151 -- -- -- -- 151 Purchase of treasury stock -- -- -- (1,989) -- -- (1,989) Purchase of company stock for deferred compensation plan (Note 5) -- 56 -- (56) -- -- -- Exercise of stock options and related tax benefits 47 994 -- -- -- -- 1,041 ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $7,495 $62,875 $99,996 $(61,749) $6,443 $(156) $114,904
See accompanying condensed notes to consolidated financial statements. 6 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31, 2002 2001 ---- ---- (In thousands) Cash flows from operating activities: Net income $ 2,650 $ 2,745 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 188 206 Loan interest capitalized (7) (12) Amortization of ESOP shares committed to be released 54 31 (Increase) decrease in accrued interest receivable (835) 474 Decrease in other liabilities (7) (70) Increase in current income taxes 1,360 1,445 Amortization of premiums (accretion of discounts) on securities, net 58 (198) Net trading securities activity (35,720) 13,490 Gains on securities available for sale, net (999) (773) Losses (gains) on trading securities, net 66 (84) Decrease in deferred mortgage loan origination fees, net of amortization (6) (55) Deferred income tax benefit (61) (58) Increase in other assets (376) (214) Provision for loan losses -- 12 Gains on sales of premises and equipment -- (4) Increase in escrow deposits of borrowers 25 22 ------------------------------------------------------------------------------------------ Net cash (used in) provided by operating activities (33,610) 16,957 ------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of term federal funds -- (10,000) Proceeds from maturities of term federal funds -- 20,000 Net decrease (increase) in interest bearing bank deposits 440 (2,235) Proceeds from sales of investment securities available for sale 7,406 7,877 Proceeds from maturities of investment securities available for sale 7,000 21,000 Purchases of investment securities available for sale (58,237) (4,453) Purchases of mortgage-backed securities (10,011) (10,046) Principal repayments of mortgage-backed securities 30,178 12,396 Principal repayments of securities available for sale 1 1 Loans originated (36,197) (12,578) Loan principal payments received 21,343 14,531 Purchases of premises & equipment (53) (650) Proceeds from sales of premises and equipment -- 4 ------------------------------------------------------------------------------------------ Net cash (used in) provided by investing activities (38,130) 35,847 ------------------------------------------------------------------------------------------
7 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited)
Three Months Ended March 31, 2002 2001 ---- ---- (In thousands) Cash flows from financing activities: Net increase in deposits 17,769 13,567 Payments to acquire treasury stock (795) (1,183) Purchase of Company stock for deferred compensation plan -- 16 Issuance of common stock under stock option plan 533 173 Tax benefit resulting from stock options exercised 125 29 Cash dividends paid on common stock (1,044) (987) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 1 2 ------------------------------------------------------------------------------------------ Net cash provided by financing activities 16,589 11,617 ------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (55,151) 64,421 Cash and cash equivalents at beginning of period 245,327 122,021 ------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $190,176 $186,442 ------------------------------------------------------------------------------------------ Supplemental cash flow disclosures: Cash transactions: Cash paid during the period for interest $ 6,095 $ 8,933 Cash paid during the period for taxes, net of refunds 92 110 Purchases of securities executed but not settled at beginning of period which settled during the period 46 60 Sales of securities executed but not settled at beginning of period which settled during the period 1,009 573 Non-cash transactions: SFAS 115: (Decrease) increase in accumulated other comprehensive income (1,682) 1,450 (Decrease) increase in deferred tax liabilities (1,062) 808 Purchases of securities executed but not settled at end of period 24 273 Sales of securities executed but not settled at end of period 2,922 707 ------------------------------------------------------------------------------------------
See accompanying condensed notes to consolidated financial statements. 8 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 March 31, 2002 and December 31, 2001, and its operating results for the three months ended March 31, 2002 and 2001. The results of operations for any interim period are not necessarily indicative of the results to be expected for the entire year. Certain amounts in the prior years' consolidated financial statements were reclassified to facilitate comparison with the current fiscal 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, 2001. (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) March 31, 2002 December 31, 2001 -------------------------------------------------------------------------------- Federal funds sold (overnight) $155,053 $204,294 Money market funds 24,749 32,088 -------------------------------------------------------------------------------- Total short-term investments $179,802 $236,382 -------------------------------------------------------------------------------- The investments above are stated at cost which approximates market value and have original maturities of less than 90 days. (4) Commitments At March 31, 2002, the Company had outstanding commitments to originate mortgage loans and to advance funds for construction loans amounting to $8,379,000 and commitments under existing home equity lines of credit and other loans of approximately $40,692,000 which are not reflected on the consolidated balance sheet. In addition, as of March 31, 2002, the Company had a performance standby letter of credit conveyed to others in the amount of $156,000 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 (1) their attaining the age of 72, or (2) their termination as a director of the Company. The plan was later amended to allow the directors' compensation to be invested in Company stock held in an irrevocable trust. At March 31, 2002 the trust held 14,800 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. 9 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 three months ended March 31, 2002 and the year ended December 31, 2001 is as follows: For the Three Months Ended March 31, 2002 -------------------------------------------------------------------------------- Tax Before-Tax (Expense) Net-of-Tax (In thousands) Amount or Benefit Amount ------ ---------- ------ Unrealized losses on securities: Unrealized holding (losses) arising during period $(1,745) $ 644 $(1,101) Less: reclassification adjustment for gains realized in net income 999 (418) 581 ------- ------- ------- Net unrealized losses (2,744) 1,062 (1,682) ------- ------- ------- Other comprehensive loss $(2,744) $ 1,062 $(1,682) ------- ------- ------- For the Year Ended December 31, 2001 -------------------------------------------------------------------------------- Tax Before-Tax (Expense) Net-of-Tax (In thousands) Amount or Benefit Amount ------ ---------- ------ Unrealized gains on securities: Unrealized holding gains arising during period $ 4,785 $(1,833) $ 2,952 Less: reclassification adjustment for gains realized in net income 4,262 (1,781) 2,481 ------- ------- ------- Net unrealized gains 523 (52) 471 ------- ------- ------- Other comprehensive income $ 523 $ (52) $ 471 ------- ------- ------- 10 MASSBANK CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2002 Forward-Looking Statement Disclosure. This Form 10-Q may contain forward-looking information, including information concerning the Company's expectations of future business prospects. These forward-looking statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The Company may also make written or oral forward-looking statements in other documents filed with the Securities and Exchange Commission ("SEC"), in annual reports to stock- holders, in press releases and other written materials, and in oral statements made by the Company's officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "will," "should," and other expressions which predict or indicate future events and trends and which do not relate to historical matters. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results or performance to be materially different from the results and performance expressed or implied by the forward-looking statements. Forward- looking statements include, but are not limited to, statements concerning the Company's belief, expectations, or intentions concerning the Company's future performance, the financial outlook of the markets it serves and the performance and activities of its competitors. These statements reflect the Company's current views, are based on numerous assumptions and are subject to numerous risks, uncertainties and other factors including but not limited to the following: - Unexpected fluctuations in market interest rates - Unexpected fluctuations in the market for equities, bonds, federal funds and other financial instruments - An increase in the level of non-performing assets - An increase in competitive pricing pressures within the Company's market which may result in the following: . An increase in the Company's cost of funds . Changes in volume of loan originations . Limit the ability of the Company to attract and retain banking customers - Adverse legislative or regulatory developments - Adverse impacts resulting from the continuing war on terrorism - An increase in medical insurance and other employee-related costs - The impact of inflation, and other factors described in the Company's annual report on Form 10-K. 11 Results of Operations for the three months ended March 31, 2002 GENERAL For the quarter ended March 31, 2002, MASSBANK Corp. reported net income of $2,650,000, or $0.82 in diluted earnings per share compared to net income of $2,745,000 or $0.86 in diluted earnings per share in the first quarter of 2001. Basic earnings per share in the recent quarter were $0.84 per share compared to $0.88 per share in the first quarter of the prior year. The Company's net income in the first quarter 2002 compared to the same quarter of 2001 reflects an increase in non-interest expense of $168,000, a decrease in net interest income of $35,000 and a slight increase in the Company's income tax rate. These items were partially offset by an improvement in non-interest income of $85,000 due mainly to higher securities gains. Net interest income Net interest income totaled $5,946,000 in the first quarter of 2002, a decrease of $35,000 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 March 31, 2002 was 2.49%, a decline from 2.60%, reported in the first quarter of 2001. While the net interest margin declined compared to the first quarter last year, it has increased sequentially by 16 basis points over the last two quarters to 2.49%, from 2.33% in the third quarter of 2001. Average earning assets for the quarter ended March 31, 2002 increased $32.6 million to $958.3 million, from $925.7 million in the same quarter of 2001. Interest and Dividend Income Interest and dividend income on a fully taxable equivalent basis for the three months ended March 31, 2002, decreased to $12,063,000 from $14,917,000 for the three months ended March 31, 2001. The decrease in interest and dividend income resulted from a decrease in yield on the Company's average earning assets, partially offset by the higher interest income resulting from an increase of $32.6 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 first quarter of 2002 was 5.04%, down from 6.45% in the same quarter of 2001. The reduction in yield on the Company's average earning assets is primarily attributable to lower market interest rates, especially the Federal Funds rate. The Federal Reserve Bank cut the Federal Funds rate eight times during the twelve months ended March 31, 2002, reducing the rate from 5.00% to 1.75%. Interest Expense Total interest expense for the three months ended March 31, 2002 decreased $2,818,000, or 31.6% to $6,094,000 from $8,912,000 for the three months ended March 31, 2001. The decrease in interest expense is due primarily to a reduction in the Bank's average cost of funds, partially offset by an increase in interest expense due to higher average deposits. A decrease in the Bank's deposit rates, due to declining market interest rates in the last twelve months, caused the Bank's cost of funds to decrease 148 basis points, from 4.37% in the first quarter of 2001 to 2.89% in the recent quarter. The Company's average deposits, as shown in the table on page 14, increased $30.0 million to $856.3 million in the first quarter of 2002, from $826.3 million in the first quarter of 2001. 12
AVERAGE BALANCE SHEETS Three Months Ended March 31, 2002 2001 ---- ---- 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 $174,469 $ 725 1.69% $168,030 $ 2,369 5.72% Short-term investments (2) 37,919 228 2.44 21,474 288 5.44 Investment securities 125,336 1,254 4.00 135,728 1,863 5.49 Mortgage-backed securities 257,150 4,145 6.45 284,627 4,787 6.73 Trading securities 24,290 128 2.10 7,480 113 6.19 Mortgage loans (1) 304,845 5,182 6.80 271,595 4,788 7.05 Other loans (1) 34,338 401 4.73 36,762 709 7.78 -------------------------------------------------- ---------------- Total earning assets 958,347 $12,063 5.04% 925,696 $14,917 6.45% Allowance for loan losses (2,643) (2,601) ------------------------------------------------------------------------------------------ Total earning assets less allowance for loan losses 955,704 923,095 Other assets 22,259 19,711 ------------------------------------------------------------------------------------------ Total assets $977,963 $942,806 ------------------------------------------------------------------------------------------
13 AVERAGE BALANCE SHEETS - (continued) Three Months Ended March 31, 2002 2001 ---- ----
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 $ 81,597 $ 89 0.44% $ 78,325 $ 119 0.62% Savings 405,616 2,694 2.69 338,036 2,842 3.41 Time certificates of deposit 369,049 3,311 3.64 409,947 5,951 5.89 -------------------------------------------------- ---------------- Total deposits 856,262 6,094 2.89 826,308 8,912 4.37 Other liabilities 5,402 6,262 ------------------------------------------------------------------------------------------ Total liabilities 861,664 832,570 Stockholders' equity 116,298 110,236 ------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $977,962 $942,806 ------------------------------------------------------------------------------------------ Net interest income (tax-equivalent basis) 5,969 6,005 Less adjustment of tax-exempt interest income 23 24 ------------------------------------------------------------------------------------------ Net interest income $ 5,946 $ 5,981 ------------------------------------------------------------------------------------------ Interest rate spread 2.15% 2.08% ------------------------------------------------------------------------------------------ Net interest margin (3) 2.49% 2.60% ------------------------------------------------------------------------------------------
(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 Provision for Loan Losses The provision for loan losses represents a charge against current earnings and an addition to the allowance for loan losses. There was no provision for loan losses in the first quarter of 2002. This compares to a $12,000 provision for loan losses in the first 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 Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan", 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 March 31, 2002, the allowance for loan losses was $2,643,000 representing 789.0% of nonaccrual loans. The Bank's nonaccrual loans totaled $335,000 at March 31, 2002 down from $424,000 a year earlier. There were no net loan charge-offs in the recent quarter. In the first quarter of last year the Bank recorded net recoveries on loans previously charged-off of $1,000. Management believes that the allowance for loan losses as of March 31, 2002 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 $85,000 to $1,256,000 in the recent quarter, from $1,171,000 in the comparable quarter of the prior year. This increase is due essentially to higher securities gains in the first quarter of 2002. Net gains on securities totaled $933,000 in the first quarter of this year compared to $857,000 in the first quarter of last year. Realized gains on the sale of equity securities and debt securities totaled $996,000 and $3,000, respectively, for the three months ended March 31, 2002. The Bank also recorded losses of $66,000 on its trading account during this same period. The Bank's deposit account service fees and other non-interest income totaled $146,000 and $177,000, respectively, in the first quarter of 2002 compared to $161,000 and $153,000, respectively, in the first quarter of 2001, reflecting a modest combined increase over the same quarter last year. Non-Interest Expense Non-interest expense increased $168,000 or 5.9% to $3,035,000 in the first quarter of 2002 from $2,867,000 in the first quarter or 2001. The increase in non-interest expense is primarily due to increases in salaries and employee benefits and professional services expense. Salaries and employee benefits, the largest component of non-interest expense increased $238,000 or 15.0% to $1,826,000 in the recent quarter, from $1,588,000 in the comparable quarter of 2001. This increase reflects higher salaries due to merit increases and an increased number of employees, higher pension costs and an increase in costs associated with various other employee benefits. Professional service expenses increased by $42,000 or 41.2% to $144,000 in the first quarter of 2002 from $102,000 in the first quarter of last year. The increase is due primarily to higher legal fees. Occupancy and equipment expenses declined $57,000 to $521,000 in the recent quarter, from $578,000 in the same quarter last year. This decrease is due in part to the construction of a new branch and the purchase of another in Chelmsford, replacing existing leases and reducing net occupancy expenses. Amortization of intangibles expense decreased $53,000 to $29,000 in the first quarter 2002, from $82,000 in the first quarter last year. This expense decreased for the following reasons: 1. The deposit acquisition premium that the Bank recorded in 1992 in connection with its acquisition of the deposits and certain assets of the former Central Savings Bank, Lowell was fully amortized in February 2002. 16 2. On January 1, 2002 the Company adopted 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 a company's balance sheet would no longer be amortized, but be reviewed for impairment periodically or upon the occurrence of certain triggering events. At January 1, 2002 the Company had $1,090,000 of goodwill on its balance sheet that was previously being amortized at a rate of $25,000 per quarter. All other non-interest expenses combined, consisting of data processing, advertising and marketing, deposit insurance and other expenses, decreased $2,000 to $515,000 for the three months ended March 31, 2002 from $517,000 for the three months ended March 31, 2001. 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 $1,517,000 in the first quarter of 2002, a decrease of $11,000 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, partially offset by a slight increase in effective income tax rate. The Company's income before income taxes was $4,167,000 in the recent quarter compared to $4,273,000 for the same quarter a year ago. The effective income tax rate for the three months ended March 31, 2002 and 2001 was 36.4% and 35.8%, respectively. 17 Financial Condition The Company's total assets amounted to $988.9 million as of March 31, 2002, an increase of $17.7 million or 1.8% from $971.2 million at December 31, 2001. This reflects an increase in the Bank's loan portfolio, net of allowance for loan losses, of $14.8 million or 4.5% and a decrease in total investments of $4.4 million or 0.7%. Other assets increased $7.3 million. Investments At March 31, 2002, the Company's investment portfolio, consisting of investment securities (including mortgage-backed securities), short-term investments and interest-bearing bank deposits totaled $614.1 million or 62.1% of total assets, compared to $618.5 million or 63.7% of total assets at December 31, 2001. The portfolio included U.S. government and agency obligations maturing within five years, 15-year mortgage-backed securities and equity securities. For further information concerning the composition, maturity and market value of the Bank's investment securities, see pages 20 through 22 of this Form 10-Q. Loans The loan portfolio, net of allowance for loan losses, increased $14.8 million or 4.5% this recent quarter. At March 31, 2002, the loan portfolio, net of allowance for loan losses, was $343.2 million representing 34.7% of total assets compared to $328.4 million representing 33.8% of total assets at December 31, 2001. The majority of loans in the portfolio are residential mortgages. Residential mortgages amounted to $309.2 million at March 31, 2002, representing 89.4% of the loan portfolio. See page 23 of this Form 10-Q for a table setting forth the composition of the loan portfolio at March 31, 2002 and year-end 2001. Lower interest rates in the first quarter 2002 resulted in increased loan origination growth for the Bank. In the first quarter 2002, the Bank originated loans of $36.2 million, an increase of $23.6 million or approximately triple the $12.6 million in loans originated in the first three months of 2001. Asset Quality Asset quality remains strong. Non-accrual loans, generally those loans which are 90 days or more delinquent, were $335 thousand and $424 thousand, respectively, at March 31, 2002 and 2001. This represents 0.10% of total loans at March 31, 2002. The Bank's allowance for loan losses at March 31, 2002 totaled $2.6 million, representing 789% of non-accrual loans and 0.76% of total loans. The Bank believes that its allowance for loan losses is adequate to cover the risks inherent in the loan portfolio under current conditions. The Bank has no real estate acquired through foreclosure at March 31, 2002. Deposits Deposits have historically been the Bank's primary source of funds for lending and investment activities. Deposit flows vary significantly and are influenced by prevailing interest rates, market conditions, economic conditions and competition. The Bank's management attempts to manage its deposits through selective pricing and marketing. Deposits increased $17.8 million or 2.1% to $867.5 million at March 31, 2002 from $849.7 million at December 31, 2001. This increase was primarily the result of an increase in savings and money market account deposits of $46.4 million or 12.1%, partially offset by a decrease in time certificates of deposit of $30.1 million or 7.8%. Other deposits grew by $1.5 million this past quarter. For information concerning deposit balances at March 31, 2002 and year-end 2001, see page 26 of this Form 10-Q. 18 Financial Condition (continued) Stockholders Equity Total stockholders' equity decreased slightly to $114.7 million at March 31, 2002, representing a book value per share of $36.32, from $114.9 million representing a book value per share of $36.51 at December 31, 2001. The Company's book value per share was negatively affected this past quarter by the decrease in the Company's unrealized gains on securities available for sale, net of tax effect. Investments As previously noted, total investments consisting of investment securities, short-term investments and interest-bearing bank deposits equaled $614.1 million at March 31, 2002, down $4.4 million from $618.5 million at year-end 2001. 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 $13.6 million as of March 31, 2002, that has yielded substantial realized and unrealized gains in recent years. While the Company's equity securities portfolio has produced increased realized gains in recent years, management does not expect this trend to continue. Management believes that the equity markets will provide more moderate returns in the near future. This will result in lower realized equity securities gains in 2002. 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 $243.8 million at March 31, 2002 versus $265.0 million at year-end 2001. The Bank also maintains a portfolio of trading securities which consisted of the following as of the dates shown: March 31, December 31, (In thousands) 2002 2001 ------------- ------------ U.S. Treasury obligations $38,740 $ 3,086 Investments in mutual funds 3 3 ------- ------- Total $38,743 $ 3,089 19 FINANCIAL CONDITION INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities at March 31, 2002 with gross unrealized gains and losses, follows:
----------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (In thousands) At March 31, 2002 Cost Gains Losses Value ----------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations $114,069 $ 656 $ (760) $113,965 U.S. Government agency obligations 18,141 48 (83) 18,106 ----------------------------------------------------------------------------------------- Total 132,210 704 (843) 132,071 ----------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 20,445 912 -- 21,357 Federal Home Loan Mortgage Corporation 214,038 6,076 (94) 220,020 Federal National Mortgage Association 1,184 28 (2) 1,210 Collateralized mortgage obligations 1,191 21 -- 1,212 ----------------------------------------------------------------------------------------- Total mortgage-backed securities 236,858 7,037 (96) 243,799 ----------------------------------------------------------------------------------------- Total debt securities 369,068 7,741 (939) 375,870 ----------------------------------------------------------------------------------------- Equity securities 12,677 2,359 (1,398) 13,638 ----------------------------------------------------------------------------------------- Total securities available for sale 381,745 $ 10,100 $ (2,337) $389,508 ----------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 7,763 ----------------------------------------------------------------------------------------- Total securities available for sale, net 389,508 ----------------------------------------------------------------------------------------- Total investment securities, net $389,508 ----------------------------------------------------------------------------------------- Trading securities $ 38,824 $ 38,743 -----------------------------------------------------------------------------------------
20 FINANCIAL CONDITION INVESTMENT SECURITIES (continued) The amortized cost and estimated market value of investment securities at December 31, 2001 with gross unrealized gains and losses, follows:
------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Market (In thousands) At December 31, 2001 Cost Gains Losses Value ------------------------------------------------------------------------------------------ Securities available for sale: Debt securities: U.S. Treasury obligations $ 79,932 $ 1,165 $ (214) $ 80,883 U.S. Government agency obligations 10,142 115 (4) 10,253 ------------------------------------------------------------------------------------------ Total 90,074 1,280 (218) 91,136 ------------------------------------------------------------------------------------------ Mortgage-backed securities: Government National Mortgage Association 22,499 1,025 -- 23,524 Federal Home Loan Mortgage Corporation 231,603 7,062 (31) 238,634 Federal National Mortgage Association 1,346 38 (1) 1,383 Collateralized mortgage obligations 1,452 38 -- 1,490 ------------------------------------------------------------------------------------------ Total mortgage-backed securities 256,900 8,163 (32) 265,031 ------------------------------------------------------------------------------------------ Total debt securities 346,974 9,443 (250) 356,167 ------------------------------------------------------------------------------------------ Equity securities 15,102 3,931 (2,616) 16,417 ------------------------------------------------------------------------------------------ Total securities available for sale 362,076 $ 13,374 $ (2,866) $372,584 ------------------------------------------------------------------------------------------ Net unrealized gains on securities available for sale 10,508 ------------------------------------------------------------------------------------------ Total securities available for sale, net 372,584 ------------------------------------------------------------------------------------------ Total investment securities, net $372,584 ------------------------------------------------------------------------------------------ Trading securities $ 3,089 $ 3,089 ------------------------------------------------------------------------------------------
21 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 March 31, 2002 and December 31, 2001 are as follows:
March 31, 2002 ------------------------- Available for Sale Amortized Market Maturing: Cost Value (In thousands) Within 1 year $ 27,970 $ 28,353 After 1 year but within 5 years 104,100 103,581 After 15 years 140 137 -------- ------- 132,210 132,071 Mortgage-backed securities 236,858 243,799 -------- ------- $369,068 $375,870
December 31, 2001 ------------------------ Available for Sale Amortized Market Maturing: Cost Value (In thousands) Within 1 year $ 28,993 $ 29,531 After 1 year but within 5 years 60,939 61,467 After 15 years 142 138 -------- ------- 90,074 91,136 Mortgage-backed securities 256,900 265,031 -------- ------- $346,974 $356,167
22 LOANS The composition of the Bank's loan portfolio is summarized as follows:
--------------------------------------------------------------------------------------- At At (In thousands) March 31, 2002 December 31, 2001 --------------------------------------------------------------------------------------- Mortgage loans: Residential $309,536 $294,023 Commercial 2,605 2,641 Construction 857 993 --------------------------------------------------------------------------------------- 312,998 297,657 Add: Premium on loans 42 51 Less: Deferred mortgage loan origination fees (1,234) (1,239) --------------------------------------------------------------------------------------- Total mortgage loans 311,806 296,469 Other loans: Consumer: Installment 1,234 1,178 Guaranteed education 4,593 4,937 Other secured 842 873 Home equity lines of credit 12,086 12,271 Unsecured 180 201 --------------------------------------------------------------------------------------- Total consumer loans 18,935 19,460 Commercial 15,134 15,088 --------------------------------------------------------------------------------------- Total other loans 34,069 34,548 --------------------------------------------------------------------------------------- Total loans $345,875 $331,017 ---------------------------------------------------------------------------------------
The Bank's loan portfolio increased $14.9 million during the first three months of 2002, from $331.0 million at December 31, 2001 to $345.9 million at March 31, 2002. Mortgage loans increased $15.3 million and consumer loans decreased $0.4 million. Loan originations increased by $23.6 million to $36.2 million in the first three months of 2002 compared to $12.6 million in the first three months of last year. 23 NON-PERFORMING ASSETS The following table shows the composition of the Bank's non-performing assets at March 31, 2002 and 2001, and December 31, 2001:
At At At March 31, December 31, March 31, (In thousands) 2002 2001 2001 ------------------------------------------------------------------------------------ Non-Performing Assets: Non-accrual loans $ 335 $ 644 $ 424 Real estate acquired through foreclosure -- -- -- ------------------------------------------------------------------------------------ Total non-performing assets $ 335 $ 644 $ 424 ------------------------------------------------------------------------------------ Allowance for loan losses $ 2,643 $ 2,643 $ 2,607 Allowance as a percent of non-accrual loans 789.0 % 410.4 % 614.9 % Allowance as a percent of non-performing assets 789.0 % 410.4 % 614.9 % Non-accrual loans as a percent of total loans 0.10% 0.19% 0.14% Non-performing assets as a percent of total assets 0.03% 0.07% 0.04% ------------------------------------------------------------------------------------
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, 2001 to March 31, 2002 as noted in the table above. The principal balance of non-accrual loans was down to $335,000, or approximately 0.10% of total loans at March 31, 2002. The Bank did not have any impaired loans as of March 31, 2002. 24 ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows:
Three Months Ended March 31, 2002 2001 -------------------------------------------------------------------------------- (In thousands) Balance at beginning of period $ 2,643 $ 2,594 Provision for loan losses -- 12 Recoveries of loans previously charged-off -- 1 Less: Charge-offs -- -- -------------------------------------------------------------------------------- Balance at end of period $ 2,643 $ 2,607 --------------------------------------------------------------------------------
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, "Accounting by Creditors for Impairment of a Loan," 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 March 31, 2002 the balance of the allowance for loan losses was $2,643,000 representing 789.0% 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. 25 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 $17.8 million to $867.5 million at March 31, 2002 from $849.7 million at December 31, 2001. The composition of the Bank's total deposits as of the dates shown are summarized as follows:
March 31, December 31, 2002 2001 ------------------------------------------------------------------------------ (In thousands) Demand and NOW $ 83,595 $ 82,143 Savings and money market accounts 430,376 383,960 Time certificates of deposit 353,511 383,610 Deposit acquisition premium, net of amortization -- (29) ------------------------------------------------------------------------------ Total deposits $867,482 $849,684 ------------------------------------------------------------------------------
Recent Accounting Developments "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. The Company adopted the new standard on January 1, 2002. At March 31, 2002, the Company had $1,090,000 of goodwill on its balance sheet. 26 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 and mortgage-backed securities 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 overnight federal funds sold, 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 March 31, 2002 the Bank had $155.1 million or 15.7% of total assets and $170.8 million or 17.3% of total assets invested, respectively, in overnight federal funds sold 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 components include supplemental capital components such as qualifying allowance for loan losses and 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 March 31, 2002, the Bank had a leverage Tier I capital to total assets ratio of 10.36%, a Tier I capital to risk- weighted assets ratio of 29.60% and a total capital to risk-weighted assets ratio of 30.49%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to total assets of 11.10%, Tier I capital to risk-weighted assets of 31.76% and total capital to risk-weighted assets of 32.66% at March 31, 2002. 27 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, 2001. There have been no material changes in reported market risks faced by the Corporation since the filing of the Corporation's 2001 Annual Report on Form 10-K. 28 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 March 31, 2002, 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 None. 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. 29 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: May 10, 2002 /s/Gerard H. Brandi --------------------------- (Signature) Gerard H. Brandi President and CEO Date: May 10, 2002 /s/Reginald E. Cormier --------------------------- (Signature) Reginald E. Cormier Sr. V.P., Treasurer and CFO 30