-----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, SqaeF95Y7R0TWDH+drRK67odKaxCqvzxhxxJARRX7wyk2D8r48nkeVunx+J51UU5 +WnXH+clc75gxAcVdjx3Ug== 0000927016-02-004089.txt : 20020814 0000927016-02-004089.hdr.sgml : 20020814 20020814101451 ACCESSION NUMBER: 0000927016-02-004089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02732064 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, 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 July 31, 2002: 4,674,250 shares. MASSBANK CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION
Page ITEM 1. Financial Statements Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001 3 Consolidated Statements of Income (unaudited) for the three months ended June 30, 2002 and 2001 4 and for the six months ended June 30, 2002 and 2001 5 Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2002 (unaudited) and the year ended December 31, 2001 6 - 7 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2002 and 2001 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 - 34 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 35 ITEM 2. Changes in Securities 35 ITEM 3. Defaults Upon Senior Securities 35 ITEM 4. Submission of Matters to a Vote of Security Holders 35 ITEM 5. Other Information 35 ITEM 6. Exhibits and Reports on Form 8-K 35 Signature Page 36
2 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share data)
June 30, December 31, 2002 2001 (unaudited) Assets: Cash and due from banks $ 10,418 $ 8,945 Short-term investments (Note 3) 207,785 236,382 - ------------------------------------------------------------------------------------- Total cash and cash equivalents 218,203 245,327 Interest-bearing deposits in banks 4,322 6,490 Securities available for sale, at market value (amortized cost of $380,910 in 2002 and $362,076 in 2001) 391,379 372,584 Trading securities, at market value 34,560 3,089 Loans: (Note 4) Mortgage loans 310,525 296,469 Other loans 18,440 34,548 Allowance for loan losses (2,642) (2,643) - ------------------------------------------------------------------------------------- Net loans 326,323 328,374 Premises and equipment 6,763 6,927 Accrued interest receivable 4,890 3,950 Goodwill 1,090 1,090 Current income tax asset, net 377 208 Other assets 8,532 3,129 - ------------------------------------------------------------------------------------- Total assets $996,439 $971,168 Liabilities and Stockholders' Equity: Deposits $873,880 $849,684 Escrow deposits of borrowers 1,245 1,403 Employee stock ownership plan liability 156 156 Deferred income taxes 2,181 2,275 Other liabilities 2,459 2,746 - ------------------------------------------------------------------------------------- Total liabilities 879,921 856,264 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, 7,569,479 and 7,494,980 shares issued, respectively 7,569 7,495 Additional paid-in capital 52,480 62,875 Retained earnings 92,829 99,996 - ------------------------------------------------------------------------------------- 152,878 170,366 Accumulated other comprehensive income: (Note 6) Net unrealized gains on securities available for sale, net of tax effect 6,515 6,443 Treasury stock at cost, 2,893,829 and 4,362,289 shares, respectively (Note 5) (42,719) (61,749) Common stock acquired by ESOP (156) (156) - ------------------------------------------------------------------------------------- Total stockholders' equity 116,518 114,904 - ------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $996,439 $971,168
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) 2002 2001 - -------------------------------------------------------------------------------- Interest and dividend income: Mortgage Loans $ 5,222 $ 4,807 Other loans 387 613 Securities available for sale: Mortgage-backed securities 3,900 4,696 Other securities 1,362 1,443 Trading securities 195 32 Federal funds sold 724 2,186 Other investments 160 328 - -------------------------------------------------------------------------------- Total interest and dividend income 11,950 14,105 - -------------------------------------------------------------------------------- Interest expense: Deposits 5,943 8,476 - -------------------------------------------------------------------------------- Total interest expense 5,943 8,476 - -------------------------------------------------------------------------------- Net interest income 6,007 5,629 Provision for loan losses -- 12 - -------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,007 5,617 - -------------------------------------------------------------------------------- Non-interest income: Deposit account service fees 141 159 Gains on securities available for sale, net 750 1,122 Gains on trading securities, net 168 18 Other 177 253 - -------------------------------------------------------------------------------- Total non-interest income 1,236 1,552 - -------------------------------------------------------------------------------- Non-interest expense: Salaries and employee benefits 1,800 1,695 Occupancy and equipment 473 513 Data processing 132 122 Professional services 152 147 Advertising and marketing 35 54 Amortization of intangibles -- 80 Deposit insurance 46 43 Other 349 337 - -------------------------------------------------------------------------------- Total non-interest expense 2,987 2,991 - -------------------------------------------------------------------------------- Income before income taxes 4,256 4,178 Income tax expense 1,554 1,490 - -------------------------------------------------------------------------------- Net income $ 2,702 $ 2,688 - -------------------------------------------------------------------------------- Weighted average common shares outstanding: Basic 4,724,320 4,673,880 Diluted 4,859,530 4,795,362 Earnings per share (in dollars): Basic $ 0.57 $ 0.57 Diluted 0.56 0.56 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) 2002 2001 - -------------------------------------------------------------------------------- Interest and dividend income: Mortgage Loans $ 10,404 $ 9,595 Other loans 788 1,322 Securities available for sale: Mortgage-backed securities 8,045 9,483 Other securities 2,593 3,279 Trading securities 323 145 Federal funds sold 1,449 4,555 Other investments 388 619 - -------------------------------------------------------------------------------- Total interest and dividend income 23,990 28,998 - -------------------------------------------------------------------------------- Interest expense: Deposits 12,037 17,388 - -------------------------------------------------------------------------------- Total interest expense 12,037 17,388 - -------------------------------------------------------------------------------- Net interest income 11,953 11,610 Provision for loan losses -- 24 - -------------------------------------------------------------------------------- Net interest income after provision for loan losses 11,953 11,586 - -------------------------------------------------------------------------------- Non-interest income: Deposit account service fees 287 320 Gains on securities available for sale, net 1,749 1,901 Gains on trading securities, net 102 96 Other 354 406 - -------------------------------------------------------------------------------- Total non-interest income 2,492 2,723 - -------------------------------------------------------------------------------- Non-interest expense: Salaries and employee benefits 3,626 3,283 Occupancy and equipment 994 1,091 Data processing 260 251 Professional services 296 249 Advertising and marketing 76 96 Amortization of intangibles 29 162 Deposit insurance 92 88 Other 649 638 - -------------------------------------------------------------------------------- Total non-interest expense 6,022 5,858 - -------------------------------------------------------------------------------- Income before income taxes 8,423 8,451 Income tax expense 3,071 3,018 - -------------------------------------------------------------------------------- Net income $ 5,352 $ 5,433 - -------------------------------------------------------------------------------- Weighted average common shares outstanding: Basic 4,729,024 4,686,297 Diluted 4,860,566 4,802,435 Earnings per share (in dollars): Basic $ 1.13 $ 1.16 Diluted 1.10 1.13 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, 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 -- -- 5,352 -- -- -- 5,352 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 6) -- -- -- -- 72 -- 72 ----- Comprehensive income 5,424 Cash dividends paid ($0.44 per share) -- -- (2,089) -- -- -- (2,089) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 2 -- -- -- 2 Amortization of ESOP shares committed to be released -- 119 -- -- -- -- 119 Purchase of treasury stock -- -- -- (3,417) -- -- (3,417) Purchase of company stock for deferred compensation plan -- 30 -- (30) -- -- -- Exercise of stock options and related tax benefits 74 1,501 -- -- -- -- 1,575 Transfer resulting from three-for-two stock split -- (12,045) (10,432) 22,477 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2002 $7,569 $ 52,480 $ 92,829 $(42,719) $6,515 $(156) $116,518
See accompanying condensed notes to consolidated financial statements. 6 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 ($0.84 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. 7 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, 2002 2001 ---- ---- (In thousands) Cash flows from operating activities: Net income $ 5,352 $ 5,433 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 334 423 Loan interest capitalized (18) (20) Amortization of ESOP shares committed to be released 119 67 (Increase) decrease in accrued interest receivable (940) 1,425 Decrease in other liabilities (287) (227) Increase in current income tax asset, net (169) (142) Amortization of premiums (accretion of discounts) on securities, net 199 (407) Net trading securities activity (31,369) 20,442 Gains on securities available for sale, net (1,789) (1,894) More than temporary impairment writedown of security available for sale 40 -- Gains on trading securities, net (102) (103) Decrease in deferred mortgage loan origination fees, net of amortization (88) (65) Deferred income tax (benefit) 17 (113) (Increase) decrease in other assets (357) 1,126 Provision for loan losses -- 24 Gains on sales of premises and equipment -- (4) Decrease in escrow deposits of borrowers (158) (71) - ----------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (29,216) 25,894 - ----------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of term federal funds -- (10,000) Proceeds from maturities of term federal funds -- 40,000 Net decrease (increase) in interest bearing bank deposits 2,168 (3,191) Proceeds from sales of investment securities available for sale 24,662 15,473 Proceeds from maturities of investment securities available for sale 24,000 52,230 Purchases of investment securities available for sale (100,422) (8,326) Purchases of mortgage-backed securities (19,977) (30,167) Principal repayments of mortgage-backed securities 49,403 33,304 Principal repayments of securities available for sale 3 2 Loans originated (54,288) (43,901) Loan principal payments received 56,436 35,673 Purchases of premises & equipment (131) (2,058) Proceeds from sales of premises and equipment -- 4 - ----------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (18,146) 79,043 - -----------------------------------------------------------------------------------------
8 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited)
Six Months Ended June 30, 2002 2001 ---- ---- (In thousands) Cash flows from financing activities: Net increase in deposits 24,167 15,264 Payments to acquire treasury stock (3,447) (1,441) Purchase of Company stock for deferred compensation plan 30 30 Issuance of common stock under stock option plan 1,162 317 Tax benefit resulting from stock options exercised 413 78 Cash dividends paid on common stock (2,089) (1,968) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 2 4 - ----------------------------------------------------------------------------------------- Net cash provided by financing activities 20,238 12,284 - ----------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (27,124) 117,221 Cash and cash equivalents at beginning of period 245,327 122,021 - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $218,203 $239,242 - ----------------------------------------------------------------------------------------- Supplemental cash flow disclosures: Cash transactions: Cash paid during the period for interest $ 12,053 $ 17,440 Cash paid during the period for taxes, net of refunds 2,807 3,195 Purchases of securities not settled at beginning of period which settled during the period 47 60 Sales and maturities of securities not settled at beginning of period which settled during the period 1,008 573 Non-cash transactions: SFAS 115: Increase in accumulated other comprehensive income 72 452 (Decrease) increase in deferred tax liabilities (111) 215 Purchases of securities not settled at end of period 133 272 Sales and maturities of securities not settled at end of period 6,141 1,511 - -----------------------------------------------------------------------------------------
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 accounting principles generally accepted in the United States of America 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, 2002 and December 31, 2001, and its operating results for the six months ended June 30, 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 Company's reported per share amounts and weighted average common shares outstanding for the current and prior year have been restated to reflect the Company's three-for-two stock split of April 19, 2002. 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) June 30, 2002 December 31, 2001 - -------------------------------------------------------------------------------- Federal funds sold (overnight) $182,913 $204,294 Money market funds 24,872 32,088 - -------------------------------------------------------------------------------- Total short-term investments $207,785 $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 June 30, 2002, the Company had outstanding commitments to originate mortgage loans and to advance funds for construction loans amounting to $6,454,000 and commitments under existing home equity lines of credit and other loans of approximately $41,006,000 which are not reflected on the consolidated balance sheet. In addition, as of June 30, 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 10 CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) irrevocable trust. At June 30, 2002 the trust held 23,200 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. (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, 2002 and the year ended December 31, 2001 is as follows:
For the Six Months Ended June 30, 2002 - ------------------------------------------------------------------------------------ Tax Before-Tax (Expense) Net-of-Tax (In thousands) Amount or Benefit Amount ------ ---------- ------ Unrealized gains on securities: Unrealized holding (gains) arising during period $ 1,710 $ (620) $ 1,090 Less: reclassification adjustment for gains realized in net income 1,749 (731) 1,018 ------- -------- ------- Net unrealized gains (losses) (39) 111 72 ------- -------- ------- Other comprehensive income (loss) $ (39) $ 111 $ 72 ------- -------- -------
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 ------- -------- -------
11 MASSBANK CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 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 provisions 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. 12 Results of Operations for the three months ended June 30, 2002 GENERAL For the quarter ended June 30, 2002, MASSBANK Corp. reported net income of $2,702,000, or $0.56 in diluted earnings per share compared to net income of $2,688,000 or $0.56 in diluted earnings per share in the second quarter of 2001. Basic earnings per share in the recent quarter were $0.57 per share, unchanged from the same quarter last year. The current and prior year per share amounts reflect the three-for-two split of the Company's common stock that occurred on April 19, 2002. The Company's net income for the second quarter 2002 compared to the same quarter of 2001 reflects an improvement of $390,000 in net interest income after provision for loan losses. This increase, however, is partially offset by a decrease in non-interest income of $316,000 due primarily to lower securities gains in the recent quarter. Earnings results for the second quarter 2002 also reflect a slight increase in the Company's effective income tax rate. Net interest income Net interest income totaled $6,007,000 in the second quarter of 2002, an increase of $378,000 from the same quarter a year ago. This is the third consecutive quarter that the Company has increased its net interest income. The increase was principally attributable to an improvement in the Company's net interest margin combined with the positive effect of average earning asset growth. The Company's net interest margin for the three months ended June 30, 2002 was 2.49%, an increase from 2.41% reported in the second quarter of 2001. Average earning assets for the quarter ended June 30, 2002 increased $33.7 million to $969.7 million, from $936.0 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 June 30, 2002, decreased $2,154,000 or 15.3% to $11,969,000 from $14,123,000 for the three months ended June 30, 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 $33.7 million in average earning assets. As reflected in the table on page 14 of this report, the yield on the Company's average earning assets in the second quarter of 2002 was 4.94%, down from 6.04% 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. During the period April 1, 2001 to June 30, 2002, the Federal Reserve Bank cut the Federal Funds rate eight times, reducing the rate from 5.00% to 1.75%. Due to the Company's large balance of overnight Federal Funds, this Federal Funds rate reduction contributed significantly to the decrease in the Company's interest and dividend income in the second quarter 2002. Interest Expense Total interest expense for the three months ended June 30, 2002 decreased $2,533,000, or 29.9% to $5,943,000 from $8,476,000 for the three months ended June 30, 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, has caused the Bank's cost of funds to decrease 133 basis points, from 4.07% in the second quarter of 2001 to 2.74% in the recent quarter. The Company's average deposits, as shown in the table on page 15, increased $32.7 million to $868.6 million in the second quarter of 2002, from $835.9 million in the second quarter of 2001. 13
AVERAGE BALANCE SHEETS Three Months Ended June 30, 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 $170,290 $ 724 1.71% $202,492 $ 2,186 4.33% Short-term investments (2) 28,973 160 2.22 28,597 328 4.60 Investment securities 147,265 1,381 3.75 110,687 1,461 5.28 Mortgage-backed securities 244,318 3,900 6.39 280,677 4,696 6.69 Trading securities 36,443 195 2.14 2,460 32 5.15 Mortgage loans (1) 311,827 5,222 6.70 274,804 4,807 7.00 Other loans (1) 30,563 387 5.07 36,239 613 6.75 - -------------------------------------------------- ---------------- Total earning assets 969,679 $11,969 4.94% 935,956 $14,123 6.04% Allowance for loan losses (2,642) (2,609) - ----------------------------------------------------------------------------------------- Total earning assets less allowance for loan losses 967,037 933,347 Other assets 22,555 20,469 - ----------------------------------------------------------------------------------------- Total assets $989,592 $953,816 - -----------------------------------------------------------------------------------------
14 AVERAGE BALANCE SHEETS - (continued) Three Months Ended June 30,
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 $ 82,476 $ 89 0.43% $ 81,907 $ 125 0.61% Savings 452,056 3,064 2.72 345,425 2,886 3.35 Time certificates of deposit 334,088 2,790 3.35 408,568 5,465 5.37 - -------------------------------------------------- ----------------- Total deposits 868,620 5,943 2.74 835,900 8,476 4.07 Other liabilities 4,669 6,326 - ----------------------------------------------------------------------------------------- Total liabilities 873,289 842,226 Stockholders' equity 116,303 111,590 - ----------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $989,592 $953,816 - ----------------------------------------------------------------------------------------- Net interest income (tax-equivalent basis) 6,026 5,647 Less adjustment of tax-exempt interest income 19 18 - ----------------------------------------------------------------------------------------- Net interest income $6,007 $5,629 - ----------------------------------------------------------------------------------------- Interest rate spread 2.20% 1.97% - ----------------------------------------------------------------------------------------- Net interest margin (3) 2.49% 2.41% - -----------------------------------------------------------------------------------------
(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. 15 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 second quarter of 2002. This compares to a $12,000 provision for loan losses 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 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 June 30, 2002, the allowance for loan losses was $2,642,000 representing 655.6% of nonaccrual loans. The Bank's nonaccrual loans totaled $403,000 at June 30, 2002 down from $644,000 at December 31, 2001 and $472,000 at June 30, 2001. The Bank had net loan charge-offs of $1,000 in the recent quarter compared to net loan charge-offs of $3,000 in the same quarter last year. Management believes that the allowance for loan losses as of June 30, 2002 is adequate to cover the risks inherent in the loan portfolio under current conditions. 16 Non-Interest Income Non-interest income consists of deposit account service fees, net gains on securities and other non-interest income. Non-interest income decreased $316,000 to $1,236,000 in the recent quarter, from $1,552,000 in the comparable quarter of the prior year. This decrease is due primarily to lower securities gains in the second quarter of 2002. Net gains on securities available for sale totaled $750,000 in the second quarter of this year compared to $1,122,000 in the second quarter of last year. Realized gains on the sale of equity securities and debt securities totaled $684,000 and $106,000, respectively, for the three months ended June 30, 2002. In addition, the Company in the recent quarter recorded a charge to earnings of $40,000 due to an equity security in its investment securities portfolio having suffered a loss in value which was considered by management to be other than temporary. Due to the decline in equity market prices over the past six months the Company expects that opportunities for securities gains from the equity portfolio will be substantially reduced in future quarters. In addition, if these market conditions persist or deteriorate further, the Company may incur losses in its equity securities portfolio. Net gains on trading securities increased to $168,000 in the recent quarter from $18,000 in the same quarter last year. During the second quarter 2002, the Company recorded net trading securities gains on sales of U.S. Treasury obligations and marketable equity securities of $13,000 and $8,000, respectively. Net gains on trading securities in the recent quarter also include mark-to-market gains on U.S. Treasury obligations of $147,000. Falling interest rates and recent volatility in the bond markets has provided the Company with trading gains that may not be available in future periods. The Bank's deposit account service fees and other non-interest income totaled $141,000 and $177,000, respectively, in the second quarter of 2002 compared to $159,000 and $253,000, respectively, in the second quarter of 2001. The decline in other non-interest income is due primarily to the assets in the Company's deferred compensation plan having declined in market value in the recent quarter versus having appreciated in value in the same quarter last year. This decrease is offset by a corresponding decline in non-interest expense under the salaries and employee benefits expense component. Non-Interest Expense Non-interest expense for the second quarter 2002 remained essentially unchanged from the same quarter last year. Total non-interest expense decreased $4,000 to $2,987,000. Salaries and employee benefits, the largest component of non-interest expense increased $105,000 or 6.2% to $1,800,000 in the recent quarter, from $1,695,000 in the comparable quarter of 2001. This increase reflects higher salaries due to merit increases, higher pension costs and an increase in costs associated with various other employee benefits partially offset by a decrease in deferred compensation expense referred to in the non-interest income section above. Occupancy and equipment expenses declined $40,000 to $473,000 in the recent quarter, from $513,000 in the same quarter last year. This decrease is due in part to the construction of one new branch and the purchase of another branch, replacing existing leases and reducing net occupancy expenses. Amortization of intangibles expense decreased $80,000 in the first quarter 2002, compared to the first quarter last year. This expense decreased for the following reasons: 17 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. 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, professional services, advertising and marketing, deposit insurance and other expenses, increased $11,000 to $714,000 for the three months ended June 30, 2002 from $703,000 for the three months ended June 30, 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 $1,554,000 in the second quarter of 2002, an increase of $64,000 when compared to the same quarter last year. The increase in income tax expense is due primarily to an increase in income before income taxes and an increase in effective income tax rate. The Company's income before income taxes was $4,256,000 in the recent quarter compared to $4,178,000 for the same quarter a year ago. The effective income tax rate for the three months ended June 30, 2002 and 2001 was 36.5% and 35.7%, respectively. 18 Results of Operations for the six months ended June 30, 2002 General For the six months ended June 30, 2002, the Company reported net income of $5,352,000 or $1.10 in diluted earnings per share ($1.13 in basic earnings per share) compared to net income of $5,433,000 or $1.13 in diluted earnings per share ($1.16 in basic earnings per share) for the six months ended June 30, 2001. The current and prior year per share amounts reflect the three-for-two split of the Company's common stock that occurred on April 19, 2002. The Company's financial performance in the first six months of 2002 reflects an increase in net interest income after provision for loan losses of $367,000. This increase, however, is offset by a decrease in non-interest income of $231,000 due primarily to lower securities gains in the first half of 2002, and an increase in non-interest expense of $164,000. Earnings results for the six months ended June 30, 2002 also reflect a slight increase in the Company's effective income tax rate. Net Interest Income Net interest income totaled $11,953,000 for the six months ended June 30, 2002, compared to $11,610,000 for the same period in 2001. The $343,000 increase is primarily attributable to an increase in average earning assets, partially offset by a decrease in the Company's net interest margin. The Company's net interest margin for the first six months of 2002 was 2.49% compared to 2.50% for the same period last year. Average earning assets for the six months ended June 30, 2002 increased $33.2 million to $964.0 million from $930.8 million for the corresponding period in 2001. The Company's interest rate spread for the first half of 2002 increased to 2.18% from 2.02% for the first six months of last year. The yield on the Company's average earning assets in the first half of 2002 decreased 125 basis points to 4.99% from 6.24% in the corresponding period of 2001. The Company's average cost of funds for the first half of 2002 decreased 141 basis points to 2.81% from 4.22% for the six months ended June 30, 2001. 19
AVERAGE BALANCE SHEETS Six Months Ended June 30, 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 $172,369 $ 1,449 1.70% $185,356 $ 4,555 4.96% Short-term investments (2) 33,421 388 2.34 25,055 616 4.96 Investment securities 136,361 2,636 3.87 123,139 3,324 5.40 Mortgage-backed securities 250,698 8,045 6.42 282,641 9,483 6.71 Trading securities 30,400 323 2.13 4,956 145 5.93 Mortgage loans (1) 308,355 10,404 6.75 273,208 9,595 7.02 Other loans (1) 32,440 788 4.89 36,499 1,322 7.27 - -------------------------------------------------- ---------------- Total earning assets 964,044 $24,033 4.99% 930,854 $29,040 6.24% Allowance for loan losses (2,643) (2,605) - ------------------------------------------------------------------------------------------ Total earning assets less allowance for loan losses 961,401 928,249 Other assets 22,408 20,092 - ------------------------------------------------------------------------------------------ Total assets $983,809 $948,341
20
AVERAGE BALANCE SHEETS - (continued) Six Months Ended June 30, 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 $ 82,039 $ 178 0.44% $ 80,126 $ 244 0.61% Savings 428,965 5,758 2.71 341,751 5,728 3.38 Time certificates of deposit 351,472 6,101 3.50 409,253 11,416 5.63 - -------------------------------------------------- ---------------- Total deposits 862,476 12,037 2.81 831,130 17,388 4.22% Other liabilities 5,033 6,294 - ------------------------------------------------------------------------------------- Total liabilities 867,509 837,424 Stockholders' equity 116,300 110,917 - ------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $983,809 $948,341 - ------------------------------------------------------------------------------------- Net interest income (tax-equivalent basis) 11,996 11,652 Less adjustment of tax-exempt interest income 43 42 - ------------------------------------------------------------------------------------- Net interest income $11,953 $11,610 - ------------------------------------------------------------------------------------- Interest rate spread 2.18% 2.02% - ------------------------------------------------------------------------------------- Net interest margin (3) 2.49% 2.50% - -------------------------------------------------------------------------------------
(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. 21 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 half of 2002. This compares to a $24,000 provision for loan losses in the first half of last year. The Bank has made no provision for loan losses in 2002 because it has had minimal net loan charge-offs in the current and prior year. Net loan charge-offs for the six months ended June 30, 2002 and 2001 were $1,000 and $2,000, respectively. In addition, management believes that the allowance for loan losses as of June 30, 2002 is adequate to cover the risks inherent in the loan portfolio under current conditions. Non-Interest Income Non-interest income consists of deposit account service fees, net gains on securities and other non-interest income. Non-interest income decreased $231,000 to $2,492,000 for the first six months of 2002 from $2,723,000 for the same period of the prior year. This decrease is due primarily to lower securities gains in the first half of 2002. Net gains on securities available for sale totaled $1,749,000 in the first half of 2002 compared to $1,901,000 in the first half of last year. Realized gains on the sale of equity securities and debt securities totaled $1,680,000 and $109,000, respectively, for the six months ended June 30, 2002. In addition, the Company in the first half of 2002 recorded a charge to earnings of $40,000 due to an equity security in its investment securities portfolio having suffered a loss in value which was considered by management to be other than temporary. Due to the decline in equity market prices over the past six months the Company expects that opportunities for securities gains from the equity portfolio will be substantially reduced in future quarters. In addition, if these market conditions persist or deteriorate further, the Company may incur losses in its equity securities portfolio. Net gains on trading securities increased to $102,000 for the first six months of 2002 from $96,000 for the same period last year. During the first half of 2002, the Company recorded net trading securities gains on sales of marketable equity securities and U.S. Treasury obligations of $22,000 and $15,000, respectively. Net gains on trading securities in the first half of 2002 also include mark-to-market gains on U.S. Treasury obligations of $65,000. Falling interest rates and recent volatility in the bond markets has provided the Company with trading gains that may not be available in future periods. Trading gains in the bond portfolio are more likely during periods of falling interest rates. The Bank's deposit account service fees and other non-interest income totaled $287,000 and $354,000, respectively, for the first half of 2002 compared to $320,000 and $406,000, respectively, for the first half of 2001. The decline in other non-interest income is due primarily to the assets in the Company's deferred compensation plan having declined in market value in the six month period ended June 30, 2002 versus having appreciated in value in the same period last year. This decrease is offset by a corresponding decline in non-interest expense under the salaries and employee benefits expense component. Non-Interest Expense Non-interest expense for the six months ended June 30, 2002 increased $164,000 or 2.8% to $6,022,000 from $5,858,000 for the same period last year. This increase is due primarily to increases in salaries and employee benefits and professional services expenses. 22 Salaries and employee benefits, the largest component of non-interest Expense increased $343,000 or $10.4% to $3,626,000 for the first half of 2002, from $3,283,000 for the comparable period of 2001. This increase reflects higher salaries due to merit increases, higher pension costs and an increase in costs associated with various other employee benefits partially offset by a decrease in deferred compensation expense referred to in the non-interest income section above. Occupancy and equipment expenses declined $97,000 or 8.9% to $994,000 for the first half of 2002, from $1,091,000 for the same period last year. This decrease is due in part to the construction of one new branch and the purchase of another branch, replacing existing leases and reducing net occupancy expenses. Professional services expense increased $47,000 or 18.9% to $296,000 for the first six months of 2002, from $249,000 for the same period last year. The increase is due primarily to higher legal and audit fees. Amortization of intangibles expense decreased $133,000 for the first half of 2002, compared to the same period 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. 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, increased $4,000 to $1,077,000 for the six months ended June 30, 2002 from $1,073,000 for the six months ended June 30, 2001. Income Tax Expense The provision for federal and state income taxes increased to $3,071,000 for the six months ended June 30, 2002 from $3,018,000 for the same period in 2001. This increase is due primarily to an increase in the Company's effective income tax rate partially offset by lower income before income taxes in the first half of 2002. The Company's combined effective income tax rate for the first half of 2002 is 36.5% compared to 35.7% for the same period a year ago. The Company's income before income taxes was $8,423,000 for the first half of 2002 compared to $8,451,000 for the first half of 2001. 23 Financial Condition The Company's total assets amounted to $996.4 million as of June 30, 2002, an increase of $25.2 million or 2.6% from $971.2 million at December 31, 2001. This reflects an increase in total investments of $19.5 million or 3.2% and a decrease in the Bank's loan portfolio of $2.1 million or less than 1%. Cash and due from banks increased $1.5 million and all other assets increased $6.3 million. Investments At June 30, 2002, the Company's investment portfolio, consisting of investment securities (including mortgage-backed securities), short-term investments and interest-bearing bank deposits totaled $638.0 million representing 64.0% of total assets, compared to $618.5 million or 63.7% of total assets at December 31, 2001. The investment securities portfolio included U.S. government and agency obligations, 15-year mortgage-backed securities, collateralized mortgage obligations and equity securities. For further information concerning the composition, maturity and market value of the Bank's investment securities, see pages 26 through 28 of this Form 10-Q. Loans The loan portfolio decreased $2.1 million or less than 1% in the first six months of 2002. At June 30, 2002, the loan portfolio, net of allowance for loan losses, was $326.3 million representing 32.7% 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 $308.0 million at June 30, 2002, representing 93.6% of the total loan portfolio. See page 29 of this Form 10-Q for a table setting forth the composition of the loan portfolio at June 30, 2002 and year- end 2001. Lower interest rates in the beginning of the year 2002 resulted in increased loan origination growth for the Bank. In the first six months of 2002, the Bank originated loans of $54.3 million, an increase of $10.4 million or 23.7% from the $43.9 million in loans originated in the first six months of 2001. Asset Quality Asset quality remains strong. Non-accrual loans, generally those loans which are 90 days or more delinquent, were $403 thousand and $644 thousand, respectively, at June 30, 2002 and December 31, 2001. This represents 0.12% of total loans at June 30, 2002. The Bank's allowance for loan losses at June 30, 2002 totaled $2.6 million, representing 656% of non-accrual loans and 0.80% 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 June 30, 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 $24.2 million or 2.8% to $873.9 million at June 30, 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 $87.1 million or 22.7%, partially offset by a decrease in time certificates of deposit of $65.1 million or 17.0%. Other deposits grew by $2.2 million during the first half of 2002. For information concerning the composition of the Bank's deposits at June 30, 2002 and year-end 2001, see page 32 of this Form 10-Q. 24 Financial Condition (continued) Stockholders Equity Total stockholders' equity increased to $116.5 million at June 30, 2002, representing a book value per share of $24.80, from $114.9 million representing a book value per share of $24.34 at December 31, 2001. The Company's book value per share as of year-end 2001 has been adjusted to reflect the three-for- two split of the Company's common stock on April 19, 2002. Investments As previously noted, total investments consisting of investment securities, short-term investments and interest-bearing bank deposits equaled $638.0 million at June 30, 2002, up $19.5 million from $618.5 million at year-end 2001. These investments are principally in federal funds sold, U.S. Treasury and government agency obligations, government agency fifteen year mortgage-backed securities, collateral mortgage obligations and bank certificates of deposit. The Bank also maintains an equity securities portfolio, valued at $11.8 million as of June 30, 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. Due to the decline in equity market prices over the past six months the Company expects that opportunities for securities gains from the equity portfolio will be substantially reduced in future quarters. In addition, if these market conditions persist or deteriorate further, the Company may incur losses in its equity securities portfolio. 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 $238.0 million at June 30, 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: June 30, December 31, (In thousands) 2002 2001 ---------- ------------- U.S. Treasury obligations $34,557 $ 3,086 Investments in mutual funds 3 3 ------- ------- Total $34,560 $ 3,089 25 FINANCIAL CONDITION INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities at June 30, 2002 with gross unrealized gains and losses, follows:
- ------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Market (In thousands) At June 30, 2002 Cost Gains Losses Value - ------------------------------------------------------------------------------------------ Securities available for sale: Debt securities: U.S. Treasury obligations $112,081 $ 1,098 $ (27) $113,152 U.S. Government agency obligations 28,139 291 (3) 28,427 - ----------------------------------------------------------------------------------------- Total 140,220 1,389 (30) 141,579 - ----------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 18,750 1,131 -- 19,881 Federal Home Loan Mortgage Corporation 207,030 9,182 -- 216,212 Federal National Mortgage Association 949 33 -- 982 Collateralized mortgage obligations 947 22 -- 969 - ----------------------------------------------------------------------------------------- Total mortgage-backed securities 227,676 10,368 -- 238,044 - ----------------------------------------------------------------------------------------- Total debt securities 367,896 11,757 (30) 379,623 - ----------------------------------------------------------------------------------------- Equity securities 13,014 391 (1,649) 11,756 - ----------------------------------------------------------------------------------------- Total securities available for sale 380,910 $ 12,148 $ (1,679) $391,379 - ----------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 10,469 - ----------------------------------------------------------------------------------------- Total securities available for sale, net 391,379 - ----------------------------------------------------------------------------------------- Total investment securities, net $391,379 - ----------------------------------------------------------------------------------------- Trading securities $ 34,494 $ 34,560 - -----------------------------------------------------------------------------------------
26 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 - -----------------------------------------------------------------------------------------
27 Investments (continued) The amortized cost and estimated market value of debt securities available for sale by contractual maturity at June 30, 2002 and December 31, 2001 are shown in the following tables. Actual maturities will differ from contractual maturities because of callable government agency securities in the Bank's portfolio that may be called prior to maturity. June 30, 2002 ------------------------- Available for Sale Amortized Market Maturing: Cost Value (In thousands) Within 1 year $ 28,119 $ 28,486 After 1 year but within 5 years 107,962 108,888 After 5 years but within 10 years 4,000 4,069 After 10 years but within 15 years 139 136 -------- -------- U.S. Treasury and Government agency obligations (a) 140,220 141,579 Mortgage-backed securities 227,676 238,044 -------- -------- Total $367,896 $379,623 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 -------- -------- U.S. Treasury and Government agency obligations (b) 90,074 91,136 Mortgage-backed securities 256,900 265,031 -------- -------- Total $346,974 $356,167 (a) At June 30, 2002 the Bank's debt securities available for sale portfolio included $28,000,000 (amortized cost) in callable securities with a market value of $28,291,000. (b) At December 31, 2001 the Bank's debt securities available for sale portfolio included $4,000,000 (amortized cost) in callable securities with a market value of $4,045,000. 28 LOANS The composition of the Bank's loan portfolio is summarized as follows:
- --------------------------------------------------------------------------------------- At At (In thousands) June 30, 2002 December 31, 2001 - --------------------------------------------------------------------------------------- Mortgage loans: Residential $308,370 $294,023 Commercial 2,504 2,641 Construction 761 993 - --------------------------------------------------------------------------------------- 311,635 297,657 Premium on loans 41 51 Deferred mortgage loan origination fees (1,151) (1,239) - --------------------------------------------------------------------------------------- Total mortgage loans 310,525 296,469 Other loans: Consumer: Installment 1,092 1,178 Guaranteed education 4,263 4,937 Other secured 772 873 Home equity lines of credit 12,032 12,271 Unsecured 192 201 - --------------------------------------------------------------------------------------- Total consumer loans 18,351 19,460 Commercial 89 15,088 - --------------------------------------------------------------------------------------- Total other loans 18,440 34,548 - --------------------------------------------------------------------------------------- Total loans $328,965 $331,017 - ---------------------------------------------------------------------------------------
The Bank's loan portfolio decreased $2.1 million in the first six months of 2002, from $331.0 million at December 31, 2001 to $328.9 million at June 30, 2002. Mortgage loans increased $14.0 million, however, this increase was offset by a decrease in consumer loans of $1.1 million and a decrease of $15.0 in commercial loans. The decrease in commercial loans is due to a loan with a single borrower that was repaid in the recent quarter. The loan was refinanced with another financial institution. Loan originations increased by $10.4 million to $54.3 million in the first six months of 2002 compared to $43.9 million in the first six months of last year. 29 NON-PERFORMING ASSETS The following table shows the composition of the Bank's non-performing assets at June 30, 2002 and 2001, and December 31, 2001: At At At June 30, December 31, June 30, (In thousands) 2002 2001 2001 - -------------------------------------------------------------------------------- Non-Performing Assets: Non-accrual loans $ 403 $ 644 $ 472 Real estate acquired through foreclosure -- -- -- - -------------------------------------------------------------------------------- Total non-performing assets $ 403 $ 644 $ 472 - -------------------------------------------------------------------------------- Allowance for loan losses $ 2,642 $ 2,643 $ 2,616 Allowance as a percent of non-accrual loans 655.6% 410.4% 554.2% Allowance as a percent of non-performing assets 655.6% 410.4% 554.2% Non-accrual loans as a percent of total loans 0.12% 0.19% 0.15% Non-performing assets as a percent of total assets 0.04% 0.07% 0.05% - -------------------------------------------------------------------------------- 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 June 30, 2002 as noted in the table above. The principal balance of non-accrual loans was down to $403,000, or approximately 0.12% of total loans at June 30, 2002. The Bank did not have any impaired loans as of June 30, 2002. 30 ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows: Six Months Ended June 30, 2002 2001 - --------------------------------------------------------------------------- (In thousands) Balance at beginning of period $ 2,643 $ 2,594 Provision for loan losses -- 24 Recoveries of loans previously charged-off 1 1 Charge-offs (2) (3) - -------------------------------------------------------------------------- Balance at end of period $ 2,642 $ 2,616 - -------------------------------------------------------------------------- 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 June 30, 2002 the balance of the allowance for loan losses was $2,642,000 representing 655.6% 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. 31 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 $24.2 million to $873.9 million at June 30, 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: June 30, December 31, 2002 2001 - ------------------------------------------------------------------------------ (In thousands) Demand and NOW $ 84,373 $ 82,143 Savings and money market accounts 471,061 383,960 Time certificates of deposit 318,446 383,610 Deposit acquisition premium, net of amortization -- (29) - ------------------------------------------------------------------------------ Total deposits $873,880 $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 June 30, 2002, the Company had $1,090,000 of goodwill on its balance sheet. 32 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, investment securities called before maturity 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 June 30, 2002 the Bank had $182.9 million or 18.4% of total assets and $176.1 million or 17.7% 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 June 30, 2002, the Bank had a leverage Tier I capital to total assets ratio of 10.32%, a Tier I capital to risk- weighted assets ratio of 30.70% and a total capital to risk-weighted assets ratio of 31.50%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to total assets of 10.98%, Tier I capital to risk-weighted assets of 32.66% and total capital to risk-weighted assets of 33.45% at June 30, 2002. 33 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. 34 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, 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 At the Annual Meeting of Stockholders of MASSBANK Corp. held on April 16, 2002, stockholders voted affirmatively on the following proposal: 1.) To elect four Directors to serve until the 2005 Annual Meeting of Stockholders. Elected at Meeting Term Gerard H. Brandi 3 Years Peter W. Carr 3 Years Robert S. Cummings 3 Years Herbert G. Schurian 3 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. c. Additional Exhibits: 1. Exhibit A: Certifications by the CEO and CFO. 35 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, 2002 /s/Gerard H. Brandi --------------------------- (Signature) Gerard H. Brandi President and CEO Date: August 13, 2002 /s/Reginald E. Cormier --------------------------- (Signature) Reginald E. Cormier Sr. V.P., Treasurer and CFO 36 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, 2002 and 2001.
Three Months Ended Six Months Ended Calculation of Basic June 30, June 30, Earnings Per Share 2002 2001 2002 2001 - ------------------------------ ---- ---- ---- ---- Net Income $2,702,000 $2,688,000 $5,352,000 $5,433,000 ---------- ---------- ---------- ---------- Average common shares outstanding 4,737,520 4,700,280 4,742,224 4,712,697 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (13,200) (26,400) (13,200) (26,400) ---------- ---------- ---------- ---------- Weighted average shares outstanding 4,724,320 4,673,880 4,729,024 4,686,297 ---------- ---------- ---------- ---------- Earnings per share (in dollars) $ 0.57 $ 0.57 $ 1.13 $ 1.16 ---------- ---------- ---------- ---------- Three Months Ended Six Months Ended Calculation of Diluted June 30, June 30, Earnings Per Share 2002 2001 2002 2001 - ------------------------------ ---- ---- ---- ---- Net Income $2,702,000 $2,688,000 $5,352,000 $5,433,000 ---------- ---------- ---------- ---------- Average common shares outstanding 4,737,520 4,700,280 4,742,224 4,712,697 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (13,200) (26,400) (13,200) (26,400) Dilutive stock options 135,210 121,482 131,542 116,138 ---------- ---------- ---------- ---------- Weighted average shares outstanding 4,859,530 4,795,362 4,860,566 4,802,435 ---------- ---------- ---------- ---------- Earnings per share (in dollars) $ 0.56 $ 0.56 $ 1.10 $ 1.13 ---------- ---------- ---------- ----------
EX-99.1 4 dex991.txt CEO AND CFO CERTIFICATIONS Form 10-Q For the quarterly period ended June 30, 2002 Exhibit A CEO and CFO Certifications The undersigned officer of MASSBANK Corp. (the "Company") hereby certifies that the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Date: August 13, 2002 /s/ Gerard H. Brandi -------------------- Gerard H. Brandi President and CEO The undersigned officer of MASSBANK Corp. (the "Company") hereby certifies that the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Date: August 13, 2002 /s/ Reginald E. Cormier ------------------------ Reginald E. Cormier Sr. V.P., Treasurer and CFO -----END PRIVACY-ENHANCED MESSAGE-----