-----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, CJ++jbIsF9RLsfwC3migG5C1rco6wt9HFvUkm9M9zcKaHAGhlW3fhhxGVNSyWeXz 6tNq1cNthwr64KBwu3VaOg== 0000950135-00-001606.txt : 20000327 0000950135-00-001606.hdr.sgml : 20000327 ACCESSION NUMBER: 0000950135-00-001606 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 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-K SEC ACT: SEC FILE NUMBER: 000-15137 FILM NUMBER: 577068 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-K 1 MASSBANK CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K /x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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) (Zip Code) Registrant's telephone number, including area code: (781) 662-0100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share (Title of Class) 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.____ The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price for the registrant's common stock on March 15, 2000 as reported by NASDAQ, was $82,604,308. As of March 15, 2000, there were 3,264,193 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of MASSBANK Scorpios 1999 Annual Report to Stockholders are incorporated by reference in Parts I, II, III and IV of this Form 10-K. Portions of the Definitive Notice of Annual Meeting and Proxy Statement for the 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. 2 Cautionary Statement. Certain statements contained in this report or incorporated herein by reference are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume" and other similar expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: fluctuations in interest rates, price volatility in the stock and bond markets, inflation, government regulations and economic conditions and competition in the geographic and business areas in which the Company conducts its operations; and increases in loan defaults. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. PART I Item 1. Business Business of MASSBANK Corp. General MASSBANK Corp. (the "Company") is a general business corporation incorporated under the laws of the State of Delaware on August 11, 1986. MASSBANK Corp. was organized for the purpose of becoming the holding company for MASSBANK (the "Bank"). The Company is a one-bank holding company registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. As of and since December 2, 1986, the effective date of the reorganization whereby MASSBANK Corp. became the holding company for the Bank, the Bank has been a wholly-owned subsidiary of MASSBANK Corp. The only office of MASSBANK Corp., and its principal place of business, is located at the main office of the Bank at 123 Haven Street, Reading, Massachusetts 01867. MASSBANK Corp. currently has no material assets other than its investment in the Bank. The Company's primary business, therefore, is managing its investment in the stock of the Bank. MASSBANK Corp. is classified by the Commonwealth of Massachusetts as a securities corporation for tax purposes which restricts its business to buying, selling, dealing in, or holding securities on its own behalf. In the future, MASSBANK Corp. may become an operating company or acquire banks or companies engaged in bank-related activities. 2 3 The principal sources of revenues for MASSBANK Corp. (the "Parent Company") only are dividends from the Bank and, to a lesser extent, interest income received from its interest-bearing bank deposits. These revenues are used primarily for the payment of dividends to stockholders and for the purchase of stock pursuant to the Company's stock repurchase program. MASSBANK Corp.'s (Parent Company) only assets at December 31, 1999 were represented by its investment in the Bank of $101.4 million and other assets of $0.9 million. The Company's liabilities consisted of loan indebtedness of $0.5 million and other liabilities of less than $0.3 million. The proceeds of the loan were used to purchase shares of the Company's common stock for the Employee Stock Ownership Plan ("ESOP"). See Note 17 to the Consolidated Financial Statements for Parent Company only financial information. At December 31, 1999 MASSBANK Corp. on a consolidated basis had total assets of $924.7 million, deposits of $818.1 million, and stockholders' equity of $101.5 million which represents 11.0% of total assets. Book value per share at December 31, 1999 was $30.65. The Company does not own or lease any real or personal property. Instead it intends to utilize during the immediate future the premises, equipment and furniture of the Bank without the direct payment of rental fees to the Bank. Competition The primary business of MASSBANK Corp. currently is the ongoing business of the Bank. Therefore, the competitive conditions faced by MASSBANK Corp. currently are the same as those faced by the Bank. See "Business of MASSBANK - Competition." In addition, many banks and financial institutions have formed holding companies. It is likely that these holding companies will attempt to acquire commercial banks, thrift institutions or companies engaged in bank-related activities. MASSBANK Corp. would face competition in undertaking any such acquisitions and in operating any such entity subsequent to its acquisition. Employees MASSBANK Corp. does not employ any persons; its management also serves as management of, and is paid by, the Bank. See "Item 10 - Directors and Executive Officers of the Registrant." MASSBANK Corp. utilizes the support staff of the Bank from time to time and does not pay any separate salaries or expenses in connection therewith. Dividends MASSBANK Corp. paid total cash dividends of $1.11 per share in 1999 compared to $1.02 per share in 1998 and $0.885 per share in 1997. The Company's dividend payout ratios (cash dividends paid divided by net income) for 1999, 1998 and 1997 were 33%, 33% and 31%, respectively. Stock Repurchase Program During 1999, the Company purchased 210,967 shares of its common stock pursuant to its ongoing stock repurchase program. At December 31, 1999 there were 91,231 shares available for repurchase under the current program. 3 4 Preferred Stock Purchase Rights In January 2000, the Company adopted a new Shareholder Rights Plan to replace an existing Plan which was expiring. Accordingly, the Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right for each outstanding share of MASSBANK Corp. common stock. These Rights, which expire January 18, 2010, entitle their holders to purchase from the Company one one-thousandth of a share (a "unit") of Series B Junior Participating Cumulative Preferred Stock, par value $1.00 per share ("preferred stock") at a cash exercise price of $136.00 per unit, subject to adjustment. The Rights will trade separately from the common stock and will become exercisable when a person or group has acquired 11% or more of the outstanding common stock, upon a tender offer that would result in a person or group acquiring 11% or more of the outstanding common stock, or upon the declaration by the Board of Directors that any person holding 10% or more of the outstanding shares of common stock is an "adverse person". In the event a person or group acquires 11% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person", each Right would entitle its holder (except if the holder is a person or group described above) to receive upon exercise sufficient units of preferred stock to equal a value of two times the exercise price of the Right. In the event the Company is acquired in a merger or other business combination transaction or if 50% or more of the Company's assets or earning power is sold, each holder may receive upon exercise common stock of the acquiring company having a market value equal to two times the exercise price of the Right. The Rights are redeemable in whole, but not in part, by the Board of Directors at a price of $.01 per Right any time before a person or group acquires 11% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person". 4 5 Business of MASSBANK General MASSBANK is a Massachusetts-chartered savings bank founded in 1872 as the Melrose Savings Bank. In 1983, the Reading Savings Bank was merged into the Melrose Savings Bank and the name of the resulting institution was changed to MASSBANK for Savings. In 1986, the Bank converted from mutual to stock form of ownership. In 1996, the name of the bank was changed from "MASSBANK for Savings" to "MASSBANK". The Bank is primarily engaged in the business of attracting deposits from the general public through its fifteen full service banking offices in Reading, Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Stoneham, Tewksbury, Westford and Wilmington, and originating residential and commercial real estate mortgages, construction loans, commercial loans, and a variety of consumer loans. The Bank invests a significant portion of its funds in U.S. Treasury and Government agency securities, mortgage-backed securities, federal funds sold, and other authorized investments. The Bank also invests a portion of its funds in equity securities traded on a national securities exchange or quoted on the NASDAQ System. The Bank's earnings depend largely upon net interest income, which is the difference between the interest and dividend income derived by the Bank from its loans and investments and the interest paid by the Bank on its deposits and borrowed funds. The Company's earnings results are also affected by the provision for loan losses; non-interest income, such as fee-based revenues and net securities gains or losses; non-interest expense; and income taxes. The Bank's deposits are insured to applicable limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC") and excess deposit accounts are insured by the Depositors Insurance Fund ("DIF"), a private industry-sponsored deposit insurer. The Bank recognizes that loan and investment opportunities change over time and that yields derived from such opportunities can vary significantly even when the risks associated with those opportunities are comparable. By developing a relatively liquid loan and investment portfolio, the Bank has attempted to position itself so as to be able to take advantage of these changing opportunities. Consequently, the Bank expects that the relative mix of its loan and investment portfolios will change over time in response to changing market conditions. 5 6 Market Area The Bank is headquartered in Reading, Massachusetts, which is located approximately 15 miles north of Boston. The Bank's market area includes a significant portion of eastern Massachusetts and is served by a network of 15 branch offices located on a broad arc stretching from Melrose and Everett in the south, Dracut in the north, and Westford in the west. The Bank's general market area consists of the municipalities in which it operates banking offices and all of the contiguous cities and towns. The Bank currently operates banking offices in the municipalities of Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Reading, Stoneham, Tewksbury, Westford and Wilmington. Lending Activities The Bank's net loan portfolio totaled $322.8 million at December 31, 1999. The following table sets forth information concerning the Bank's loan portfolio by type of loan at the dates shown:
- ------------------------------------------------------------------------------------------- (In thousands) At December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------- Mortgage loans: Residential: Conventional $286,429 $280,681 $243,482 $216,832 $209,408 FHA and VA 740 1,181 1,843 2,515 3,244 Commercial 2,471 2,257 3,861 4,121 6,975 Construction 232 730 492 1,388 1,516 - ------------------------------------------------------------------------------------------- Total mortgage loans 289,872 284,849 249,678 224,856 221,143 Add: premium on loans 159 259 343 325 388 Less: deferred mortgage loan origination fees (1,451) (1,454) (1,223) (1,042) (928) - ------------------------------------------------------------------------------------------- Mortgage loans, net 288,580 283,654 248,798 224,139 220,603 - ------------------------------------------------------------------------------------------- Other loans: Consumer: Installment 1,418 1,547 2,199 1,967 1,988 Guaranteed education 7,037 7,967 8,934 9,729 10,420 Other secured 1,318 1,366 1,600 1,611 2,012 Home equity lines of credit 11,737 10,159 10,470 11,316 13,144 Unsecured 225 235 266 271 265 - ------------------------------------------------------------------------------------------- Total consumer loans 21,735 21,274 23,469 24,894 27,829 Commercial 15,050 61 36 628 753 - ------------------------------------------------------------------------------------------- Total other loans 36,785 21,335 23,505 25,522 28,582 - ------------------------------------------------------------------------------------------- Total loans 325,365 304,989 272,303 249,661 249,185 Less: Allowance for loan losses (2,555) (2,450) (2,334) (2,237) (2,529) - ------------------------------------------------------------------------------------------- Net loans $322,810 $302,539 $269,969 $247,424 $246,656 - -------------------------------------------------------------------------------------------
6 7 The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 1999:
Maturity/Scheduled Payments (1) Within One to Five to After (In thousands) one year five years ten years ten years Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $ 193 $10,753 $76,243 $198,698 $285,887 Commercial & construction 405 149 950 1,189 2,693 - ------------------------------------------------------------------------------------------- Total mortgage loans 598 10,902 77,193 199,887 288,580 Other loans 16,466 2,627 4,715 12,977 36,785 - ------------------------------------------------------------------------------------------- Total loans $17,064 $13,529 $81,908 $212,864 $325,365 - -------------------------------------------------------------------------------------------
(1) Loan amounts are accumulated as if the entire balance came due on the last contractual payment date. Accordingly, the amounts do not reflect proceeds from contractual loan amortization or anticipated prepayments. The following table shows the amounts, included in the table above, which are due after one year and which have fixed or adjustable interest rates:
Total Due After One Year Fixed Adjustable (In thousands) Rate Rate Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $246,871 $38,823 $285,694 Commercial & construction 179 2,109 2,288 - ------------------------------------------------------------------------------------------- Total mortgage loans 247,050 40,932 287,982 Other loans 1,547 18,772 20,319 - ------------------------------------------------------------------------------------------- Total loans $248,597 $59,704 $308,301 - -------------------------------------------------------------------------------------------
Mortgage Lending. The Bank believes that the repayment periods of long- term first mortgage loans, the general resistance of the public to variable rate mortgage instruments and the highly competitive nature of the mortgage industry require a prudent approach to mortgage lending. Consequently, as part of its policy of generally attempting to match the maturities of its assets and its liabilities, the Bank has kept its mortgage loan portfolio to a level at which the Bank believes there is an acceptable risk-to-reward ratio in light of opportunities in the market-place and its long-term objectives. The Bank's net loan portfolio represented approximately 34.9% and 32.0% of the Company's total assets at December 31, 1999, and 1998, respectively. The Bank realizes that this low level of loans with respect to assets in relation to the securities portfolio results in a reduction in yield; however, the Bank believes that this reduction would be more than offset in risk and loss associated with lending during periods of economic decline. In today's economic climate, the Bank would prefer a more even mix of loans and securities. However, there remains a tremendous amount of competition for mortgages in the Bank's area, and developing a quality loan portfolio takes time. In 1999, the Bank's total loan portfolio continued to grow, showing a 6.7% increase to $325.4 million compared to $305.0 million at the end of 1998. 7 8 Mortgage Lending (continued) Loan originations come from a number of sources, including referrals from real estate brokers, walk-in customers, purchasers of property owned by existing customers and refinancings for existing customers. In addition to actively soliciting loan referrals, the Bank conducts an advertising and promotion program, directed both toward the general public and real estate professionals who might refer potential borrowers. Substantially all of the real estate loans originated by the Bank during 1999 were secured by real estate located in the Bank's primary lending area, reflecting the Bank's commitment to serve the credit needs of the local communities in which it operates banking offices. The Bank makes both conventional fixed and adjustable-rate loans on one- to-four family residential properties for a term of ten to thirty years. The Bank currently retains all of the mortgages it originates for its own portfolio. These are primarily 10, 12, 15 or 20 year fixed rate and adjustable rate mortgages. The few long-term (25 or 30 year) fixed rate mortgage loans that the Bank originates from time to time are also added to the loan portfolio. Adjustable rate mortgage loans ("ARMs") have rates that are re-set at either 1, 3, 5 or 10 year intervals and provide a margin over various mortgage indices. In recent years, the Bank has instituted several new loan programs which have been well received by customers. It instituted a program featuring a 5/1 and 7/1 year ARM product with an initial fixed rate for 5 or 7 years and a 1 year adjustable rate thereafter. A special First Time Home Buyers Program has also been instituted featuring a discounted 7/1 ARM. This program is designed for first-time home buyers meeting certain income and property location restrictions. The Bank has also introduced the "Home Town Advantage" mortgage program which has produced some good results. This program offers homebuyers a (0.125) percent discount on their mortgage rate if they purchase residential property located in one of the communities where the bank operates a banking office. At December 31, 1999, 1-4 family residential mortgage loans totaled $285.9 million, or 87.9% of the total loan portfolio, compared to $280.7 million, or 92.0% of the total loan portfolio, at December 31, 1998. Residential mortgage loan originations amounted to $55.2 million during 1999, down from $93.8 million in 1998. Origination volumes are sensitive to interest rates and are affected by the interest rate environment. In 1999, the upturn in interest rates significantly reduced the demand for mortgage refinancings. Consequently, the Bank was not able to reach the prior year's level of residential mortgage loan originations. The Bank also originates construction loans and mortgage loans secured by commercial or investment property such as multifamily housing, strip shopping centers, office buildings and retail buildings. At December 31, 1999, commercial and multifamily real estate mortgages and construction loans totaled approximately $2.7 million, or 0.8% of the total loan portfolio, compared to $3.0 million, or 1.0% of the total loan portfolio, at December 31, 1998. In 1999, commercial and multifamily real estate mortgage loan and construction loan originations amounted to $0.8 million. 8 9 Mortgage Lending (continued) The total amount of first mortgage loans held by the Bank at December 31, 1999 was $288.6 million as indicated in the maturity distribution table appearing on page six. Of this amount, $41.3 million was subject to interest rate adjustments. The remaining $247.3 million in fixed rate mortgage loans represents 26.7% of the Company's total assets. Fees received for originating loans and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. The Bank also receives fees and charges relating to existing loans, primarily late charges and prepayment penalties. Other Loans. The Bank makes a variety of consumer loans and had a consumer loan portfolio of approximately $21.7 million at December 31, 1999 representing 6.7% of the Bank's total loan portfolio. Of this amount $7.0 million or 2.2% of the total loan portfolio are education loans made under the Massachusetts Higher Education Assistance Corporation. The Bank may sell education loans in the future. The balance of the Bank's consumer loan portfolio consists of home equity lines of credit and installment consumer credit contracts such as automobile loans, home improvement loans and other secured and unsecured financings. These loans totaled $14.7 million at December 31, 1999, representing 4.5% of the Bank's total loan portfolio. At December 31, 1999, the Bank also had $15.1 million in outstanding loans to commercial enterprises not secured by real estate. Loan Approval. The Bank's loan approval process for all loans generally includes a review of an applicant's financial statements, credit history, banking history and verification of employment. For mortgage loans, the Bank generally obtains an independent appraisal of the subject property. The Bank has a formal lending policy approved by the Board of Directors of the Bank which delegates levels of loan approval authority to Bank personnel. All loans in excess of established limits require approval of the Bank's Board of Directors. The Bank issues commitments to prospective borrowers to make loans subject to certain conditions for generally up to 60 days. The interest rate applicable to the committed loans is usually the rate in effect at the time the application fee is paid. At December 31, 1999, the Bank had issued commitments on residential first mortgage loans totaling $2,829,000, and had commitments to advance funds on construction loans and unused credit lines, including unused portions of home equity lines of credit, of $65,000 and $31,693,000, respectively. Loan Delinquencies. It is the Bank's policy to manage its loan portfolio so as to recognize problem loans at an early stage and thereby minimize loan losses. Loans are considered delinquent when any payment of principal or interest is 30 days or more past due. The Bank generally commences collection procedures, however, when accounts are 15 days past due. It is the Bank's practice to generally discontinue accrual of interest on all loans for which payments are more than 90 days past due. Loans delinquent for 90 or more days, as shown in the table on the following page, totaled $795,000 at December 31, 1999. 9 10 Real Estate Acquired through Foreclosure. Real estate acquired through foreclosure is comprised of foreclosed properties where the Bank has actually received title and loans determined to be substantially repossessed. Real estate loans that are substantially repossessed include only those loans for which the Bank has taken possession of the collateral but has not completed legal foreclosure proceedings. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Real estate acquired through foreclosure is recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received, less estimated costs to sell the property following foreclosure. Operating expenses and any subsequent provisions to reduce the carrying value to fair value are charged to current period earnings. Gains and losses upon disposition are reflected in earnings as realized. As of year-end 1999, MASSBANK had $62 thousand in real estate acquired through foreclosure in its balance sheet. Non-Performing Assets The following table shows the composition of non-performing assets at the dates shown:
- ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Nonaccrual loans: Mortgage loans: Residential: Conventional $ 655 $ 845 $1,536 $1,468 $2,016 FHA and VA -- -- 9 13 14 Commercial -- -- -- -- -- Consumer 140 159 226 120 398 - ------------------------------------------------------------------------------------------------ Total nonaccrual loans 795 1,004 1,771 1,601 2,428 - ------------------------------------------------------------------------------------------------ Real estate acquired through foreclosure: Residential: Conventional 62 86 -- 503 255 - ------------------------------------------------------------------------------------------------ Total real estate acquired through foreclosure 62 86 -- 503 255 - ------------------------------------------------------------------------------------------------ Total non-performing assets $ 857 $1,090 $1,771 $2,104 $2,683 - ------------------------------------------------------------------------------------------------ Percent of non-performing loans to total loans 0.24% 0.33% 0.65% 0.64% 0.97% Percent of non-performing assets to total assets 0.09% 0.12% 0.19% 0.24% 0.31%
The reduction in interest income associated with nonaccrual loans is as follows:
- ------------------------------------------------------------------------------------------------ (In thousands) Years Ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Interest income that would have been recorded under original terms $ 64 $ 84 $163 $149 $204 Interest income actually recorded 51 61 97 78 60 - ------------------------------------------------------------------------------------------------ Reduction in interest income $ 13 $ 23 $ 66 $ 71 $144 - ------------------------------------------------------------------------------------------------
10 11 Allowance for Loan Losses. The allowance for loan losses is increased by provisions charged to operations based on management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may affect 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 substantially 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. The following table sets forth the activity in the allowance for loan losses during the years indicated:
- ------------------------------------------------------------------------------------------------ (In thousands) Years ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Balance at beginning of year $2,450 $2,334 $2,237 $2,529 $2,566 Glendale Co-Operative Bank acquisition -- -- 105 -- -- Provision for loan losses 140 193 260 160 170 Charge-offs: Residential real estate (62) (81) (221) (480) (124) Consumer loans (14) (22) (12) (25) (30) Other loans -- -- (94) (37) (95) Recoveries: Residential real estate 39 17 34 83 41 Commercial real estate -- -- 20 -- -- Consumer loans 2 6 1 7 1 Other Loans -- 3 4 -- -- - ------------------------------------------------------------------------------------------------ Net charge-offs (35) (77) (268) (452) (207) - ------------------------------------------------------------------------------------------------ Balance at end of year $2,555 $2,450 $2,334 $2,237 $2,529 - ------------------------------------------------------------------------------------------------ Net loan charge offs as a percent of average loans outstanding during the period 0.01% 0.03% 0.10% 0.18% 0.08% Allowance for loan losses as a percent of total loans outstanding at year-end 0.79% 0.80% 0.86% 0.90% 1.01% Allowance for loan losses as a percent of nonaccrual loans 321.4 % 244.0 % 131.8 % 139.7 % 104.2 % - ------------------------------------------------------------------------------------------------
11 12 Investment Activities The Bank believes that investment opportunities in United States Government, corporate and other securities are at times more attractive than the opportunities present in the loan market. As compared to loans, these investments of the Bank are generally shorter-term and hence more liquid, are subject to lower risk of loss, and present an opportunity for appreciation. In addition, these investments often permit the Bank to better match the maturities of its assets and its liabilities. The Bank's investment portfolio is managed by its officers in accordance with an investment policy approved by the Bank's Board of Directors. The objectives of that policy are to provide a level of liquidity, earnings and diversification consistent with the exercise of prudent investment judgment. The policy authorizes the senior management of the Bank to make and execute investment decisions and requires that those persons report all investment transactions to the Bank's Board of Directors at each of its regular meetings. In addition, management is required to report all gains or losses on all securities transactions at each meeting of the Bank's Board of Directors. Purchases and sales of securities by the Bank are generally required to be made on a competitive basis and all investments must be permitted by applicable law. The Bank invests in a wide variety of securities and obligations, including: Federal funds sold (which are sold only to institutions included on the Bank's internally-prepared approved list of adequately capitalized institutions); commercial paper and bankers' acceptances; United States Treasury and Government agency obligations; United States agency guaranteed and other mortgage-backed securities; investment grade corporate debt securities (generally limited to those rated A or better by Standard & Poor's); mutual funds; and equity securities traded on a national securities exchange or quoted on the NASDAQ System. Under the investment policy management determines the appropriate classification of securities at the time of purchase. Those securities that the Company has the intent and the ability to hold to maturity are classified as securities held to maturity and are carried at amortized historical cost. Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in market conditions, interest rates, changes in prepayment risk, the need to increase regulatory capital and other factors. Income on debt securities available for sale is accrued and included in interest and dividend income. The specific identification method is used to determine realized gains or losses on sales of securities available for sale which are also reported in non-interest income under the caption "gains on securities." When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings. 12 13 Investment Activities (continued) Investments classified as trading securities are stated at market with unrealized gains or losses included in earnings. Income on trading securities is accrued and included in interest and dividend income. All of the Company's mortgage-backed securities are currently classified as available for sale. At times of low loan demand, short-term mortgage-backed securities may be used as substitutes for loans as certain of their financial characteristics are very similar to short-term mortgage loans. At December 31, 1999, the Company's investments, which consists of securities held to maturity, securities available for sale (including mortgage-backed securities), trading securities, short-term investments, term federal funds sold and interest-bearing deposits in banks totaled $578.5 million, representing 62.6% of the Company's total assets. 13 14 The following table sets forth the composition of the Company's investment portfolio as of the dates indicated: Investment Portfolio
- ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Federal funds sold: Overnight federal funds $ 86,211 $123,207 $ 85,241 Term federal funds -- 25,000 20,000 - ------------------------------------------------------------------------------------------------ Total federal funds sold 86,211 148,207 105,241 Money market funds 24,717 24,569 24,514 Interest-bearing deposits in bank 3,841 2,033 2,083 - ------------------------------------------------------------------------------------------------ Total federal funds sold and other short-term investments $114,769 $174,809 $131,838 - ------------------------------------------------------------------------------------------------ Percent of total assets 12.4% 18.5% 14.2% - ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Securities held to maturity: (a) Other bonds and obligations $ 230 $ 354 $ 372 - ------------------------------------------------------------------------------------------------ Total securities held to maturity $ 230 $ 354 $ 372 Securities available for sale: (b) U.S. Treasury obligations 137,615 114,981 123,021 U.S. Government agency obligations 16,015 8,992 9,813 Marketable equity securities 21,537 21,580 17,545 Investments in mutual funds -- -- 1,114 Mortgage-backed securities 282,335 272,573 330,731 - ------------------------------------------------------------------------------------------------ Total securities available for sale 457,502 418,126 482,224 Trading securities: (b) U.S. Treasury obligations 4,956 29,707 18,542 Investments in mutual funds 1,086 1,086 2,718 - ------------------------------------------------------------------------------------------------ Total trading securities 6,042 30,793 21,260 - ------------------------------------------------------------------------------------------------ Total securities $463,774 $449,273 $503,856 - ------------------------------------------------------------------------------------------------ Percent of total assets 50.2% 47.5% 54.4% - ------------------------------------------------------------------------------------------------ Total investments $578,543 $624,082 $635,694 Total investments as a percent of total assets 62.6% 65.9% 68.7% - ------------------------------------------------------------------------------------------------
(a) At amortized cost. (b) At market value. 14 15 The following tables present the carrying value of debt securities held to maturity and available for sale at December 31, 1999 maturing within stated periods with the weighted average interest yield from securities falling within the range of maturities: Debt Securities Held to Maturity
Other bonds and (Dollars in thousands) obligations (1) Total - ------------------------------------------------------------------------------------------------ Maturing after 1 but within 5 years Amount $ 230 $ 230 Yield 6.80% 6.80% - ------------------------------------------------------------------------------------------------ Total Amount $ 230 $ 230 Yield 6.80% 6.80% Average life in years 1.29 1.29
Debt Securities Available for Sale
U.S. U. S. Government Mortgage- Treasury agency backed (Dollars in thousands) obligations obligations securities (2) Total - ------------------------------------------------------------------------------------------------ Maturing within 1 year Amount $ 52,845 $6,992 $ 523 $ 60,360 Yield 6.09% 5.19% 5.33% 5.98% Maturing after 1 but within 5 years Amount 82,707 9,000 3,869 95,576 Yield 5.93% 5.46% 8.06% 5.97% Maturing after 5 but within 10 years Amount 2,966 -- 56,571 59,537 Yield 5.85% -- 6.88% 6.83% Maturing after 10 but within 15 years Amount -- -- 221,202 221,202 Yield 6.79% 6.79% Maturing after 15 years Amount -- 151 4,103 4,254 Yield 7.68% 6.16% 6.21% - ------------------------------------------------------------------------------------------------ Total Amount $138,518 $16,143 $286,268 $440,929 Yield 5.99% 5.36% 6.81% 6.50% - ------------------------------------------------------------------------------------------------ Average life in years 1.87 0.97 Average contractual maturity in years 11.86
15 16 (1) Yields on tax exempt obligations have been computed on a tax equivalent basis. (2) Mortgage-backed securities are based on contractual maturities. Actual maturities will differ from contractual maturities due to scheduled amortization and prepayments. At December 31, 1999, the Company did not have an investment in any issuer (other than securities of the U.S. Government and Government Agencies) in excess of 10% of stockholders equity. 16 17 Deposits and Other Sources of Funds General. Deposits have been the Bank's primary source of funds for making investments and loans. In addition to deposits, the Bank's other major sources of funds are derived from amortization and prepayment of loans and mortgage-backed securities, from sales or maturities of securities, and from operations. Deposit flows can vary significantly and are influenced by prevailing interest rates, money market conditions, economic conditions and competition. The Bank can respond to changing market conditions and competition through the pricing of its deposit accounts. Management can attempt to control the level of its deposits to a significant degree through its pricing policies. Another important factor in attracting deposits is convenience. In addition to the Bank's fifteen conveniently located banking offices, customers can access accounts through the Bank's ATM network. The Bank is a member of the Transaxion ("TX"), New York Cash Exchange ("NYCE") and CIRRUS System, Inc. ("CIRRUS") networks which allow access to ATMs in over 100,000 locations worldwide. Deposits. A substantial amount of the Bank's deposits are derived from customers who live or work within the Bank's market area. The Bank does not solicit deposits through any outside agents. The Bank's deposits consist of regular, silver and smart savings accounts, special notice accounts, NOW and Super NOW accounts, business checking accounts, money market deposit accounts, IRA and Keogh accounts, and term deposit accounts. The performance of the stock market in 1999, continued to draw savings from bank deposit accounts making it more difficult to grow bank deposits. As a result, the Bank's deposits decreased by $6.0 million during the twelve months ended December 31, 1999, from $824.0 million at year-end 1998 to $818.0 million at the end of 1999. Borrowed Funds. From time to time the Bank has obtained funds through repurchase agreements with its customers and federal funds purchased. The Bank also has the ability, although it has never exercised it, to borrow from the Federal Reserve Bank and The Depositors Insurance Fund, Inc. The Company did not have any borrowed funds in 1999 or 1998. 17 18 DEPOSITS The following table shows the composition of the deposits as of the dates indicated:
(In thousands) at December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Percent Percent Percent of of of Amount Deposits Amount Deposits Amount Deposits Demand and NOW NOW $ 48,422 5.92% $ 52,324 6.35% $ 47,944 5.92% Demand accounts (non interest-bearing) 24,516 3.00 23,849 2.89 18,915 2.34 ------- ---- ------- ---- ------ ----- Total demand and NOW 72,938 8.92 76,173 9.24 66,859 8.26 Savings: Regular savings and special notice accounts 333,535 40.77 326,192 39.59 329,348 40.67 Money market accounts 19,555 2.39 21,857 2.65 23,527 2.90 ------- ------- ----- ------- ----- Total savings 353,090 43.16 348,049 42.24 352,875 43.57 Time Certificates of deposit: Fixed rate certificates 302,423 36.97 318,491 38.65 316,368 39.06 Variable rate certificates 90,093 11.01 82,033 9.96 74,666 9.22 ------ ------ ---- ------ ---- Total time certificates of deposit 392,516 47.98 400,524 48.61 391,034 48.28 Deposit acquisition premium, net of amortization (487) (.06) (715) (.09) (918) (0.11) ---- ---- ---- ---- ----- Total deposits $818,057 100.00% $824,031 100.00% $809,850 100.00%
In the following table the average amount of deposits and average rate is shown for each of the years as indicated.
(In thousands) Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate NOW accounts $ 49,559 1.01% $ 48,006 1.15% $ 46,580 1.14% Demand (non interest-bearing) accounts 24,189 -- 21,011 -- 18,156 -- Escrow deposits of borrowers 1,185 0.19 1,142 0.18 1,159 0.28 Money market accounts 20,519 2.96 22,299 3.07 24,186 3.07 Regular savings and special notice accounts 333,332 3.44 327,338 3.44 331,209 3.47 Time certificates of deposit 397,935 5.19 391,816 5.57 386,062 5.67 ------- ------- ------- 826,719 4.02 811,612 4.23% 807,352 4.30%
18 19 Investment Management and Trust Services The Bank's Trust and Investment Services Division offers a variety of investment, trust and estate planning services and also serves as Trustee, Executor, and Executor's Agent for bank customers. As of December 31, 1999 the Trust Division had approximately $33.9 million (market value) of assets in custody and under management. Competition The Bank faces substantial competition both in originating loans and in attracting deposits. Competition in originating loans comes primarily from other thrift institutions, commercial banks, credit unions and mortgage banking companies. The Bank competes for loans principally on the basis of interest rates and loan fees, the types of loans originated and the quality of services provided to borrowers. In attracting deposits, the Bank's primary competitors are other thrift institutions, commercial banks, mutual funds and credit unions located in its market area. The Bank's attraction and retention of deposits depend on its ability to provide investment opportunities that satisfy the requirements of customers with respect to rate of return, liquidity, risk and other factors. The Bank attracts a significant amount of deposits through its branch offices primarily from the communities in which those branch offices are located. The Bank competes for these deposits by offering competitive rates, convenient branch and ATM locations and convenient business hours. 19 20 Supervision and Regulation of the Company and its Subsidiaries The Company and the Bank are in a heavily regulated industry. As a Delaware business corporation, the Company is subject to all of the federal and state laws and regulations that apply to corporations generally, including the federal and state securities laws and the Delaware Business Corporation Law. In addition, as a company that owns and controls a bank, the Company is regulated as a bank holding company, is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System (the "FRB") under the federal Bank Holding Company Act (the "BHC Act"), and is subject to statutes, regulations and policies administered by the FRB relating to, among other things, mergers, acquisitions and changes in controlling ownership, non-bank activities and subsidiaries, capital adequacy, the receipt and payment of dividends, and the provision of financial and managerial support to its subsidiary bank. In addition, the Company is subject to certain state law restrictions administered by the Massachusetts Division of Banks (the "Division"), relating to, among other things, the acquisition of additional banking institutions and the conduct of nonbank activities. As a Massachusetts-chartered savings bank whose deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") (and, with respect to any deposits in excess of FDIC limits, by the private, industry-sponsored Depositors Insurance Fund of Massachusetts), the Bank is subject to regulation, supervision and examination by federal and state regulatory authorities, including the FDIC and the Division. This framework of federal and state banking supervision and regulation is administered primarily for the benefit of borrowers, depositors and the respective deposit insurance funds and not for the benefit of the Bank, the Company or its stockholders. The Bank is subject to extensive federal and state statutes, regulations, policies and standards regarding virtually all aspects of its operations, including capital adequacy, reserves, liquidity, payment of dividends, transactions with affiliates, loans to officers, directors, principal shareholders and their related interests, mergers, acquisitions and changes in controlling ownership, establishment, relocation and closure of branch banking offices, community reinvestment, equal credit opportunity, credit reporting, real estate settlement procedures, funds availability, disclosure to consumers, financial accounting, reporting and recordkeeping, and Year 2000 preparedness. In the event the Bank failed to maintain adequate capital or otherwise failed to operate in accordance with applicable federal and Massachusetts statutes, regulations or policies, the FDIC and the Division have authority to place the Bank in receivership or conservatorship or impose other sanctions, including but not limited to restrictions on dividend or other payments by the Bank to the Company, termination of the Bank's deposit insurance, restrictions on the Bank's growth, issuance of orders to cease and desist from or to take specified actions, assessment of money penalties, and removal of officers or directors. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") establishes five categories of banking institutions -- in descending order of capital adequacy: "well-capitalized," "adequately capitalized," "undercapitalized," significantly undercapitalized," and "critically undercapitalized" -- and imposes certain restrictions and requires federal bank regulatory agencies to take "prompt corrective action" with respect to banks that are in one of the three "undercapitalized" categories. As of December 31, 1999, the Bank was "well capitalized" as defined under FDICIA. For a discussion of the Bank's capital adequacy, see Note 14 to the Company's Consolidated Financial Statements, on page 46. 20 21 Supervision and Regulation of the Company and its Subsidiaries (continued) FDICIA establishes a system of risk-based deposit insurance assessments that takes a bank's capital level and supervisory risk characteristics into account in calculating the amount of its federal deposit insurance assessment. In addition, FDICIA places certain restrictions on the equity investments and other "principal" activities of all state-chartered banks, including the Bank. FDICIA further requires the FDIC and other federal bank regulatory agencies to establish regulatory "safety and soundness" standards to govern various aspects of bank operations including internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, executive compensation, asset quality, earnings and stock valuation, as the agencies consider appropriate. The FDIC may require a bank that is not in compliance with safety and soundness standards promulgated under FDICIA to submit and implement a written plan to achieve compliance within a specified time period and may impose sanctions on a bank that fails to submit and implement an acceptable plan when required. At December 31, 1998, the Bank's operations were in substantial compliance with all applicable safety and soundness standards promulgated under FDICA. On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate Banking Act") was signed into law by President Clinton. In 1996, Massachusetts enacted legislation "opting in" to interstate branch banking and imposing certain limitations and requirements as permitted by the Interstate Banking Act. The Interstate Banking Act and the 1996 Massachusetts legislation permit interstate branching, mergers and bank acquisitions by Massachusetts bank holding companies and banks and permit out-of-state bank holding companies and banks to expand their banking operations into Massachusetts by merger, acquisition or de novo branching subject to certain regulatory approval requirements and other limitations. As to the Gramm-Leach-Bliley Act, the legislation, which became law on November 12, 1999, repeals provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a bank and any company or person "primarily engaged" in specified securities activities. Moreover, the general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system, such as the Company, to engage in a full range of financial activities through a new entity known as a financial holding company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Bank ("FRB"), in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In sum, the Gramm- Leach-Bliley Act is intended to permit bank holding companies that qualify and elect to be treated as a financial holding company to engage in a significantly broader range of financial activities than the activities described above that are not so treated. Generally, although significant implementation, regulations have yet to be published, the Gramm-Leach-Bliley Act: 21 22 Supervision and Regulation of the Company and its Subsidiaries (continued) * repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; * provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; * broadens the activities that may be conducted by national banks (and derivatively state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries; * provides an enhanced framework for protecting the privacy of consumer information; * adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system; * modifies the laws governing the implementation of the Community Reinvestment Act of 1977; and * addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order to elect to become a financial holding company and engage in the new activities, a bank holding company, such as the Company, must meet certain tests and file an election form with the FRB which generally is acted on within thirty days. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized (as discussed below under "The Bank") and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities each of the bank holding company's banks must have been rated "satisfactory" or better in its most recent federal Community Reinvestment Act evaluation. Furthermore, a bank holding company that elects to be treated as a financial holding company may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. At this time, the Company has not determined whether it will become a financial holding company. From time to time the U.S. Congress and the Massachusetts Legislature adopt legislation and the Federal and State bank regulatory agencies issue regulations and policies that may significantly affect the operations of the Bank and the Company. No assurance can be given as to whether or when such additional legislation, regulations or policies may be adopted or as to the effect any such legislation, regulations or policies may have on the Company or the Bank. 22 23 Employees MASSBANK Corp. utilizes the support staff of the Bank from time to time without the payment of any fees. No separate compensation is being paid to the executive officers of MASSBANK Corp., all of whom are executive officers of the Bank and receive compensation as such. As of December 31, 1999, the Bank had 143 full-time employees, including 29 officers, and 62 part-time employees. None of the Bank's employees is represented by a collective bargaining group, and management believes that its employee relations are good. The Bank provides its employees with formal training in product knowledge, sales techniques, fair lending, and motivation. In addition, each supervisor at the Bank receives management training before assuming his or her supervisory duties and periodically thereafter. The Bank maintains a comprehensive employee benefit program for qualified employees that includes a qualified pension plan, an Employee Stock Ownership Plan (ESOP), health and dental insurance, life and long-term disability insurance and tuition assistance. Subsidiaries The Bank has three wholly-owned subsidiaries: Readibank Investment Corporation, Melbank Investment Corporation, and Readibank Properties, Inc. Readibank Investment Corporation and Melbank Investment Corporation were established for the purpose of managing portions of the Bank's investment portfolio. Assets of Readibank Investment Corporation and Melbank Investment Corporation totaled $133.9 million and $134.1 million, respectively, at December 31, 1999. Readibank Properties, Inc. incorporated primarily for the purpose of real estate development, had total assets of $630 thousand at December 31, 1999. Executive Officers of the Registrant The executive officers of the Company and the Bank and the age of each officer as of March 4, 2000 are as follows: Name Age Office Gerard H. Brandi 51 Chairman of the Board of Directors, President and Chief Executive Officer of the Company and the Bank David F. Carroll 52 Vice President of the Bank Reginald E. Cormier 52 Senior Vice President, Treasurer and Chief Financial Officer of the Company and the Bank Thomas J. Queeney 37 Vice President and Senior Trust Officer of the Bank Donald R. Washburn 56 Senior Vice President of the Bank Donna H. West 54 Senior Vice President of the Bank and Assistant Secretary of the Company 23 24 Gerard H. Brandi. Mr. Brandi has served in various capacities with MASSBANK since he joined the Bank in 1975 as Vice President of the Lending Division. He served as Senior Vice President from 1978 to 1981, Executive Vice President and Senior Lending Officer from 1981 to 1983, and Executive Vice President and Treasurer from 1983 to 1986. Mr. Brandi was named President of the Company and the Bank in 1986, Chief Executive Officer in 1992 and Chairman in 1993. David F. Carroll. Mr. Carroll has been employed by the Bank since 1983 and has been Vice President of Operations since 1984. He served as Vice President of the Lending Division for a year before becoming Vice President of Operations. Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in September, 1987 and served in this capacity until his promotion to Vice President, Treasurer and Chief Financial Officer in January, 1995. In December 1999, he was promoted to Senior Vice President, Treasurer and Chief Financial Officer. Thomas J. Queeney. Mr. Queeney joined the Bank in 1986 as a Management Trainee in Loan Origination. He became an Assistant Manager in 1987 and was promoted to Assistant Treasurer in 1988. He then served as a Marketing and Investor Relations Representative until his promotion to Loan Servicing Manager in 1990. In 1992, he was promoted to Loan Officer and Commercial Lending Manager. He was promoted to Assistant Vice President, Lending in 1997, where he served until his promotion to AVP/Trust Administrator in July of 1998. In January of 1999, he was promoted to Vice President and Senior Trust Officer. Donald R. Washburn. Mr. Washburn joined the Bank in 1973 as a Loan Officer. He became an Assistant Vice President in January, 1977 and a Vice President in the Lending Division in June, 1980. Mr. Washburn served as Vice President of the Operations Division from February, 1983 to January, 1984, as Vice President of the Community Banking Division from January, 1984 to January, 1986 and as Vice President of the Lending Division from January, 1986 until his promotion to Senior Vice President of the Lending Division in June, 1994. Donna H. West. Mrs. West has been employed by the Bank since 1979 and has served as Vice President of the Community Banking Division since October, 1987. Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West became a Branch Manager in 1981, an Assistant Treasurer and Branch Manager in 1982, an Assistant Treasurer and Regional Branch Administrator in 1984 and an Assistant Vice President and Regional Branch Administrator in 1986. She served in this capacity until her October, 1987 promotion to Vice President of the Community Banking Division. In June, 1994, Mrs. West was promoted to Senior Vice President of the Community Banking Division. 24 25 Item 2. Properties The main office of MASSBANK Corp. and MASSBANK is located at 123 Haven Street, Reading, Massachusetts. Additionally, the Bank has fourteen branches and three operations facilities. The Bank owns its main office, two operations facilities and seven of its branches. All of the remaining branches and other facilities are leased under various leases. At December 31, 1999, management believes that the Bank's existing facilities are adequate for the conduct of its business. The following table sets forth certain information relating to the Bank's existing facilities.
Owned Lease Renewal or Expiration Option Location Leased Date Through MAIN OFFICE: 123 Haven Street, Reading, MA Owned ---- ---- BRANCH 296 Chelmsford Street, Chelmsford, MA Leased (2) ---- OFFICES: 17 North Road, Chelmsford, MA Leased (2) (1) 45 Broadway Road, Dracut, MA Leased 2002 ---- 738 Broadway, Everett, MA Owned ---- ---- 50 Central Street, Lowell, MA Owned ---- ---- 755 Lakeview Avenue, Lowell, MA Owned ---- ---- 4110 Mystic Valley Pkwy, Medford, MA Leased 2001 ---- 476 Main Street, Melrose, MA Owned ---- ---- 27 Melrose Street, Towers Plaza, Melrose, MA Leased 2004 2014 240 Main Street, Stoneham, MA Leased 2003 ---- 1800 Main Street, Tewksbury, MA Owned ---- ---- 203 Littleton Road, Westford, MA Owned ---- ---- 370 Main Street, Wilmington, MA Owned ---- ---- 219 Lowell Street, Lucci's Plaza, Wilmington, MA Leased 2006 ---- OPERATIONS FACILITIES: 159 Haven Street, Reading, MA Owned ---- ---- 169 Haven Street, Reading, MA Owned ---- ---- 11 North Road, Chelmsford, MA Leased (2) (1)
(1) The Bank has an option to purchase in the year 2000. (2) The Bank is a tenant at will. Item 3. 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 December 31, 1999, 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 4. Submission of Matters to a Vote of Security Holders None. 25 26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information contained under the caption "MASSBANK Corp. and Subsidiaries Stockholder Data" in the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. Item 6. Selected Financial Data The information contained under the caption "MASSBANK Corp. and Subsidiaries - Selected Consolidated Financial Data" in the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. This selected consolidated financial data should be read in conjunction with the consolidated statements and related notes thereto appearing in the Registrant's 1999 Annual Report to Stockholders which are incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information contained under the captions "Asset and Liability Management", "Interest Rate Risk" and "Other Market Risks" included in Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's consolidated financial statements and notes thereto, together with the report of KPMG LLP, contained in the Registrant's 1999 Annual Report to Stockholders are incorporated herein by reference. The unaudited quarterly financial data set forth on page 52 of such Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure None 26 27 PART III Item 10. Directors and Executive Officers of the Registrant The information appearing under the caption "Election of Directors" and "Compliance with Section 16(A) of the Exchange Act" in the Registrant's definitive proxy statement relating to its 2000 Annual Meeting of Stockholders is incorporated herein by reference. Information required by this item concerning the Executive Officers of the Registrant is contained in Part I of this Form 10-K. Item 11. Executive Compensation The information appearing under the caption "Executive Compensation" in the Registrant's definitive proxy statement relating to its 2000 Annual Meeting of Stockholders is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information appearing under the captions "Election of Directors" and "Principal Stockholders" in the Registrant's definitive proxy statement relating to its 2000 Annual Meeting of Stockholders is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information contained in Note 5 of the Consolidated Financial Statements under the caption "Loans" in the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The following financial statements and financial statement schedules are contained herein or are incorporated herein by reference: (a)1. Financial Statements
Reference to 1999 Annual Report to Stockholders (Pages) Independent Auditors' Report 25 Consolidated balance sheets at December 31, 1999 and 1998 26 Consolidated statements of income for the three years ended December 31, 1999 27 Consolidated statements of cash flows for the three years ended December 31, 1999 28-29 Consolidated statements of changes in stockholders' equity for the three years ended December 31, 1999 30 Notes to consolidated financial statements 31-52
2. Financial Statement Schedules All schedules are omitted as the required information is either not applicable or is included in the consolidated financial statements or related notes. 27 28 3. Exhibits Exhibit No. Description of Exhibit 3.1 Restated Certificate of Incorporation of the Registrant - incorporated by reference to Exhibit 3.1 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 3.2 By-Laws of the Registrant - incorporated by reference to Exhibit 3 of the Registrant's Form 10-Q for the quarter ended September 30, 1991. 4.1 Shareholder Rights Agreement dated as of January 18, 2000, between the Company and The First National Bank of Boston, as Rights Agent - incorporated herein by reference to the Exhibit to the Company's Current Report on Form 8-K dated as of January 20, 2000. 10.1 MASSBANK Corp. 1986 Stock Option Plan, as amended - incorporated by reference to Exhibit 28.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-11949). 10.1.2 Amendment to MASSBANK Corp. 1986 Stock Option Plan dated April 19, 1991 - incorporated by reference to Exhibit 10.1.2 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.1.3 MASSBANK Corp. 1994 Stock Incentive Plan - incorporated by reference to Exhibit 10.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-82110). 10.1.4 Amendment to MASSBANK Corp. 1994 Stock Incentive Plan dated April 21, 1998 - incorporated by reference to Exhibit 10.1.4 to the Registrant's annual report on Form 10-K for the year ended December 31, 1997. 10.2 MASSBANK for Savings Employees' Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 10.2.1 Amendments to the MASSBANK for Savings Employee's Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2.1 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.2.2 Amendments to the MASSBANK for Savings Employee's Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2.2 to the Registrant's annual report on Form 10-K for the year ended December 31, 1997. 10.3 Form of Employment Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.3 of the Registrant's annual report on Form 10-K for the year ended December 31, 1986 and Exhibit 10.3.1 of the Registrant's annual report on Form 10-K for the year ended December 31, 1989. 28 29 Exhibit No. Description of Exhibit 10.3.2 Amendment to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.2 of the Registrant's annual report on Form 10-K for the year ended December 31, 1990. 10.3.3 Second amendment dated as of February 1, 1993 to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.3. to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.7 Form of Employment Agreement with David F. Carroll dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.7 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.8 Form of Employment Agreement with Reginald E. Cormier dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.8 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.9 Form of Employment Agreement with Donald R. Washburn dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.9 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.10 Form of Employment Agreement with Donna H. West dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.10 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.11 Executive Severance Agreement with Gerard H. Brandi dated as of January 18, 1994 - incorporated by reference to exhibit 10.3.11 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.12 Executive Severance Agreement with David F. Carroll dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.12 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.13 Executive Severance Agreement with Reginald E. Cormier dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.13 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 29 30 Exhibit No. Description of Exhibit 10.3.14 Executive Severance Agreement with Donald R. Washburn dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.14 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.15 Executive Severance Agreement with Donna H. West dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.15 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.4 Form of Executive Supplemental Retirement Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.4 of Registrant's annual report on Form 10-K for the year ended December 31, 1986. 10.4.1 Amendments to the Executive Supplemental Retirement Agreement with Gerard H. Brandi are incorporated by reference to Exhibit 10.4.1 of the Registrant's annual report on Form 10-K for the year ended December 31, 1996. 12 Statement re: Computation of Ratios - Not applicable as MASSBANK Corp. does not have any debt securities registered under Section 12 of the Securities Exchange Act of 1934. 13 1999 Annual Report to Stockholders - except for those portions of the 1999 Annual Report to Stockholders which are expressly incorporated by reference in this report, such 1999 Annual Report to Stockholders is furnished for the information of the SEC and is not to be deemed "filed" with the SEC. 22 Subsidiaries of the Registrant - A list of subsidiaries of the Registrant is attached hereto as Exhibit 22 to this Annual Report. 23 Independent Accountants' Consent. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this Form 10-K. (c) Exhibits to this Form 10-K are attached or incorporated by reference as stated in the Index to Exhibits. (d) Not applicable. 27 Financial Data Schedule 30 31 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MASSBANK CORP. /s/Gerard H. Brandi ------------------- Gerard H. Brandi Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/Gerard H. Brandi Chairman, President, - ---------------------- Chief Executive Officer and Gerard H. Brandi Director March 8, 2000 ------------- /s/Reginald E. Cormier Senior Vice President, Treasurer - ---------------------- and Chief Financial Officer Reginald E. Cormier (Principal Financial and Accounting Officer) March 8, 2000 ------------- /s/Samuel Altschuler Director March 14, 2000 - ---------------------- ------------- Samuel Altschuler /s/Mathias B. Bedell Director March 8, 2000 - ---------------------- ------------- Mathias B. Bedell /s/Allan S. Bufferd Director March 10, 2000 - ---------------------- -------------- Allan S. Bufferd Director - ---------------------- Peter W. Carr /s/Alexander S. Costello Director March 13, 2000 - ---------------------- -------------- Alexander S. Costello 31 32 /s/Robert S. Cummings Director March 8, 2000 - ---------------------- ------------- Robert S. Cummings /s/Leonard Lapidus Director March 10, 2000 - ---------------------- -------------- Leonard Lapidus /s/Stephen E. Marshall Director March 8, 2000 - ---------------------- ------------- Stephen E. Marshall /s/Nancy L. Pettinelli Director March 13, 2000 - ---------------------- -------------- Nancy L. Pettinelli /s/Herbert G. Schurian Director March 10, 2000 - ---------------------- -------------- Herbert G. Schurian /s/Donald B. Stackhouse Director March 8, 2000 - ---------------------- ------------- Donald B. Stackhouse 32 EX-13 2 ANNUAL REPORT TO SHAREHOLDERS 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion should be read in conjunction with the consolidated financial statements and related notes included in this report. Certain amounts reported for prior years have been reclassified to conform to the 1999 presentation. The discussion contains certain forward-looking statements regarding the future performance of the Company. All forward-looking information is inherently uncertain and actual results may differ substantially from the assumptions, estimates, or expectations reflected or contained in the forward-looking information. The financial condition and results of operations of MASSBANK Corp. (the "Company") essentially reflect the operations of its subsidiary, MASSBANK (the "Bank"). The Company's consolidated net income depends largely upon net interest income, which is the difference between interest income from loans and investments ("interest-earning assets") and interest expense on deposits and borrowed funds ("interest-bearing liabilities"). Net interest income is significantly affected by general economic conditions, policies established by regulatory authorities and competition. The Company's earnings results are also affected by the provision for loan losses; non-interest income, such as fee-based revenues and net securities gains or losses; non-interest expense; and income taxes. FINANCIAL CONDITION The Company's total assets decreased $21.9 million, or 2.3%, to $924.7 million at December 31, 1999. The decline in total assets reflects a decrease in total investments of $45.6 million partially offset by an increase in total loans and other assets of $20.4 million and $3.3 million, respectively. The Bank's total loan portfolio at December 31, 1999, prior to the allowance for loan losses, amounted to $325.4 million compared with $305.0 million at December 31, 1998, an increase of $20.4 million or 6.7%. This increase resulted primarily from an increase in residential mortgage loans and commercial loans. MASSBANK benefited from the favorable mortgage interest rate environment during the first half of 1999; however, an increase in interest rates during the last half of the year significantly reduced the demand for mortgage refinancings. Total loan originations reached $82.4 million in 1999, compared with $105.2 million in 1998. This includes a $15.0 million commercial loan to a single borrower with AAA credit. Total investments consisting of investment securities and other short-term investments, including term federal funds sold and interest-bearing bank deposits, decreased $45.6 million from $624.1 million at December 31, 1998 to $578.5 million at year-end 1999. The decrease is mainly attributable to a decrease in short-term investments, term federal funds sold and trading securities of $36.8 million, $25.0 million and $24.8 million, respectively. These were partially offset by an increase in longer term investments. The primary components of the Bank's investment securities portfolio, U.S. Treasury securities, U.S. Government agency securities, and mortgage-backed securities increased by $22.6 million, $7.0 million and $9.8 million, respectively, during 1999. Other investments increased by $1.6 million in 1999. The decrease in total investments also reflects a decrease in net unrealized gains on the Bank's securities available for sale from $19.8 million at December 31, 1998 to $3.7 million at December 31, 1999. The decrease in market value of the Bank's investment securities available for sale portfolio is primarily due to an upward movement in market interest rates and the resulting downward movement in debt securities prices by year-end 1999. The change in the market value of the Bank's available for sale securities also had the effect of decreasing stockholders' equity by $9.7 million in 1999. The net unrealized gains on securities available for sale, net of tax effect, reported as part of stockholders' equity totaled $2.0 million at year-end 1999, down from $11.7 million at December 31, 1998. Also contributing to the decrease in stockholders' equity was the payment of $3.8 million in dividends to stockholders and the cost of additional shares of treasury stock repurchased during the year in the amount of $7.6 million. These were partially offset by the Company's record net income of $11.3 million in 1999 and the issuance of common stock under the Company's stock option plan. Total stockholders' equity was $101.5 million at December 31, 1999 representing a book value per share of $30.65 compared to $110.5 million at year-end 1998 representing a book value $31.58 per share. 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. Total deposits decreased $6.0 million during 1999 to $818.0 million at December 31, 1999, from $824.0 million at year-end 1998. This modest decrease was due in part to the strong performance of certain sectors of the equity securities market which made it more difficult to attract new deposits and some deposit outflow resulting from customer concerns about the Year 2000 ("Y2K"). 13 2 ASSET QUALITY Asset quality continued to improve during 1999. Nonaccrual loans, generally those loans which are 90 days or more delinquent, decreased to $0.8 million at December 31, 1999, from $1.0 million at December 31, 1998. The bank's provision for loan losses, which amounted to $193 thousand in 1998, decreased by $53 thousand to $140 thousand in 1999. Loan charge-offs, net of recoveries, amounted to $35 thousand in 1999, down from $77 thousand in 1998, which continued the trend of recent years. The Bank continued to add to its allowance for loan losses in 1999 due to the continued growth of its loan portfolio. The bank's allowance for loan losses at December 31, 1999 totaled approximately $2.6 million, representing 321% of nonaccrual loans and 0.79% 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. Real estate acquired through foreclosure totaled only $62 thousand at year-end 1999. RESULTS OF OPERATIONS COMPARISON OF THE YEARS 1999 AND 1998 MASSBANK Corp. reported consolidated net income of $11.3 million or $3.35 in basic earnings per share in 1999 compared to net income of $10.9 million or $3.09 in basic earnings per share in 1998. This was the seventh consecutive year of record net income for the Company. Diluted earnings per share for 1999 increased 9.4% to $3.25 from $2.97 in 1998. In 1999, the Company's return on average assets rose to a new high of 1.20% from 1.17% in the prior year. Return on average realized equity also increased, from 11.08% in 1998 to 11.35% in 1999. Increases in both net income and earnings per share in 1999 compared to 1998 primarily reflect an increase in securities gains of $1.1 million, a decrease in the provision for loan losses of $53 thousand and the Company's lower effective income tax rate. These improvements were partially offset by a decrease of $512 thousand in net interest income, a decrease of $168 thousand in non-interest income (exclusive of securities gains) and an increase in non-interest expense of $51 thousand. Additionally, the earnings per share increase in 1999 was positively affected by the reduced number of average common shares outstanding as a result of the Company's purchase of 210,967 shares of its common stock, during 1999, pursuant to its stock repurchase program. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis totaled $25.1 million for 1999 and $25.7 million for 1998. This decrease was principally attributable to a decline in net interest margin, partially offset by the positive effect of average earning asset growth. The net interest margin for 1999 was 2.72%, a decline from 2.81% reported in 1998. The Company's average earning assets increased $9.8 million to $922.7 million in 1999, from $912.9 million in 1998. The tables on pages 23 and 24 set forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have effected interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes due to (1) changes in volume and (2) changes in interest rates. INTEREST AND DIVIDEND INCOME Interest and dividend income on a fully taxable equivalent basis totaled $58.3 million for the year ended December 31, 1999, compared to $60.0 million for the year ended December 31, 1998. The yield on average earning assets was 6.32% in 1999, down from 6.56% in the prior year. The average total earning assets of the Company increased to $922.7 million in 1999, up $9.8 million from $912.9 million in 1998. As shown in the rate/volume analysis table on page 24, the decline in yield on average earning assets resulted in a decrease in interest and dividend income in 1999 of $2.6 million from 1998. Conversely, the total effect of higher average earning assets on interest and dividend income in 1999 was a $942 thousand increase over 1998, resulting in a net decrease in total interest and dividend income of $1.6 million from 1998. 14 3 INTEREST EXPENSE Total interest expense decreased $1.1 million or 3.3% to $33.2 million for the year ended December 31, 1999 from $34.3 million for the year ended December 31, 1998. This decrease is due to a decline in the Company's average cost of funds from 4.23% in 1998 to 4.02% in 1999, partially offset by the higher interest expense resulting from an increase in the Company's average total deposits, from $811.6 million in 1998 to $826.7 million in 1999. The Company's lower cost of funds in 1999 was the result of changes in market interest rates and certain pricing strategies which the bank implemented during the year. As shown in the rate/volume analysis table on page 24, the effect on total interest expense from changes in interest-bearing deposit rates was a $1.6 million decrease from 1998. Conversely, the total effect of higher average total deposits on interest expense in 1999 was a $516 thousand increase over 1998, resulting in a net decrease in total interest expense of $1.1 million from 1998. PROVISION FOR LOAN LOSSES The provision for loan losses represents a charge against current earnings and an addition to the allowance for loan losses. The provision for loan losses in 1999 was $140 thousand compared to $193 thousand in 1998. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. In making its decision, management considers a number of factors, including the risk characteristics of the loan portfolio, underlying collateral, current and anticipated economic conditions, and trends in loan delinquencies and charge-offs. At December 31, 1999, the allowance for loan losses was $2.6 million representing 321% of nonaccrual loans. The Banks nonaccrual loans totaled $0.8 million at December 31, 1999 down from $1.0 million a year earlier. Net charge-offs also declined to $35 thousand in 1999 from $77 thousand in the prior year. Management believes that the allowance for loan losses as of year-end 1999 is adequate to cover the risks inherent in the loan portfolio under current conditions. NON-INTEREST INCOME Non-interest income consists of gains or losses on securities, deposit account service fees and other non-interest income. Non-interest income increased to $5.6 million for the year ended December 31, 1999, from $4.6 million for the year ended December 31, 1998. This improvement is due to an increase in securities gains in 1999 compared to 1998. Net securities gains totaled $4.0 million in 1999 compared to $2.9 million in the prior year. This increase is primarily attributable to the favorable performance of the Company's equity securities portfolio which has produced strong returns over the past five years. Management believes the equity markets will return to levels which represent more closely the historical norms than has recently been the case, and does not anticipate the trend of recent years gains to continue. All other non-interest income combined decreased $168 thousand to $1.5 million in 1999 from $1.7 million in the prior year, due to a decrease in deposit account service fees and other non-interest income of $87 thousand and $81 thousand, respectively. NON-INTEREST EXPENSE Non-interest expense totaled $12.6 million for 1999, compared with $12.5 million in 1998. Expenses increased by only $51 thousand in 1999, due to the Company's cost containment efforts and the reasons summarized below: Salaries and employee benefits expenses increased by only $10 thousand to $7.4 million in 1999 compared to 1998. Annual merit increases and the slightly higher costs of employee benefits were partly offset by staff reductions and a decrease of $96 thousand in the Company's Employee Stock Ownership Plan ("ESOP") expense. The ESOP expense is tied closely to the average market price of the Company's common stock which declined during 1999. Also contributing to the slight increase in salaries and employee benefits expenses was a decrease of $41 thousand in loan origination related salary expenses being deferred (and amortized over the life of the loans) due to a decrease in residential lending activity in 1999 compared to 1998. Occupancy and equipment expense increased by 4.2% or $87 thousand to $2.1 million in 1999. This increase reflects higher depreciation expense due to the building and leasehold improvements completed in 1998 and 1999, and an increase in real estate tax expense in 1999, due partly to the larger dollar amount of real estate tax abatements received in 1998 compared to 1999. All other non-interest expenses combined consisting of data processing, professional services, advertising and marketing, amortization of intangibles, deposit insurance, contributions and other expenses remained relatively flat, decreasing $46 thousand in 1999 compared to 1998. The bank's efficiency ratio, which measures how much it costs to generate one dollar of revenue, continued its steady improvement of the past several years, reaching 40.9% in 1999. 15 4 INCOME TAX EXPENSE The Company recorded income tax expense of $6.5 million in 1999, an increase of $65 thousand when compared to the prior year. The increase in income tax expense is due primarily to higher pretax earnings partially offset by a slight reduction in the Company's effective income tax rate. The effective income tax rate for the year ended December 31, 1999 was 36.66%, down from 37.26% in the prior year. The decrease in the Company's effective income tax rate in 1999 is due, in part, to the scheduled reduction in the Bank's statutory state excise tax rate from 10.91% in 1998 to 10.50% in 1999; and to the increased investment income generated by the Bank's two security corporation subsidiaries which are taxed at a lower rate than the Bank for state income tax purposes. RESULTS OF OPERATIONS COMPARISON OF THE YEARS 1998 AND 1997 MASSBANK Corp. recorded net income for the year ended December 31, 1998 of $10.9 million or $3.09 in basic earnings per share compared to $10.2 million or $2.88 in basic earnings per share for the year ended December 31, 1997. This was the sixth consecutive year of record net income for the Company. Diluted earnings per share for 1998 increased to $2.97 from $2.77 in the prior year. In 1998, MASSBANK's return on average assets rose to 1.17% from 1.12% in the prior year. Return on average realized equity was 11.08% in 1998, down slightly from 11.11% in 1997. The Company's favorable earnings performance in 1998 is mainly attributable to higher securities gains and lower non-interest expenses and provision for loan losses, partially offset by a decrease in net interest income and non-interest income (exclusive of securities gains). NET INTEREST INCOME The Company's net interest income on a fully taxable equivalent ("FTE") basis was $25.7 million in 1998, a decrease of $0.5 million from the prior year. The decrease is the result of a lower net interest margin, due mainly to the flattening of the yield curve which was seen in 1998, partially offset by the positive effect of average earning asset growth. The Company's net interest margin was 2.81% in 1998, down from its prior year net interest margin of 2.93%. The Company's average earning assets increased $18.3 million or 2.0% to $912.9 million in 1998, from $894.6 million in 1997. The tables on pages 23 and 24 set forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have effected interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes due to (1) changes in volume and (2) changes in interest rates. INTEREST AND DIVIDEND INCOME Interest and dividend income on a fully taxable equivalent basis was $60.0 million for the year ended December 31, 1998, compared to $60.9 million for the year ended December 31, 1997. The average total earning assets of the Company increased to $912.9 million in 1998, up $18.3 million from $894.6 million in 1997. As reflected in the table on page 23, the Company saw a decline in yield in all categories of earning assets this past year. This resulted in an overall decline in yield on total average earning assets of 25 basis points in 1998. The yield on average earning assets for the year ended December 31, 1998 was 6.56% compared to 6.81% in the prior year. As exhibited in the rate/volume analysis table on page 24, the total effect of lower market interest rates on interest income in 1998 was a $1.9 million decline from 1997. Conversely, the total effect of higher average earning assets on interest income in 1998 was a $1.0 million increase over 1997, resulting in a net decrease in total interest and dividend income of $899 thousand from 1997. INTEREST EXPENSE Total interest expense decreased 1.0% to $34.3 million for the year ended December 31, 1998 from $34.7 million for the year ended December 31, 1997. This decrease is due to a decrease in the Company's average cost of funds from 4.30% in 1997 to 4.23% in 1998, partially offset by the higher interest expense resulting from an increase in the Company's average total deposits, from $807.3 million in 1997 to $811.6 million in 1998. The principal reason for the Company's lower cost of funds was lower market interest rates in 1998. As exhibited in the rate/volume analysis table on page 24, the effect on total interest expense from changes in interest-bearing deposit rates from a year ago was a $522 thousand decrease from 1997. Conversely, the total effect of higher average deposits on interest expense in 1998 was a $161 thousand increase over 1997, resulting in a net decrease in total interest expense of $361 thousand from 1997. 16 5 PROVISION FOR LOAN LOSSES The provision for loan losses in 1998 was $193 thousand compared to $260 thousand in 1997. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. In making its decision, management considers a number of factors, including the risk characteristics of the loan portfolio, underlying collateral, current and anticipated economic conditions, and trends in loan delinquencies and charge-offs. At December 31, 1998, the allowance for loan losses was approximately $2.5 million representing 244.0% of nonaccrual loans. The Bank's nonaccrual loans totaled $1.0 million at December 31, 1998 compared to $1.8 million a year earlier. Net charge-offs totaled $77 thousand in 1998 compared to $268 thousand in 1997. Management believes that the allowance for loan losses is adequate to cover the risks inherent in the loan portfolio under current conditions. NON-INTEREST INCOME Non-interest income consists of gains or losses on securities, deposit account service fees, and other non-interest income. Non-interest income increased to $4.6 million for the year ended December 31, 1998, from $3.8 million for the year ended December 31, 1997. This improvement is due to an increase in securities gains in 1998. Net gains on securities totaled $2.9 million in 1998 compared to $1.9 million in the prior year. The bank's equity securities portfolio continued to contribute significant returns in 1998 through a combination of gains on the sale of securities in the amount of $2.6 million and unrealized gains. The pretax unrealized gains in the bank's equity securities portfolio amounted to $10.5 million at year-end 1998, up from $8.2 million at December 31, 1997. All other non-interest income combined decreased $162 thousand to $1.7 million from $1.9 million in the prior year. NON-INTEREST EXPENSE One measure often used in the banking industry to assess the level of non-interest expense is the efficiency ratio. The efficiency ratio measures how much it cost to generate one dollar of revenue. MASSBANK's efficiency ratio continued its steady improvement of the past several years, reaching 41.4% in 1998. MASSBANK's non-interest expenses (i.e., operating expenses) decreased by $910 thousand to $12.5 million in 1998, from $13.4 million a year ago. This decrease is due largely to non-recurring expenses incurred in 1997, summarized below, and to a decrease in compensation expenses which are tied to the Company's stock performance. Salaries and employee benefits decreased by $317 thousand or 4.1%, to $7.4 million in 1998, from $7.7 million in 1997. The decrease reflects a reduction of $311 thousand in Deferred Compensation Plan expenses which are tied to the Company's stock performance. The price of MASSBANK Corp. stock decreased by $8.50 or 17.8% in 1998, from $47.62 at December 31, 1997 to $39.12 at December 31, 1998. Conversely, in 1997 the Company saw the price of its common stock increase by $19.03 or 66.6%. This significantly increased Deferred Compensation Plan expenses in 1997. Normal salary increases and higher employee benefit costs, in 1998, were partly offset by staff reductions and more loan origination related salary expenses (which are amortized over the life of the loans) being deferred due to increased residential lending activity in 1998. Occupancy and equipment expense decreased by $37 thousand to $2.1 million in 1998. This decrease reflects a reduction in utilities expenses and a drop in real estate tax expenses due to real estate tax abatements received in 1998. Data processing expenses increased by $72 thousand to $510 thousand in 1998, from $438 thousand in the previous year. 1997 expenses, however, reflect a reduction of $150 thousand due to a one-time credit the bank negotiated as part of its initial contract with a new service bureau. This temporary reduction in data processing expense was used, in part, to defray nonrecurring expenses the bank incurred in converting to the new service bureau. Professional services expenses increased by $54 thousand to $461 thousand in 1998, from $407 thousand in 1997. This increase was due mostly to higher legal fees. 17 6 NON-INTEREST EXPENSE (continued) In 1998, the Company did not incur any merger and acquisition related expenses. As a result, 1998 expenses when compared to the prior year, show a decrease of $156 thousand due to the nonrecurring merger and acquisition related expenses incurred in 1997 in connection with the bank's acquisition of the Glendale Co-operative Bank ("Glendale"). Advertising and marketing expenses declined slightly in 1998 to $171 thousand, from $187 thousand in the prior year. The amortization of intangibles expense increased by $51 thousand to $302 thousand in 1998, from $251 thousand in 1997. The increase reflects the additional amortization of goodwill recorded in 1998 in connection with the Glendale acquisition. In 1997, the goodwill was only amortized for a partial year since the acquisition was completed in July of that year. Deposit insurance expense totaled $116 thousand in 1998, unchanged from the prior year. The bank's contributions expense decreased by $650 thousand to $14 thousand in 1998, from $664 thousand in the prior year. This decrease is due to a significant contribution made in the prior year. The bank, in 1997, contributed appreciated securities valued at $622 thousand to establish and endow a tax exempt private foundation. The establishment of the MASSBANK Charitable Foundation benefits the bank by reducing its contributions expense in 1998 and future years, since many of the contributions previously made by the bank are now made by the Foundation. Other expenses increased by $89 thousand to $1.5 million in 1998, from $1.4 million in 1997 due to increases in several other non-interest expense categories. INCOME TAX EXPENSE The Company recorded income tax expense of $6.5 million in 1998 compared to $6.0 million in 1997. The increase in income tax expense is due primarily to higher pretax earnings and a slight increase in the Company's effective income tax rate. The effective income tax rate for the year ended December 31, 1998 was 37.3%, up from 37.1% in the prior year. The increase in the Company's effective income tax rate in 1998 was due to a non-recurring income tax benefit in the amount of $260 thousand the Company recorded in 1997 as a result of having donated appreciated securities to establish and endow a tax exempt private foundation. This reduced the effective income tax rate for 1997. In 1998, there were two factors which reduced the effective income tax rate for the year. The Company, in 1998, received a state tax refund, net of federal tax, of approximately $44 thousand due to the settlement of a state tax issue from prior years. It also changed its year-end for tax filing purposes from October 31 to December 31. This change, because of the bank tax reform legislation signed into law in 1995 which lowered the bank tax rate from 12.54% to 10.50% over five years, accelerated the scheduled reduction in the Bank's state excise tax rate by one full year from 11.32% to 10.91%. For years beginning after 1998, the rate is 10.50%. LIQUIDITY AND CAPITAL RESOURCES The Bank must maintain a sufficient level of cash and assets which can readily be converted into cash in order to meet cash outflows from normal depositor requirements and loan demands. The Bank's primary sources of funds are deposits, loan amortization and prepayments, sales or maturities of investment securities and income on earning assets. In addition to loan payments and maturing investment securities, which are relatively predictable sources of funds, the Bank maintains a high percentage of its assets invested in 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 December 31, 1999, the Bank had $86.2 million or 9.3% of total assets and $158.6 million or 17.1% of total assets invested, respectively, in overnight federal funds sold and United States obligations. The Bank is a Federal Deposit Insurance Corporation insured institution subject to the FDIC regulatory capital requirements. The FDIC regulations require all FDIC insured institutions to maintain minimum levels of Tier I 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 I capital to total average 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 I capital to risk-weighted assets ratio of 4.00% and 18 7 LIQUIDITY AND CAPITAL RESOURCES (continued) are generally expected to meet a minimum total qualifying capital to risk-weighted assets ratio of 8.00%. The risk-based capital guidelines take into consideration risk factors, as defined by the regulators, associated with various categories of assets, both on and off the balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk adjusted assets to determine the risk-based capital ratios. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses, qualifying subordinated debt and up to 45 percent of the pretax 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 December 31, 1999, the Bank had a leverage Tier I capital to average assets ratio of 10.48%, a Tier I capital to risk-weighted assets ratio of 30.93% and a total capital to risk-weighted assets ratio of 32.98%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to average assets of 10.54%, Tier I capital to risk-weighted assets of 31.10% and total capital to risk-weighted assets of 33.15% at December 31, 1999. YEAR 2000 ISSUE The Company's effort to address the Year 2000 (Y2K) issue began in 1997 and culminated in a business as usual 1999 year-end and a smooth transition into the Year 2000. The Company did not experience any disruptions in its operating activities resulting from the date rollover to Year 2000. Additionally, management does not expect any Y2K issue to have a material adverse effect on the Company's operations or financial results. Since 1997, the Company has incurred total Y2K project related expenditures, excluding personnel costs, of approximately $295 thousand. Most of these expenditures were to replace or upgrade computer systems that were not believed to be Year 2000 compliant. Expenditures for 1999 totaled $242 thousand. Approximately $78 thousand of the current year's expenditures were expensed as incurred, while the cost of new hardware and software of approximately $164 thousand was capitalized and will be amortized over the hardware and software's useful life in accordance with the Company's standard accounting practices. ASSET AND LIABILITY MANAGEMENT The goal of asset/liability management is to ensure that liquidity, capital and market risk are prudently managed. Asset/liability management is governed by policies reviewed and approved annually by the Bank's Board of Directors (the "Board"). The Board establishes policy limits for long-term interest rate risk assumption and delegates responsibility for monitoring and measuring the Company's exposure to interest rate risk to the Asset/Liability Committee ("ALCO"). The ALCO which is comprised of members of the Company's Board of Directors, members of senior management and the bank's comptroller, generally meets three times a year to review the economic environment and the volume, mix and maturity of the Company's assets and liabilities. 1 8 INTEREST RATE RISK The primary goal of interest-rate risk management is to control the Company's exposure to interest rate risk both within limits approved by the Board and within narrower guidelines approved by ALCO. These limits and guidelines reflect the Company's tolerance for interest rate risk over both short-term and long-term time horizons. The Company monitors its interest rate exposures using a variety of financial tools. It also produces a GAP analysis quarterly, reflecting the known or assumed maturity, repricing and other cash flow characteristics of the Company's interest-earning assets and interest-bearing liabilities. Interest rate risk materializes in two forms, market value risk and reinvestment risk. Financial instruments calling for future cash flows show market value increases or decreases when rates change. Management monitors the potential change in market value of the Company's debt securities assuming an immediate (parallel) shift in interest rates of up to 200 basis points up or down. Results are calculated using industry standard modeling analytics and securities data from The Bloomberg. The Company uses the results to review the potential changes in market value resulting from immediate rate shifts and to manage the effect of market value changes on the Company's capital position. Reinvestment risk occurs when an asset and the liability funding the asset do not reprice and/or mature at the same time. The difference or mismatch with respect to repricing frequency and/or maturity is a risk to net interest income. Complicating management's efforts to control the Company's exposure to interest rate risk is the fundamental uncertainty of the maturity, repricing and/or runoff characteristics of a significant portion of the Company's assets and liabilities. This uncertainty often reflects optional features embedded in these financial instruments. The most important optional features are embedded in the Company's deposits, loans and mortgage-backed securities. For example, many of the Company's interest-bearing deposit products (e.g., savings, money market deposit accounts and NOW accounts) have no contractual maturity. Customers have the right to withdraw funds from these deposit accounts freely. Deposit balances may therefore run off unexpectedly due to changes in competitive or market conditions. In addition, when market interest rates rise, customers with time certificates of deposit ("CDs") often pay a penalty to redeem their CDs and reinvest at higher rates. Given the uncertainties surrounding deposit runoff and repricing, the interest rate sensitivity of the Company's liabilities cannot be determined precisely. Similarly, customers have the right to prepay loans, particularly residential mortgage loans, usually without penalty. As a result, the Company's mortgage based assets (i.e., mortgage loans and mortgage-backed securities) are subject to prepayment risk. This risk tends to increase when interest rates fall due to the benefits of refinancing. Since the future prepayment behavior of the Company's customers is uncertain, the interest rate sensitivity of mortgage based assets cannot be determined exactly. Management monitors and adjusts the difference between the Company's interest-earning assets and interest-bearing liabilities repricing within various time frames ("GAP position"). GAP analysis provides a static view of the maturity and repricing characteristics of the Company's balance sheet positions. The interest rate GAP is prepared by scheduling all interest-earning assets and interest-bearing liabilities according to scheduled or anticipated repricing or maturity. The GAP analysis identifies the difference between an institution's assets and liabilities that will react to a change in market rates. GAP analysis theory postulates that if the GAP is positive and rates increase, the institution's net interest spread will increase as more assets than liabilities react to the rate change. If the GAP is negative, more liabilities than assets will react to a change in market rates. If rates rise, the institution's net interest spread will fall as more liabilities react to market rates than assets. In contrast, however, the Company's one-year GAP position in recent years has been negative and its net interest spread has moved in the same direction as the change in market rates rather than in the opposite direction as GAP analysis theory postulates. One of the more significant reasons for this is the fact that a GAP presentation does not reflect the degrees to which interest earning assets and deposit costs respond to changes in market interest rates. The rates on all financial instruments do not always move by the same amount as the general change in market rates. In addition, the Company has elected, in recent years, either not to raise rates or to raise rates by a modest amount on its savings and transaction-oriented accounts in response to an increase in market rates. It should be noted that for the above two reasons, among others, the Company's net interest spread has moved in the same direction as market interest rates in the past and may in the near future despite having a negative cumulative one-year GAP position. 20 9 INTEREST RATE RISK (continued) The Company's policy is to limit its one-year GAP position to 15.0% of total assets. The Company has historically managed its interest rate GAP primarily by lengthening or shortening the maturity structure of its securities portfolio, by continually modifying the composition of its securities portfolio and by selectively pricing and marketing its various deposit products. The following table summarizes the Company's GAP position at December 31, 1999. As of this date, the Company's one-year cumulative GAP position was negative $27.5 million, or approximately 3.0% of total assets. The cumulative GAP-asset ratio measures the direction and extent of imbalance between an institution's assets and liabilities repricing through the end of a particular period.
- --------------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVITY PERIODS 3 MONTHS 3 TO 6 6 MONTHS 1 TO 5 OVER (IN THOUSANDS) OR LESS MONTHS TO 1 YEAR YEARS 5 YEARS TOTAL - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans $ 44,553 $ 10,399 $ 23,617 $ 131,641 $ 115,155 $ 325,363 Short-term investments: Federal funds sold 86,211 -- -- -- -- 86,211 Investment in money market funds 24,717 -- -- -- -- 24,717 Interest-bearing deposits in banks 1,815 570 107 1,349 -- 3,841 Securities held to maturity -- -- -- 230 -- 230 Securities available for sale 49,561 21,207 54,527 229,416 102,791 457,502 Trading securities 6,042 -- -- -- -- 6,042 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 212,899 $ 32,176 $ 78,251 $ 362,636 $ 217,946 $ 903,908 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Deposits $ 199,888 $ 85,219 $ 65,708 $ 91,804 $ 352,399 $ 795,018 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 199,888 $ 85,219 $ 65,708 $ 91,804 $ 352,399 $ 795,018 - --------------------------------------------------------------------------------------------------------------------------------- GAP for period $ 13,011 $ (53,043) $ 12,543 $ 270,832 $(134,453) $ 108,890 Cumulative GAP - December 31, 1999 $ 13,011 $ (40,032) $ (27,489) $ 243,343 $ 108,890 Cumulative GAP as a percent of total assets 1.4% (4.3%) (3.0%) 26.3% 11.8% - --------------------------------------------------------------------------------------------------------------------------------- Cumulative GAP - December 31, 1998 $ 19,810 $ (21,045) $ (21,579) $ 257,318 $ 127,451 - ---------------------------------------------------------------------------------------------------------------------------------
21 10 INTEREST RATE RISK (continued) The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values as of December 31, 1999.
EXPECTED MATURITY DATE AT DECEMBER 31, 1999 - -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 2000 2001 2002 2003 - -------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVE ASSETS: Fixed rate securities $ 101,305 $ 75,627 $ 67,566 $ 54,412 Average interest rate(1) 6.44% 6.75% 6.75% 6.84% Variable rate securities(2) 28,565 -- -- -- Average interest rate(1) 3.15% -- -- -- Fixed rate loans 35,177 29,722 26,506 25,727 Average interest rate 6.88% 6.86% 6.89% 6.88% Variable rate loans 21,322 5,597 5,130 4,500 Average interest rate 6.93% 7.49% 7.50% 7.54% Other fixed rate assets 677 1,145 204 -- Average interest rate 6.11% 5.09% 6.08% -- Other variable rate assets(3) 112,743 -- -- -- Average interest rate 4.27% -- -- -- - -------------------------------------------------------------------------------------------------------------- Total interest sensitive assets $ 299,789 $ 112,091 $ 99,406 $ 84,639 - -------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVE LIABILITIES: Savings and money market deposit accounts $ 11,415 $ 6,313 $ 6,218 $ 6,129 Average interest rate 3.28% 3.25% 3.25% 3.26% Fixed rate certificates of deposit 230,133 58,496 11,333 1,146 Average interest rate 4.92% 5.19% 5.25% 5.09% Variable rate certificates of deposit 35,997 26,031 27,931 106 Average interest rate 6.48% 6.53% 5.25% 6.70% NOW accounts -- -- -- -- Average interest rate -- -- -- -- Escrow deposits of borrowers 1,477 -- -- -- Average interest rate 0.25% -- -- -- Deposit acquisition premium, net of amortization (230) (230) (27) -- - -------------------------------------------------------------------------------------------------------------- Total interest sensitive liabilities $ 278,792 $ 90,610 $ 45,455 $ 7,381 - --------------------------------------------------------------------------------------------------------------
EXPECTED MATURITY DATE AT DECEMBER 31, 1999 FAIR VALUE - -------------------------------------------------------------------------------------------- (IN THOUSANDS) 2004 THEREAFTER TOTAL AT 12/31/99 - --------------------------------------------------------------------------------------------------------- INTEREST SENSITIVE ASSETS: Fixed rate securities $ 29,170 $ 105,662 $ 433,742 $ 433,742 Average interest rate(1) 7.15% 7.20% 6.83% Variable rate securities(2) -- 1,467 30,032 30,032 Average interest rate(1) -- 6.61% 3.32% Fixed rate loans 22,282 110,820 250,234 246,373 Average interest rate 6.90% 6.80% 6.85% Variable rate loans 4,067 34,515 75,131 74,772 Average interest rate 7.55% 7.80% 7.48% Other fixed rate assets -- -- 2,026 2,026 Average interest rate -- -- 5.53% Other variable rate assets(3) -- -- 112,743 112,743 Average interest rate -- -- 4.27% - --------------------------------------------------------------------------------------------------------- Total interest sensitive assets $ 55,519 $ 252,464 $ 903,908 $ 899,688 - --------------------------------------------------------------------------------------------------------- INTEREST SENSITIVE LIABILITIES: Savings and money market deposit accounts $ 6,048 $ 316,967 $ 353,090 $ 353,090 Average interest rate 3.26% 3.44% 3.42% Fixed rate certificates of deposit 872 443 302,423 302,065 Average interest rate 4.87% 5.12% 4.98% Variable rate certificates of deposit 28 -- 90,093 90,093 Average interest rate 6.70% -- 6.56% NOW accounts -- 48,422 48,422 48,422 Average interest rate -- 0.98% 0.98% Escrow deposits of borrowers -- -- 1,477 1,477 Average interest rate -- -- 0.25% Deposit acquisition premium, net of amortization -- -- (487) -- - --------------------------------------------------------------------------------------------------------- Total interest sensitive liabilities $ 6,948 $ 365,832 $ 795,018 $ 795,147 - ---------------------------------------------------------------------------------------------------------
(1) Securities rates presented are on a tax equivalent basis. (2) Includes equity securities. (3) Consists of overnight Federal funds sold, money market funds and interest-bearing deposits in banks. The Company uses certain assumptions to estimate fair values and expected maturities. For interest-sensitive assets, expected maturities are based upon contractual maturity, and projected repayments and prepayments of principal. For interest-sensitive deposit liabilities, maturities are based on contractual maturity and estimated deposit runoff based on the Bank's own historical experience. The actual maturity of the Company's financial instruments could vary significantly from what has been presented in the above table if actual experience differs from the assumptions used. OTHER MARKET RISKS The Company's investment securities portfolio includes equity securities with a market value of approximately $21.5 million at December 31, 1999. The net unrealized gains on these securities totaled $8.6 million at year-end 1999. Movements in equity prices may effect the amount of securities gains or losses which the Company realizes from the sale of these securities and thus may have an impact on earnings. 22 11 AVERAGE BALANCE SHEETS
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE(4) EXPENSE RATE(4) BALANCE(4) EXPENSE RATE(4) BALANCE(4) EXPENSE RATE(4) - ----------------------------------------------------------------------------------------------------------------------------- ASSETS: Earning assets: Federal funds sold $128,124 $ 6,294 4.91% $137,123 $ 7,316 5.34% $106,890 $ 5,840 5.46% Short-term investments(2) 22,600 1,105 4.89 26,792 1,440 5.37 26,369 1,459 5.53 Investment securities 164,117 8,931 5.44 145,863 8,473 5.81 166,949 10,554 6.32 Mortgage-backed securities 275,361 18,735 6.80 299,368 20,496 6.85 321,521 22,368 6.96 Trading securities 10,760 495 4.60 16,460 819 4.98 12,741 735 5.77 Mortgage loans(1) 292,172 20,516 7.02 264,898 19,413 7.33 235,587 17,704 7.51 Other loans(1) 29,516 2,256 7.64 22,375 2,021 9.03 24,584 2,224 9.05 - --------------------------------------------------- ------------------------ ------------------- Total earning assets 922,650 58,332 6.32% 912,879 59,978 6.56% 894,641 60,884 6.81% - ----------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (2,498) (2,375) (2,245) - ----------------------------------------------------------------------------------------------------------------------------- Total earning assets less allowance for loan losses 920,152 910,504 892,396 Other assets 19,923 19,512 18,956 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $940,075 $930,016 $911,352 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Deposits: Demand and NOW $ 74,933 504 0.67% $ 70,159 554 0.79% $ 65,895 536 0.81% Savings 353,851 12,060 3.41 349,637 11,959 3.42 355,395 12,240 3.44 Time certificates of deposit 397,935 20,640 5.19 391,816 21,807 5.57 386,062 21,905 5.67 - --------------------------------------------------- ------------------------ ------------------- Total deposits 826,719 33,204 4.02% 811,612 34,320 4.23% 807,352 34,681 4.30% - ----------------------------------------------------------------------------------------------------------------------------- Other liabilities 7,209 9,776 7,296 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 833,928 821,388 814,648 - ----------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY: 106,147 108,628 96,704 Total liabilities and stockholders' equity $940,075 $930,016 $911,352 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income (tax- equivalent basis) 25,128 25,658 26,203 Less adjustment of tax- exempt interest income (126) (144) (151) - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 25,002 $ 25,514 $26,052 - ----------------------------------------------------------------------------------------------------------------------------- Interest rate spread 2.30% 2.33% 2.51% - ----------------------------------------------------------------------------------------------------------------------------- Net interest margin(3) 2.72% 2.81% 2.93% - -----------------------------------------------------------------------------------------------------------------------------
(1) Loans on nonaccrual status are included in the average balance. (2) Short-term investments consist of interest-bearing deposits in banks and investments in money market funds. (3) Net interest income (tax equivalent basis) before provision for loan losses divided by average interest-earning assets. (4) Includes the effects of SFAS No. 115. 23 12 RATE/VOLUME ANALYSIS The following table presents, for the years indicated, the changes in interest and dividend income and the changes in interest expense attributable to changes in interest rates and changes in the volume of earning assets and interest-bearing liabilities. A change attributable to both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
- ----------------------------------------------------------------------------------------------------------------------------- 1999 COMPARED TO 1998 1998 COMPARED TO 1997 (IN THOUSANDS) INCREASE (DECREASE) INCREASE (DECREASE) YEARS ENDED DECEMBER 31, DUE TO DUE TO VOLUME RATE TOTAL VOLUME RATE TOTAL - ----------------------------------------------------------------------------------------------------------------------------- INTEREST AND DIVIDEND INCOME: Federal funds sold $ (463) $ (559) $(1,022) $ 1,616 $ (140) $ 1,476 Short-term investments (212) (123) (335) 23 (42) (19) Investment securities 1,000 (524) 476 (1,248) (826) (2,074) Trading securities (266) (58) (324) 194 (110) 84 Mortgage-backed securities (1,634) (127) (1,761) (1,521) (351) (1,872) Mortgage loans 1,939 (836) 1,103 2,157 (448) 1,709 Other loans 578 (343) 235 (200) (3) (203) - ----------------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 942 (2,570) (1,628) 1,021 (1,920) (899) - ----------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits: Demand and NOW 36 (86) (50) 34 (16) 18 Savings 144 (43) 101 (197) (84) (281) Time certificates of deposit 336 (1,503) (1,167) 324 (422) (98) - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 516 (1,632) (1,116) 161 (522) (361) - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 426 $ (938) $ (512) $ 860 $(1,398) $ (538) - -----------------------------------------------------------------------------------------------------------------------------
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. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes comprehensive accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair market value. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company intends to adopt SFAS No. 133 as of January 1, 2001. The Statements are not expected to have a material effect on the Company's consolidated financial statements. 24 13 INDEPENDENT AUDITORS' REPORT [KPMG LOGO] The Board of Directors and Stockholders MASSBANK Corp.: We have audited the accompanying consolidated balance sheets of MASSBANK Corp. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MASSBANK Corp. and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Boston, Massachusetts KPMG LLP January 11, 2000 25 14 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: Cash and due from banks $ 10,476 $ 7,038 Short-term investments (Note 2) 110,928 147,776 - ------------------------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 121,404 154,814 - ------------------------------------------------------------------------------------------------------------------------------------ Term federal funds sold -- 25,000 Interest-bearing deposits in banks 3,841 2,033 Securities held to maturity, at amortized cost (market value of $230 in 1999 and $354 in 1998) (Note 3) 230 354 Securities available for sale, at market value (amortized cost of $453,844 in 1999 and $398,343 in 1998) (Note 3) 457,502 418,126 Trading securities, at market value (Note 4) 6,042 30,793 Loans (Notes 5, 7 and 11): Mortgage loans 288,580 283,654 Other loans 36,785 21,335 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans 325,365 304,989 Less: allowance for loan losses (Note 6) (2,555) (2,450) - ------------------------------------------------------------------------------------------------------------------------------------ Net loans 322,810 302,539 - ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment (Note 9) 4,127 4,320 Real estate acquired through foreclosure (Note 7) 62 86 Accrued interest receivable 5,045 5,058 Goodwill 1,288 1,387 Accrued income tax asset, net 292 -- Other assets 2,073 2,115 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 924,716 $ 946,625 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits (Notes 10 and 11): Demand and NOW $ 72,938 $ 76,173 Savings 353,090 348,049 Time certificates of deposit 392,516 400,524 Deposit acquisition premium, net of amortization (487) (715) - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 818,057 824,031 Escrow deposits of borrowers 1,477 1,438 Employee stock ownership plan liability (Note 15) 468 625 Accrued income taxes payable -- 723 Deferred income taxes payable (Note 12) 199 6,761 Other liabilities 3,036 2,558 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 823,237 836,136 - ------------------------------------------------------------------------------------------------------------------------------------ Commitments and contingent liabilities (Notes 8 and 9) -- -- Stockholders' equity (Notes 12, 14, 15 and 16): 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, 7,407,432 and 7,384,332 shares issued, respectively 7,407 7,384 Additional paid-in capital 60,591 60,003 Retained earnings 85,873 78,308 - ------------------------------------------------------------------------------------------------------------------------------------ 153,871 145,695 Treasury stock at cost, 4,096,189 and 3,885,222 shares, respectively (53,890) (46,272) Accumulated other comprehensive income (Note 1) 1,966 11,691 Common stock acquired by ESOP (Note 15) (468) (625) - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 101,479 110,489 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 924,716 $ 946,625 - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 26 15 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- INTEREST AND DIVIDEND INCOME: Mortgage loans $20,516 $19,413 $17,704 Other loans 2,256 2,021 2,224 Securities available for sale: Mortgage-backed securities 18,735 20,496 22,368 Other securities 8,790 8,310 10,385 Trading securities 495 819 735 Federal funds sold 6,294 7,316 5,840 Other investments 1,120 1,459 1,477 - -------------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 58,206 59,834 60,733 - -------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits: NOW 504 554 536 Savings 12,060 11,959 12,240 Time certificates of deposit 20,640 21,807 21,905 - -------------------------------------------------------------------------------------------------------------------------- Total interest expense 33,204 34,320 34,681 - -------------------------------------------------------------------------------------------------------------------------- Net interest income 25,002 25,514 26,052 PROVISION FOR LOAN LOSSES (Note 6) 140 193 260 - -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 24,862 25,321 25,792 - -------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Deposit account service fees 724 811 924 Gains on securities, net 4,033 2,893 1,939 Other 805 886 935 - -------------------------------------------------------------------------------------------------------------------------- Total non-interest income 5,562 4,590 3,798 - -------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 7,436 7,426 7,743 Occupancy and equipment 2,146 2,059 2,096 Data processing 486 510 438 Professional services 481 461 407 Merger and acquisition related expense -- -- 156 Advertising and marketing 198 171 187 Amortization of intangibles 327 302 251 Deposit insurance 114 116 116 Contributions 21 14 664 Other 1,357 1,456 1,367 - -------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 12,566 12,515 13,425 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 17,858 17,396 16,165 INCOME TAX EXPENSE (Note 12) 6,547 6,482 5,998 - -------------------------------------------------------------------------------------------------------------------------- Net income $11,311 $10,914 $10,167 - -------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 3,374,623 3,528,817 3,524,657 Diluted 3,478,944 3,676,642 3,663,310 EARNINGS PER SHARE (in dollars): Basic $ 3.35 $ 3.09 $ 2.88 Diluted 3.25 2.97 2.77 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 27 16 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,311 $ 10,914 $ 10,167 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 993 928 853 Loan interest capitalized (58) (88) -- Amortization of ESOP shares committed to be released 163 243 184 Charitable contribution of appreciated securities -- -- 622 Decrease in accrued interest receivable 13 337 464 Increase (decrease) in other liabilities 478 (734) 56 (Decrease) increase in current income taxes payable (1,015) (517) 435 Accretion of discounts on securities, net of amortization of premiums (961) (1,152) (1,178) Net trading securities activity 25,174 (8,671) (16,480) Gains on securities available for sale (3,954) (2,798) (1,831) Gains on trading securities (79) (95) (108) (Decrease) increase in deferred mortgage loan origination fees, net of amortization (3) 231 168 Deferred income tax (benefit) expense (161) 146 (372) (Increase) decrease in other assets (327) 85 553 Loans originated for sale -- (129) (770) Loans sold -- 129 770 Provision for loan losses 140 193 260 Provisions for losses and writedowns on real estate acquired through foreclosure -- -- (21) Gains on sales of real estate acquired through foreclosure -- (5) (34) Gains on sales of premises and equipment (2) -- (1) Increase (decrease) in escrow deposits of borrowers 39 (64) 231 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 31,751 (1,047) (6,032) - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash and cash equivalents for acquisitions -- -- (2,874) Purchases of term federal funds -- (35,000) (30,000) Proceeds from maturities of term federal funds 25,000 30,000 20,000 Increase in interest-bearing bank deposits (3,117) (766) (1,649) Proceeds from maturities of interest-bearing bank deposits 1,309 816 1,240 Proceeds from sales of investment securities available for sale 72,582 26,580 42,741 Proceeds from maturities of investment securities held to maturity and available for sale 65,800 43,650 59,000 Purchases of investment securities available for sale (169,020) (59,291) (63,696) Purchases of investment securities held to maturity -- -- (230) Purchases of mortgage-backed securities (88,397) (10,043) (63,661) Principal repayments of mortgage-backed securities 68,430 70,203 42,246 Principal repayments of securities held to maturity 44 18 18 Principal repayments of securities available for sale 124 4 85 Loans originated (82,415) (105,103) (57,787) Loan principal payments received 62,254 71,687 48,560 Loans purchased (345) -- (201) Purchases of premises and equipment (376) (508) (491) Proceeds from sale of premises and equipment 2 -- 9 Proceeds from sale of real estate acquired through foreclosure 86 316 964 Net advances on real estate acquired through foreclosure (4) (20) (30) - -------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (48,043) 32,543 (5,756) - --------------------------------------------------------------------------------------------------------------------------
(Continued) 28 17 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- -------------------------------------------------------------------------------------------------------------------------- (In thousands) Years ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net (decrease) increase in deposits (6,202) 13,978 (8,523) Payments to acquire treasury stock (7,618) (4,703) (1,665) Issuance of common stock under stock option plan 351 741 466 Tax benefit resulting from stock options exercised 97 329 260 Cash dividends paid on common stock (3,759) (3,605) (3,124) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 13 15 15 - -------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (17,118) 6,755 (12,571) - -------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (33,410) 38,251 (24,359) Cash and cash equivalents at beginning of year 154,814 116,563 140,922 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $121,404 $154,814 $116,563 - -------------------------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosures: Cash transactions: Cash paid during the year for interest $33,204 $34,319 $34,671 Cash paid during the year for taxes, net of refunds 7,617 6,185 5,237 Purchases of securities executed but not settled at beginning of year which settled during the year 129 32 -- Sales of securities executed but not settled at beginning of year which settled during the year 583 -- -- Non-cash transactions: SFAS 115: (Decrease) increase in stockholders' equity (9,725) 2,620 5,070 (Decrease) increase in deferred tax liabilities (6,401) 1,688 3,510 Securities reclassified from available for sale to trading -- 1,111 -- Transfers from loans to real estate acquired through foreclosure 58 377 376 Transfers from loans to other assets -- 56 -- Transfers from premises and equipment to other assets -- 9 -- Purchases of securities executed but not settled as of year-end 117 129 32 Sales of securities executed but not settled as of year-end 202 583 -- Cost of donated securities -- -- 2 - -------------------------------------------------------------------------------------------------------------------------- In connection with the acquisition of Glendale Co-operative Bank in July, 1997, assets acquired and liabilities assumed were as follows: Assets acquired -- -- $ 31,561 Goodwill -- -- 1,530 Liabilities assumed -- -- 30,217 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 29 18 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------- (In thousands except share data) Years ended December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------------------------------------------------- Accumulated Common Additional other stock Common paid-in Retained Treasury comprehensive acquired stock capital earnings stock income by ESOP Total - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 $5,476 $57,858 $65,756 $(39,904) $4,001 $ (937) $ 92,250 Net Income -- -- 10,167 -- -- -- 10,167 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 1) -- -- -- -- 5,070 -- 5,070 Comprehensive income -- -- -- -- -- -- 15,237 Cash dividends declared ($0.885 per share) -- -- (3,124) -- -- -- (3,124) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 15 -- -- -- 15 Net decrease in liability to ESOP -- -- -- -- -- 156 156 Amortization of ESOP shares committed to be released -- 184 -- -- -- -- 184 Purchase of treasury stock -- -- -- (1,665) -- -- (1,665) Exercise of stock options and related tax benefits 31 695 -- -- -- -- 726 Transfer resulting from four-for-three stock split 1,830 -- (1,830) -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 7,337 58,737 70,984 (41,569) 9,071 (781) 103,779 Net Income -- -- 10,914 -- -- -- 10,914 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 1) -- -- -- -- 2,620 -- 2,620 Comprehensive income -- -- -- -- -- -- 13,534 Cash dividends declared ($1.02 per share) -- -- (3,605) -- -- -- (3,605) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 15 -- -- -- 15 Net decrease in liability to ESOP -- -- -- -- -- 156 156 Amortization of ESOP shares committed to be released -- 243 -- -- -- -- 243 Purchase of treasury stock -- -- -- (4,703) -- -- (4,703) Exercise of stock options and related tax benefits 47 1,023 -- -- -- -- 1,070 - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 7,384 60,003 78,308 (46,272) 11,691 (625) 110,489 Net Income -- -- 11,311 -- -- -- 11,311 Other comprehensive loss, net of tax: Unrealized (losses) on securities, net of reclassification adjustment (Note 1) -- -- -- -- (9,725) -- (9,725) Comprehensive income -- -- -- -- -- -- 1,586 Cash dividends declared ($1.11 per share) -- -- (3,759) -- -- -- (3,759) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 13 -- -- -- 13 Net decrease in liability to ESOP -- -- -- -- -- 157 157 Amortization of ESOP shares committed to be released -- 163 -- -- -- -- 163 Purchase of treasury stock -- -- -- (7,618) -- -- (7,618) Exercise of stock options and related tax benefits 23 425 -- -- -- -- 448 - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $7,407 $60,591 $85,873 $(53,890) $1,966 $(468) $101,479 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 30 19 Massbank Corp. and Subsidiaries Notes to Consolidated Financial Statements Years ended December 31, 1999, 1998 and 1997 1. Summary of Significant Accounting Policies Massbank Corp. (the "Company") is a Delaware chartered holding company whose principal subsidiary is Massbank (the "Bank"). The Bank operates fifteen full service banking offices in Reading, Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford, Dracut, Lowell and Everett providing a variety of deposit, lending and trust services. As a Massachusetts chartered savings bank whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and the Depositors Insurance Fund ("DIF"), the activities of the Bank are subject to regulation, supervision and examination by federal and state regulatory authorities, including, but not limited to the FDIC, the Massachusetts Commissioner of Banks and the DIF. In addition, as a bank holding company, the Company is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Massbank and its subsidiaries: Readibank Properties, Inc., Readibank Investment Corporation and Melbank Investment Corporation. The accounts of Massbank's subsidiary, Readibank Equipment Corporation, which was sold in October, 1997 are also included through the sale date. The Company has one reportable operating segment. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and income and expenses for the period. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses. Certain amounts in the prior years' consolidated financial statements were reclassified to permit comparison with the current fiscal year. Investments in Debt and Equity Securities Under its investment policy, management determines the appropriate classification of securities at the time of purchase. Those debt securities that the Company has the intent and the ability to hold to maturity are classified as securities held to maturity and are carried at amortized historical cost. Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in market conditions, interest rates, changes in prepayment risk, the need to increase regulatory capital and other factors. The Company records investment securities available for sale at aggregate market value with the net unrealized holding gains or losses reported, net of tax effect, as a separate component of stockholders' equity until realized. As of December 31, 1999, stockholders' equity included approximately $2.0 million, representing the net unrealized gains on securities available for sale, less applicable income taxes. Investments classified as trading securities are stated at market value with unrealized gains and losses included in earnings. Income on debt securities is accrued and included in interest and dividend income. The specific identification method is used to determine realized gains or losses on sales of securities available for sale which are also reported in non-interest income under the caption "gains on securities." When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings. Loans Loans are reported at the principal amount outstanding, net of unearned fees. Loan origination fees and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the loan using the level-yield method. The Bank generally does not accrue interest on loans which are 90 days or more past due. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed from income and all amortization of deferred loan fees is discontinued. Interest received on nonaccrual loans is either applied against principal or reported as income according to management's judgment as to the collectibility of principal. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Impairment on loans for which it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement are measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. However, impairment must be measured based on the fair value of the collateral if it is determined that foreclosure is probable. Impaired loans consist of all nonaccrual commercial loans. 31 20 1. Summary of Significant Accounting Policies (continued) Allowance for Loan Losses 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 management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may affect 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. Premises and Equipment Land is carried at cost. Premises, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization computed primarily by use of the straight-line method over the estimated useful lives of the related assets or terms of the related leases. Real Estate Acquired through Foreclosure Real estate acquired through foreclosure is comprised of foreclosed properties where the Bank has actually received title and loans determined to be substantially repossessed. Real estate loans that are substantially repossessed include only those loans for which the Bank has taken possession of the collateral but has not completed legal foreclosure proceedings. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Real estate acquired through foreclosure is recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received, less estimated costs to sell the property following foreclosure. Operating expenses and any subsequent provisions to reduce the carrying value to fair value are charged to current period earnings. Gains or losses upon disposition are reflected in earnings as realized. Goodwill The excess of purchase price over the fair value of net assets of acquired companies is classified and reported as goodwill. Goodwill is being amortized using the straight-line method, over 15 years. Deposit Acquisition Premium The deposit acquisition premium arising from acquisitions is reported net of accumulated amortization. Such premium is being amortized on a straight-line basis over 10 years. Pension Plan The Bank accounts for pension benefits on the net periodic pension cost method for financial reporting purposes. This method recognizes the compensation cost of an employee's pension benefit over that employee's approximate service period. Pension costs are funded in the year of accrual using the aggregate cost method. Employees' Stock Ownership Plan ("ESOP") The Company recognizes compensation cost equal to the fair value of the ESOP shares committed to be released. Dividends on unallocated ESOP shares are reported as a reduction of accrued interest on the ESOP loan. The Company reports loans from outside lenders to its ESOP as a liability on its balance sheet and reports interest cost on the debt. For earnings per share (EPS) computations, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are not considered outstanding. Stock-Based Compensation On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The Statement establishes financial accounting and reporting standards for stock-based compensation plans. SFAS No. 123 encourages, but does not require, a fair value based method of accounting for stock-based compensation plans. The Statement allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. For those entities electing to use the intrinsic value based method, SFAS No. 123 requires pro forma disclosures of net income and earnings per share computed as if the fair value based method had been applied. The Company continues to account for stock-based compensation costs under APB Opinion No. 25. 32 21 1. Summary of Significant Accounting Policies (continued) Earnings Per Common Share Basic EPS excludes the dilutive effect of common stock equivalents. Diluted EPS is computed pursuant to APB Opinion No. 15 for all entities with complex capital structures. For earnings per share computations, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are not considered outstanding. 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. As a regulated financial institution, the Bank is required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston. At December 31, 1999 vault cash and/or deposits with the Federal Reserve Bank of Boston included in "Cash and Due from Banks," rose to $7.4 million, temporarily exceeding reserve requirements. The increase was due to the extra vault cash maintained by the Bank at the end of 1999 as part of its year 2000 preparedness efforts. Income Taxes The Bank recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Bank's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. The Bank's deferred tax asset is reviewed and adjustments to such asset are recognized as deferred income tax expense or benefit based upon management's judgment relating to the realizability of such asset. Based on the Bank's historical and current pretax earnings, management believes it is more likely than not that the Bank will realize its existing gross deferred tax asset. 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 year ended December 31, 1999 and the year ended December 31, 1998 is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- (In thousands) Years ended December 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Tax Net- Tax Net- Before-Tax (Expense) of-Tax Before-Tax (Expense) of-Tax Amount or Benefit Amount Amount or Benefit Amount Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period $(12,171) $4,716 $(7,455) $7,106 $(2,864) $ 4,242 Less: reclassification adjustment for gains realized in net income (3,954) 1,684 (2,270) (2,798) 1,176 (1,622) - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) (16,125) 6,400 (9,725) 4,308 (1,688) 2,620 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) $(16,125) $6,400 $(9,725) $ 4,308 $(1,688) $ 2,620 - -----------------------------------------------------------------------------------------------------------------------------------
33 22 2. SHORT-TERM INVESTMENTS Short-term investments consist of the following:
- ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Federal funds sold (overnight) $ 86,211 $123,207 Money market funds 24,717 24,569 - ----------------------------------------------------------------------------------------------------------------------------------- Total short-term investments $110,928 $147,776 - -----------------------------------------------------------------------------------------------------------------------------------
The investments above are stated at cost which approximates market value. 3. INVESTMENT SECURITIES The amortized cost and market value of investment securities follows:
- ----------------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (IN THOUSANDS) AT DECEMBER 31, 1999 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Other bonds and obligations $ 230 $ -- $ -- $ 230 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities held to maturity 230 -- -- 230 - ----------------------------------------------------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations 138,518 122 (1,025) 137,615 U.S. Government agency obligations 16,143 -- (128) 16,015 - ----------------------------------------------------------------------------------------------------------------------------------- Total 154,661 122 (1,153) 153,630 - ----------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 38,061 251 (490) 37,822 Federal Home Loan Mortgage Corporation 239,607 311 (4,028) 235,890 Federal National Mortgage Association 3,951 74 (45) 3,980 Collateralized mortgage obligations 4,649 16 (22) 4,643 - ----------------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 286,268 652 (4,585) 282,335 - ----------------------------------------------------------------------------------------------------------------------------------- Total debt securities 440,929 774 (5,738) 435,965 - ----------------------------------------------------------------------------------------------------------------------------------- Equity securities 12,915 8,985 (363) 21,537 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale 453,844 $9,759 $(6,101) $457,502 - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 3,658 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale, net 457,502 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities, net $457,732 - -----------------------------------------------------------------------------------------------------------------------------------
34 23 3. INVESTMENT SECURITIES (continued) The amortized cost and market value of investment securities follows:
- ----------------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (IN THOUSANDS) AT DECEMBER 31, 1998 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Other bonds and obligations $ 354 $ -- $ -- $ 354 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities held to maturity 354 -- -- 354 - ----------------------------------------------------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations 112,627 2,354 -- 114,981 U.S. Government agency obligations 8,966 26 -- 8,992 - ----------------------------------------------------------------------------------------------------------------------------------- Total 121,593 2,380 -- 123,973 - ----------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 48,347 1,517 -- 49,864 Federal Home Loan Mortgage Corporation 205,949 5,116 (6) 211,059 Federal National Mortgage Association 4,984 181 -- 5,165 Collateralized mortgage obligations 6,193 60 (3) 6,250 Other 223 12 -- 235 - ----------------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 265,696 6,886 (9) 272,573 - ----------------------------------------------------------------------------------------------------------------------------------- Total debt securities 387,289 9,266 (9) 396,546 - ----------------------------------------------------------------------------------------------------------------------------------- Equity securities 11,054 10,579 (53) 21,580 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale 398,343 $19,845 $(62) $418,126 - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 19,783 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale, net 418,126 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities, net $418,480 - -----------------------------------------------------------------------------------------------------------------------------------
During the years ended December 31, 1999, 1998 and 1997, the Company realized gains and losses on sales of securities available for sale as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 1997 Realized Realized Realized - ----------------------------------------------------------------------------------------------------------------------------------- Gains Losses Gains Losses Gains Losses - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 2 $ (576) $ 180 $ -- $ 38 $ (35) Mortgage-backed securities -- -- -- -- -- (301) Marketable equity securities 5,099 (571) 3,577 (959) 2,201 (96) Other equity securities -- -- -- -- 25 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total realized gains (losses) $5,101 $(1,147) $3,757 $(959) $2,264 $(432) - -----------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of debt securities available for sale during 1999, 1998 and 1997 were $48.4 million, $13.1 million and $34.1 million, respectively. Proceeds from sales of equity securities available for sale during 1999, 1998 and 1997, were $24.1 million, $13.7 million and $8.6 million, respectively. There were no sales of investment securities held-to-maturity during 1999, 1998 and 1997. 35 24 3. INVESTMENT SECURITIES (continued) The amortized cost and market value of debt securities held to maturity and debt securities available for sale by contractual maturity are as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE - ----------------------------------------------------------------------------------------------------------------------------------- Investment securities held to maturity: Other bonds and obligations: Maturing after 1 year but within 5 years $ 230 $ 230 $ 230 $ 230 Maturing after 5 years but within 10 years -- -- 82 82 Maturing after 10 years but within 15 years -- -- 42 42 - ----------------------------------------------------------------------------------------------------------------------------------- Total debt securities held to maturity 230 230 354 354 =================================================================================================================================== Investment securities available for sale: U.S. Treasury obligations: Maturing within 1 year 52,845 52,825 50,876 51,260 Maturing after 1 year but within 5 years 82,707 81,919 58,790 60,557 Maturing after 5 years but within 10 years 2,966 2,871 2,961 3,164 - ----------------------------------------------------------------------------------------------------------------------------------- Total 138,518 137,615 112,627 114,981 - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Government agency obligations: Maturing within 1 year 6,992 6,971 2,000 2,006 Maturing after 1 year but within 5 years 9,000 8,899 6,771 6,788 Maturing after 15 years 151 145 195 198 - ----------------------------------------------------------------------------------------------------------------------------------- Total 16,143 16,015 8,966 8,992 - ----------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Maturing within 1 year 523 518 371 367 Maturing after 1 year but within 5 years 3,869 3,922 6,014 6,155 Maturing after 5 years but within 10 years 56,571 56,227 35,087 36,073 Maturing after 10 years but within 15 years 221,202 217,629 219,579 225,298 Maturing after 15 years 4,103 4,039 4,645 4,680 - ----------------------------------------------------------------------------------------------------------------------------------- Total 286,268 282,335 265,696 272,573 - ----------------------------------------------------------------------------------------------------------------------------------- Total debt securities available for sale 440,929 435,965 387,289 396,546 =================================================================================================================================== Net unrealized gains on debt securities available for sale (4,964) -- 9,257 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total debt securities available for sale, net carrying value $435,965 $435,965 $396,546 $396,546 ===================================================================================================================================
Maturities of mortgage-backed securities are based on contractual maturities. Actual maturities will differ from contractual maturities due to scheduled amortization and prepayments. 36 25 4. TRADING SECURITIES The amortized cost and market values of trading securities are as follows:
- -------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE - -------------------------------------------------------------------------------- U.S. Treasury obligations $4,960 $4,956 $29,690 $29,707 Investments in mutual funds 1,112 1,086 1,112 1,086 - -------------------------------------------------------------------------------- Total trading securities $6,072 $6,042 $30,802 $30,793 ================================================================================
During the years ended December 31, 1999, 1998 and 1997, the Company realized gains and losses on sales of trading securities as follows:
- ---------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- REALIZED REALIZED REALIZED GAINS LOSSES GAINS LOSSES GAINS LOSSES - ---------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 4 $(11) $ 48 $ -- $22 $ -- Investments in mutual funds -- -- 11 (35) -- (33) Marketable equity securities 132 (25) 55 (20) 46 -- - ---------------------------------------------------------------------------------------------------------- Total realized gains (losses) $136 $(36) $114 $(55) $68 $(33) ==========================================================================================================
Proceeds from sales of trading securities during 1999, 1998 and 1997 were $13.8 million, $50.2 million and $16.3 million, respectively. Unrealized gains or (losses) included in income in 1999, 1998 and 1997 were $(21) thousand, $36 thousand and $73 thousand, respectively. 5. LOANS The Bank's lending activities are conducted principally in the local communities in which it operates banking offices, and to a lesser extent, in selected areas of Massachusetts and southern New Hampshire. The Bank offers single family and multi-family residential mortgage loans and a variety of consumer loans. The Bank also offers mortgage loans secured by commercial or investment property such as apartment buildings and commercial or corporate facilities; loans for the construction of residential homes, multi-family properties and for land development; and business loans for other commercial purposes. Most loans granted by the Bank are either collateralized by real estate or guaranteed by federal or local governmental authorities. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the borrowers' geographic areas. The ability of commercial real estate and commercial loan borrowers to honor their repayment commitments is generally dependent on the economic health of the real estate sector in the borrowers' geographic areas and the overall economy. 37 26 5. LOANS (continued) The composition of the Bank's loan portfolio is summarized as follows:
- ---------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - ---------------------------------------------------------------------------------- MORTGAGE LOANS: Residential: Conventional: Fixed rate $ 247,512 $ 237,979 Variable rate 38,917 42,702 FHA and VA 740 1,181 Commercial 2,471 2,257 Construction 232 730 - ---------------------------------------------------------------------------------- Total mortgage loans 289,872 284,849 Add: premium on loans 159 259 Less: deferred mortgage loan origination fees (1,451) (1,454) - ---------------------------------------------------------------------------------- Mortgage loans, net 288,580 283,654 - ---------------------------------------------------------------------------------- OTHER LOANS: Consumer: Installment 1,418 1,547 Guaranteed education 7,037 7,967 Other secured 1,318 1,366 Home equity lines of credit 11,737 10,159 Unsecured 225 235 - ---------------------------------------------------------------------------------- Total consumer loans 21,735 21,274 Commercial 15,050 61 - ---------------------------------------------------------------------------------- Total other loans 36,785 21,335 - ---------------------------------------------------------------------------------- Total loans $ 325,365 $ 304,989 ==================================================================================
In the ordinary course of business, the Bank makes loans to its directors, officers and their associates and affiliated companies ("related parties") at substantially the same terms as those prevailing at the time of origination for comparable transactions with unrelated borrowers. An analysis of total related party loans for the year ended December 31, 1999 follows:
- --------------------------------------------------------------------------------- (IN THOUSANDS) - --------------------------------------------------------------------------------- Balance at December 31, 1998 $562 Additions 168 Repayments (117) - --------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 $613 =================================================================================
38 27 6. ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows:
- --------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 - --------------------------------------------------------------------------------------- Balance at beginning of year $ 2,450 $ 2,334 $ 2,237 Glendale Co-operative Bank acquisition -- -- 105 Provision for loan losses 140 193 260 Recoveries of loans previously charged-off 41 26 59 - --------------------------------------------------------------------------------------- Total 2,631 2,553 2,661 - --------------------------------------------------------------------------------------- LESS CHARGE-OFFS: Mortgage loans (62) (81) (221) Other loans (14) (22) (106) - --------------------------------------------------------------------------------------- Balance at end of year $ 2,555 $ 2,450 $ 2,334 =======================================================================================
The following table shows the allocation of the allowance for loan losses by category of loans at December 31, 1999, 1998 and 1997.
- ---------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- PERCENTAGE PERCENTAGE PERCENTAGE OF LOANS OF LOANS OF LOANS AMOUNT TO TOTAL AMOUNT TO TOTAL AMOUNT TO TOTAL - ---------------------------------------------------------------------------------------------------- MORTGAGE LOANS: Residential $1,535 88% $1,786 92% $1,544 90% Commercial 7 1 2 1 12 1 Consumer loans 215 7 153 7 160 9 Commercial loans 301 4 25 -- -- -- Unallocated 497 -- 484 -- 618 -- - ---------------------------------------------------------------------------------------------------- Total $2,555 100% $2,450 100% $2,334 100% ====================================================================================================
7. NON-PERFORMING ASSETS The following schedule summarizes non-performing assets at the dates shown:
- --------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 1997 - --------------------------------------------------------------------------------------- Total nonaccrual loans $ 795 $ 1,004 $ 1,771 Total real estate acquired through foreclosure 62 86 -- - --------------------------------------------------------------------------------------- Total non-performing assets $ 857 $ 1,090 $ 1,771 ======================================================================================= Percent of non-performing loans to total loans 0.24% 0.33% 0.65% Percent of non-performing assets to total assets 0.09% 0.12% 0.19%
The reduction in interest income associated with nonaccrual loans is as follows:
- ------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Interest income that would have been recorded under original terms $64 $84 $163 Interest income actually recorded 51 61 97 - ------------------------------------------------------------------------------------------------- Reduction in interest income $13 $23 $ 66 =================================================================================================
During 1999, 1998 and 1997 the Company had no impaired loans. 39 28 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts reflect the extent of involvement the Bank has in particular classes of these instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
- ---------------------------------------------------------------------------------------------------------- CONTRACT OR NOTIONAL AMOUNT (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - ---------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to originate residential mortgage loans $ 2,829 $ 7,941 Unadvanced portions of construction loans 65 281 Unused credit lines, including unused portions of equity lines of credit 31,693 29,163 ==========================================================================================================
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management's credit evaluation of the borrower. 9. PREMISES AND EQUIPMENT A summary of premises and equipment and their estimated useful lives used for depreciation purposes is as follows:
- -------------------------------------------------------------------------------------------- ESTIMATED USEFUL LIFE (IN THOUSANDS) AT DECEMBER 31, 1999 1998 (IN YEARS) - -------------------------------------------------------------------------------------------- Premises: Land $ 1,227 $ 1,227 -- Buildings 3,637 3,637 25--45 Building and leasehold improvements 2,030 1,937 1-20 Equipment 3,889 3,606 1-30 - -------------------------------------------------------------------------------------------- 10,783 10,407 Less: accumulated depreciation and amortization 6,656 6,087 - -------------------------------------------------------------------------------------------- Total premises and equipment, net $ 4,127 $ 4,320 ============================================================================================
The Bank is obligated under a number of noncancelable operating leases for various banking offices. These operating leases expire at various dates through 2006 with options for renewal. Rental expenses for the years ended December 31, 1999, 1998 and 1997 amounted to $521 thousand, $518 thousand and $522 thousand, respectively. The minimum rental commitments, with initial or remaining terms of one year or more exclusive of operating costs and real estate taxes to be paid by the Bank under these leases, as of December 31, 1999, are as follows:
- -------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS - -------------------------------------------------------------------------------- 2000 $264 2001 258 2002 166 2003 109 2004 39 Later years 59 - -------------------------------------------------------------------------------- Total $895 ================================================================================
40 29 10. DEPOSITS Deposits are summarized as follows:
- --------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - --------------------------------------------------------------------------------------------------------- AMOUNT RATE AMOUNT RATE - --------------------------------------------------------------------------------------------------------- Demand and NOW: NOW accounts $ 48,422 0.98% $ 52,324 1.16% Demand accounts 24,516 -- 23,849 -- - --------------------------------------------------------------------------------------------------------- Total demand and NOW 72,938 0.65 76,173 0.80 - --------------------------------------------------------------------------------------------------------- Savings: Regular savings and special notice accounts 333,535 3.45 326,192 3.46 Money market accounts 19,555 2.97 21,857 2.99 - --------------------------------------------------------------------------------------------------------- Total savings 353,090 3.42 348,049 3.43 - --------------------------------------------------------------------------------------------------------- Time certificates: Fixed rate certificates 302,423 4.98 318,491 5.23 Variable rate certificates 90,093 6.56 82,033 5.88 - --------------------------------------------------------------------------------------------------------- Total time certificates 392,516 5.35 400,524 5.36 - --------------------------------------------------------------------------------------------------------- Deposit acquisition premium, net of amortization (487) -- (715) -- - --------------------------------------------------------------------------------------------------------- Total deposits $ 818,057 4.10% $ 824,031 4.13% =========================================================================================================
The maturity distribution and related rate structure of the Bank's time certificates at December 31, 1999 follows:
- -------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 - -------------------------------------------------------------------------------- AVERAGE AMOUNT INTEREST RATE - -------------------------------------------------------------------------------- Due within 3 months $101,126 5.06% Due within 3 - 6 months 88,156 5.08 Due within 6 - 12 months 76,848 5.27 Due within 1 - 2 years 84,527 5.60 Due within 2 - 3 years 39,264 6.28 Due within 3 - 5 years 2,152 5.10 Thereafter 443 5.12 - -------------------------------------------------------------------------------- Total $392,516 5.35% ================================================================================
At December 31, the Bank had individual time certificates of deposit of $100 thousand or more maturing as follows:
- -------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- Due within 3 months $19,152 $24,283 Due within 3 - 6 months 12,615 13,338 Due within 6 - 12 months 16,393 15,511 Due within 1 - 2 years 15,309 16,997 Due within 2 - 3 years 9,760 6,759 Due within 3 - 5 years 223 100 Thereafter 270 -- - -------------------------------------------------------------------------------- Total $73,722 $76,988 ================================================================================
41 30 11. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Bank disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Bank's financial instruments. CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND ACCRUED INTEREST RECEIVABLE The carrying amounts for these financial instruments approximate fair value because of the short-term nature of these financial instruments. INTEREST-BEARING DEPOSITS IN BANKS AND TERM FEDERAL FUNDS SOLD The carrying amounts of the interest-bearing deposits in banks and term federal funds sold reported in the balance sheet at December 31, 1999 and 1998 approximate fair value. SECURITIES The fair value of investment securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. Statement 107 specifies that fair values should be calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. The carrying amount and estimated fair values of the Company's investment securities are as follows:
- ----------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------------------------- CARRYING CALCULATED CARRYING CALCULATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE - ----------------------------------------------------------------------------------------- Securities held to maturity $ 230 $ 230 $ 354 $ 354 Securities available for sale 457,502 457,502 418,126 418,126 Trading securities 6,042 6,042 30,793 30,793 - ----------------------------------------------------------------------------------------- Total securities $463,774 $463,774 $449,273 $449,273 =========================================================================================
LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, commercial real estate, consumer and commercial. The fair values of residential and commercial real estate, and certain consumer loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For variable rate commercial loans and certain variable rate consumer loans, including home equity lines of credit, carrying value approximates fair value. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information. The following table presents information for loans:
- ----------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------------------------------- CARRYING CALCULATED CARRYING CALCULATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE - ----------------------------------------------------------------------------------------------- Real estate: Residential: Variable $ 38,844 $ 38,259 $ 42,617 $ 43,142 Fixed 247,273 243,483 238,787 245,858 Commercial: Variable 2,463 2,454 2,243 2,267 Fixed -- -- 7 7 Consumer 21,735 21,899 21,274 21,503 Commercial 15,050 15,050 61 61 - ----------------------------------------------------------------------------------------------- Total loans 325,365 321,145 304,989 312,838 Less: allowance for loan losses (2,555) -- (2,450) -- - ----------------------------------------------------------------------------------------------- Net loans $ 322,810 $321,145 $ 302,539 $312,838 ===============================================================================================
42 31 11. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) DEPOSITS Under Statement 107, the fair value of deposits with no stated maturity, such as demand deposits, NOW accounts, regular savings and special notice accounts, and money market accounts, is equal to the amount payable on demand as of December 31, 1999 and 1998. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
- ---------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999 1998 - ---------------------------------------------------------------------------------------------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE - ---------------------------------------------------------------------------------------------------------------- Demand accounts $ 24,516 $ 24,516 $ 23,849 $ 23,849 NOW accounts 48,422 48,422 52,324 52,324 Regular savings and special notice accounts 333,535 333,535 326,192 326,192 Money market accounts 19,555 19,555 21,857 21,857 Time certificates 392,516 392,158 400,524 402,040 Deposit acquisition premium, net of amortization (487) -- (715) -- - ---------------------------------------------------------------------------------------------------------------- Total deposits 818,057 818,186 824,031 826,262 Escrow deposits of borrowers 1,477 1,477 1,438 1,438 - ---------------------------------------------------------------------------------------------------------------- Total $ 819,534 $819,663 $ 825,469 $827,700
The fair value estimates and the carrying amounts above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. COMMITMENTS TO EXTEND CREDIT The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The Bank estimates the fair value of the cost to terminate commitments to advance funds on construction loans and for residential mortgage loans in the pipeline at December 31, 1999 and 1998 to be immaterial. Unused credit lines, including unused portions of equity lines of credit, are at floating interest rates and therefore there is no fair value adjustment. LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no active market exists for a portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a trust department that contributes fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. 43 32 12. INCOME TAXES Income tax expense (benefit) was allocated as follows:
- --------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 - --------------------------------------------------------------------------------------- Current income tax expense: Federal $ 6,134 $ 5,565 $ 5,096 State 574 771 1,034 - --------------------------------------------------------------------------------------- Total current tax expense 6,708 6,336 6,130 - --------------------------------------------------------------------------------------- Deferred income tax expense (benefit): Federal (121) 110 (102) State (40) 40 (26) Change in valuation reserve -- (4) (4) - --------------------------------------------------------------------------------------- Total deferred tax expense (benefit) (161) 146 (132) - --------------------------------------------------------------------------------------- Total income tax expense $ 6,547 $ 6,482 $ 5,998 =======================================================================================
Income tax expense attributable to income from operations for the years ended December 31, differed from the amounts computed by applying the federal income tax rate of 35 percent as a result of the following:
- ------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Computed "expected" income tax expense at statutory rate $ 6,250 $ 6,089 $ 5,658 Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal benefit 347 527 656 Dividends received deduction (79) (87) (95) Other 29 (43) (217) Change in valuation reserve -- (4) (4) - ------------------------------------------------------------------------------------------------------- Income tax expense $ 6,547 $ 6,482 $ 5,998 - ------------------------------------------------------------------------------------------------------- Effective income tax rate 36.66% 37.26% 37.10% =======================================================================================================
44 33 12. INCOME TAXES (continued) At December 31, 1999 and 1998, the Bank had gross deferred tax assets and gross deferred tax liabilities as follows:
- -------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- Deferred tax assets: Loan losses $ 609 $ 431 Deferred loan fees, net 8 100 Deferred compensation and pension cost 502 463 Depreciation 14 33 Purchase accounting 415 419 Other 41 6 - -------------------------------------------------------------------------------- Gross deferred tax asset 1,589 1,452 - -------------------------------------------------------------------------------- Deferred tax liabilities: Valuation of securities 1,691 8,092 Other unrealized securities gains 93 102 Other 4 19 - -------------------------------------------------------------------------------- Gross deferred tax liability 1,788 8,213 - -------------------------------------------------------------------------------- Net deferred tax liability $ 199 $6,761 ================================================================================
Based on the Company's historical and current pretax earnings, management believes it is more likely than not that the Company will realize the gross deferred tax asset existing at December 31, 1999. The primary sources of recovery of the gross federal deferred tax asset are federal income taxes paid in 1999, 1998 and 1997 that are available for carryback and the expectation that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. Since there is no carryback provision for state income tax purposes, management believes the existing net deductible temporary differences which give rise to the gross deferred state income tax asset will reverse during periods in which the Company generates net taxable income. There can be no assurance, however, that the Company will generate any earnings or any specific level of continuing earnings. As a result of the Tax Reform Act of 1996, the special tax bad debt provisions were amended to eliminate the reserve method. However, the tax effect of the pre-1988 bad debt reserve amount of approximately $7.3 million remains subject to recapture in the event that the Bank pays dividends in excess of its reserves and profits. 13. EARNINGS PER SHARE The following is a calculation of earnings per share for the years indicated:
- ---------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 11,311 $ 11,311 $ 10,914 $ 10,914 $ 10,167 $ 10,167 Average shares outstanding 3,408,280 3,408,280 3,571,298 3,571,298 3,575,962 3,575,962 Dilutive stock options -- 104,321 -- 147,825 -- 138,653 Unallocated Employee Stock Ownership Plan ("ESOP") shares not committed to be released (33,657) (33,657) (42,481) (42,481) (51,305) (51,305) - ---------------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 3,374,623 3,478,944 3,528,817 3,676,642 3,524,657 3,663,310 Earnings per share (in dollars) $ 3.35 $ 3.25 $ 3.09 $ 2.97 $ 2.88 $ 2.97 ==================================================================================================================================
45 34 14. STOCKHOLDERS' EQUITY The Company may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause its stockholders' equity to be reduced below or to otherwise violate legal or regulatory requirements. Substantially all of the Company's retained earnings are unrestricted at December 31, 1999. The Bank is a Federal Deposit Insurance Corporation insured institution subject to the FDIC regulatory capital requirements. The FDIC regulations require all FDIC insured institutions to maintain minimum levels of Tier I 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 I capital to total average 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 new risk-based capital standards, FDIC insured institutions must maintain a Tier I 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 new risk-based capital guidelines take into consideration risk factors, as defined by the regulators, associated with various categories of assets, both on and off the balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk adjusted assets to determine the risk-based capital ratios. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses, qualifying subordinated debt and up to 45 percent of the pretax 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 Company and its principal subsidiary "MASSBANK" set forth below currently exceed the minimum ratios for "well capitalized" banks as defined by federal regulators.
- -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FOR CAPITAL TO BE WELL AT DECEMBER 31, 1999 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1) - -------------------------------------------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - -------------------------------------------------------------------------------------------------------------- TIER I CAPITAL (TO AVERAGE ASSETS): MASSBANK Corp. (consolidated) $ 97,738 10.54% $ 27,811 3.00% N/A -- MASSBANK (the "Bank") 97,177 10.48 27,811 3.00 $ 46,352 5.00% TIER I CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 97,738 31.10 12,569 4.00 N/A -- MASSBANK (the "Bank") 97,177 30.93 12,567 4.00 18,850 6.00 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 104,173 33.15 25,138 8.00 N/A -- MASSBANK (the "Bank") 103,612 32.98 25,133 8.00 31,417 10.00 =============================================================================================================
(1) This column presents the minimum amounts and ratios that a financial institution must have to be categorized as adequately capitalized.
- -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FOR CAPITAL TO BE WELL AT DECEMBER 31, 1998 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1) - -------------------------------------------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - -------------------------------------------------------------------------------------------------------------- TIER I CAPITAL (TO AVERAGE ASSETS): MASSBANK Corp. (consolidated) $ 96,696 10.61% $ 27,349 3.00% N/A -- MASSBANK (the "Bank") 94,305 10.34 27,349 3.00 $ 45,583 5.00% TIER I CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 96,696 32.40 11,936 4.00 N/A -- MASSBANK (the "Bank") 94,305 31.59 11,939 4.00 17,909 6.00 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 103,883 34.81 23,872 8.00 N/A -- MASSBANK (the "Bank") 101,492 34.00 23,878 8.00 29,848 10.00 =============================================================================================================
(1) This column presents the minimum amounts and ratios that a financial institution must have to be categorized as adequately capitalized. 46 35 15. EMPLOYEE BENEFITS PENSION PLAN The Bank sponsors a noncontributory defined benefit pension plan that covers all employees who meet specified age and length of service requirements, which is administered by the Savings Banks Employees Retirement Association ("SBERA"). The plan provides for benefits to be paid to eligible employees at retirement based primarily upon their years of service with the Bank and compensation levels near retirement. Contributions to the plan reflect benefits attributed to employees' service to date, as well as services expected to be earned in the future. Pension plan assets consist principally of government and agency securities, equity securities (primarily common stocks) and short-term investments. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated financial statements for the plan years ended October 31, 1999, 1998, and 1997, the plan's latest valuation dates:
- ------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Actuarial present value of vested benefits $ 4,690 $ 4,442 $ 4,028 Total accumulated benefit obligation 4,724 4,481 4,063 Change in benefit obligation: Projected benefit obligation at beginning of year $ 5,788 $ 4,990 $ 4,287 Service cost 440 443 367 Interest cost 375 362 321 Actuarial loss (gain) (463) 283 221 Benefits paid (234) (290) (206) - ------------------------------------------------------------------------------------------------------- Projected benefit obligation at end of year $ 5,906 $ 5,788 $ 4,990 - ------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year $ 6,243 $ 5,810 $ 5,090 Actual return on plan assets 1,166 469 926 Employer contribution -- 254 -- Benefits paid (234) (290) (206) - ------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 7,175 $ 6,243 $ 5,810 - ------------------------------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation $ 1,269 $ 455 $ 820 =======================================================================================================
Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and the amounts included in the consolidated balance sheets are shown below: Unrecognized net actuarial gain $1,535 $ 487 $ 886 Transition asset 169 190 211 Accrued benefit cost (435) (222) (277) - ------------------------------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation $1,269 $ 455 $ 820 =======================================================================================================
Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: Discount rate 7.75% 6.75% 7.25% Rate of compensation increase 4.50% 4.50% 4.50% Assumptions used to develop the net periodic benefit cost data were: Discount rate 6.75% 7.25% 7.50% Expected return on plan assets 8.00% 8.00% 8.00% Rate of compensation increase 4.00% 4.50% 4.50% Components of net periodic benefit cost: Service cost $ 440 $ 443 $ 367 Interest cost 375 362 322 Expected return on plan assets (499) (465) (407) Transition obligation (21) (21) (21) Recognized net actuarial (gain) loss (82) (119) (84) - ------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 213 $ 200 $ 177 =======================================================================================================
47 36 15. EMPLOYEE BENEFITS (continued) PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLANS The Bank's Profit Sharing and Incentive Compensation Bonus Plans provide for payments to employees under certain circumstances based upon a year-end measurement of the Company's net income and attainment of individual goals and objectives by certain key officers. Payments of $426 thousand, $399 thousand and $417 thousand were awarded under the plan in 1999, 1998 and 1997, respectively. EMPLOYEE STOCK OWNERSHIP PLAN The Bank has an Employees' Stock Ownership Plan ("ESOP") for the benefit of each employee who has completed at least 1,000 hours of service with the Company in the previous twelve months. Under the plan, the ESOP has borrowed funds from a third party bank to invest in the Company's common stock. As this obligation will be liquidated primarily through future contributions to the ESOP by the Bank, the obligation is reflected as a liability of the Company and a reduction of stockholders' equity on the consolidated balance sheet. As of December 31, 1999 and 1998, such outstanding liabilities totaled $468 thousand and $625 thousand, respectively. Shares of the Company's common stock purchased with the loan proceeds are held in a suspense account. As the loan is repaid, a proportionate number of shares are released for allocation to plan participants. The shares are allocated to plan participants annually, on a pro rata basis, based on compensation. The ESOP acquired unallocated shares in 1986 when the plan was first established and more recently in 1993. At December 31, 1999, the ESOP held 26,400 unallocated shares and 129,763 shares which have been allocated to participants. The fair value of the unallocated shares at December 31, 1999 was approximately $779 thousand. Dividends on unallocated shares are used to offset a portion of the interest paid on the ESOP loan. Dividends on allocated shares held by the ESOP are allocated to plan participants proportionately based on the number of shares in the participant's allocated account. Total compensation and interest expense applicable to the ESOP amounted to $366 thousand, $462 thousand and $398 thousand for the years ended December 31, 1999, 1998 and 1997, respectively. EMPLOYEE AGREEMENTS The Bank has entered into employment agreements with certain executive officers which provide that the officer will receive a minimum amount of annual compensation from the Bank for a specified period. The agreements also provide for the continued payment of compensation to the officer for a specified period after termination under certain circumstances, including if the officer's termination follows a "change of control," generally defined to mean a person or group attaining ownership of 25% or more of the shares of the Company. EXECUTIVE SUPPLEMENTAL RETIREMENT AGREEMENTS The Bank maintains executive supplemental retirement agreements for certain executive officers. These agreements provide retirement benefits designed to supplement benefits available through the Bank's retirement plan for employees. Total expenses for benefits payable under the agreements amounted to $139 thousand, $105 thousand and $132 thousand in 1999, 1998 and 1997, respectively. STOCK OPTION PLAN Effective May 28, 1986, the Board of Directors of the Bank adopted a stock option plan for the benefit of its officers and other employees. In January, 1991, the plan was amended to authorize the grant of options to non-employee Directors of the Company. All but 5 of the 690,000 shares reserved for issuance under the plan were issued. On April 19, 1994, shareholders approved and the Bank adopted the Company's 1994 Stock Incentive Plan. The total number of shares of common stock that can be issued under this plan is 360,000 shares. Both incentive stock options and non-qualified stock options may be granted under the plans. As of December 31, 1999, there were 152,010.7 non-qualified stock options and 211,306.6 incentive stock options granted and outstanding to purchase shares under the plans. The maximum option term is ten years. Further stock options may be granted pursuant to the 1994 Stock Incentive Plan and will generally have an exercise price equal to, or in excess of, the fair market value of a share of common stock of the Company on the date the option is granted. 48 37 15. EMPLOYEE BENEFITS (continued) A summary of the status of the Company's fixed stock option plan as of December 31, 1999, 1998 and 1997, and changes during the years ended on those dates is presented below:
- --------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE FIXED OPTIONS OPTION PRICE OPTION PRICE OPTION PRICE - --------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 347,917.3 $ 20.62 360,200 $ 17.65 347,166.7 $ 15.46 Granted 40,000 37.50 35,250 44.25 48,333.3 30.09 Exercised (23,100) 15.17 (47,532) 15.59 (35,300) 13.19 Forfeited (1,500) 40.88 (0.7) 30.09 -- -- - --------------------------------------------------------------------------------------------------------------- Outstanding at end of year 363,317.3 $ 22.74 347,917.3 $ 20.62 360,200 $ 17.65 - --------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 363,317.3 347,917.3 360,200 ===============================================================================================================
The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 1999:
- -------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1999 OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------------------------------------------------------------- WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG. RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE - -------------------------------------------------------------------------------------------------------------------- $6.88 to $10.75 50,350 1.6 YEARS $ 8.75 50,350 $ 8.75 16.00 to $17.34 154,134 3.7 YEARS 16.62 154,134 16.62 18.28 to $19.88 3,666.7 5.5 YEARS 19.44 3,666.7 19.44 23.25 to $30.09 81,416.6 6.6 YEARS 26.92 81,416.6 26.92 37.50 to $44.25 73,750 8.6 YEARS 40.66 73,750 40.66 - -------------------------------------------------------------------------------------------------------------------- $6.88 to $44.25 363,317.3 5.1 YEARS $22.74 363,317.3 $22.74 ====================================================================================================================
As discussed in Note 1, the Company has adopted SFAS No. 123 but continues to account for its stock option plan using the intrinsic value based method prescribed by APB Opinion No. 25. Accordingly, no compensation cost for this plan has been recognized in the Consolidated Statements of Income for 1999. In determining the pro forma disclosures required by SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming the stock option plan was accounted for using the fair value method prescribed by SFAS No. 123, the weighted average assumptions used and the grant date fair value of options granted in 1999, 1998 and 1997:
- --------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- Net income As reported $ 11,311 $ 10,914 $ 10,167 Pro forma 11,095 10,743 9,916 - --------------------------------------------------------------------------------------------------------- Basic earnings per share As reported $ 3.35 $ 3.09 $ 2.88 Pro forma 3.29 3.04 2.81 - --------------------------------------------------------------------------------------------------------- Diluted earnings per share As reported $ 3.25 $ 2.97 $ 2.77 Pro forma 3.19 2.92 2.70 - --------------------------------------------------------------------------------------------------------- Weighted average fair value $ 9.01 $ 8.23 $ 8.84 Expected life 7.3 YEARS 7.3 years 7.4 years Risk-free interest rate 4.80% 5.53% 6.47% Expected volatility 23.0% 23.0% 22.0% Expected dividend yield 2.9% 2.7% 2.3% =========================================================================================================
49 38 16. SHAREHOLDER RIGHTS AGREEMENT In January, 1990, the Board of Directors adopted a Shareholders Rights Plan. Under the Plan, the Rights automatically become part of and trade with the Company's shares of common stock. Although the Rights are not exercisable initially, they become exercisable upon the occurrence of one of three triggering events as specified in the Plan. In the event they become exercisable, each holder of a Right would then be entitled to buy a unit consisting of one one-hundredth of a share of the Company's preferred stock at an exercise price of $70. The provisions of the Rights Plan, including the time periods set forth therein, generally may be extended or amended by the Board of Directors. The Rights will expire January 16, 2000, but they may be redeemed at the option of the Board of Directors for $0.01 per Right until ten days after a person becomes a 15% shareholder of MASSBANK Corp. or until certain other triggering events have occurred. Since the Company's Shareholder Rights Plan expires on January 16, 2000 management intends to adopt a new Shareholder Rights Plan on January 18, 2000 to replace the existing Plan. 17. PARENT COMPANY FINANCIAL STATEMENTS The following are the condensed financial statements for MASSBANK Corp. (the "Parent Company") only: BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ ASSETS: Cash $ 2 $ 1 Interest-bearing deposits in banks 706 2,324 Investment in subsidiaries 101,386 108,724 Due from subsidiaries 104 45 Other assets 70 53 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 102,268 $ 111,147 ======================================================================================================================== LIABILITIES: Employee stock ownership plan liability (Note 15) $ 468 $ 625 Other liabilities 321 33 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 789 658 ======================================================================================================================== STOCKHOLDERS' EQUITY (Notes 12, 14, 15 and 16): 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, 7,407,432 and 7,384,332 shares issued, respectively 7,407 7,384 Additional paid-in capital 60,591 60,003 Retained earnings 85,873 78,308 - ------------------------------------------------------------------------------------------------------------------------ 153,871 145,695 Treasury stock at cost, 4,096,189 and 3,885,222 shares, respectively (53,890) (46,272) Accumulated other comprehensive income (Note 1) 1,966 11,691 Common stock acquired by ESOP (Note 15) (468) (625) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 101,479 110,489 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 102,268 $ 111,147 ========================================================================================================================
50 39 17. PARENT COMPANY FINANCIAL STATEMENTS (continued)
STATEMENTS OF INCOME - ---------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- INCOME: Dividends received from subsidiaries $ 9,200 $ 6,400 $ 6,400 Interest and dividend income 23 96 56 - ---------------------------------------------------------------------------------------------------- Total interest and dividend income 9,223 6,496 6,456 NON-INTEREST EXPENSE 92 99 118 - ---------------------------------------------------------------------------------------------------- Income before income taxes 9,131 6,397 6,338 INCOME TAX BENEFIT 53 28 40 - ---------------------------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiaries 9,184 6,425 6,378 EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 2,127 4,489 3,789 - ---------------------------------------------------------------------------------------------------- Net income $11,311 $10,914 $10,167 ====================================================================================================
The Parent Company only Statements of Changes in Stockholders' Equity are identical to the consolidated statements and therefore are not presented here.
STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,311 $ 10,914 $ 10,167 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (2,127) (4,489) (3,789) (Decrease) increase in accrued income taxes payable (17) 25 (59) Deferred income tax benefit -- (1) (4) Increase in other liabilities 288 4 13 Increase in amount due from subsidiaries (59) (45) -- Decrease in amount due to subsidiaries -- -- (3) - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 9,396 6,408 6,325 - -------------------------------------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Payments to acquire treasury stock (7,618) (4,703) (1,665) Issuance of common stock under stock option plan 351 741 467 Tax benefit resulting from stock options exercised -- 66 -- Dividends paid on common stock (3,759) (3,605) (3,124) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 13 15 15 - -------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (11,013) (7,486) (4,307) - -------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents (1,617) (1,078) 2,018 Cash and cash equivalents at beginning of year 2,325 3,403 1,385 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 708 $ 2,325 $ 3,403 ==============================================================================================================
During the years ended December 31, 1999, 1998 and 1997, the Company made cash payments for income taxes of $16 thousand, $24 thousand and $16 thousand, respectively, and no payments for interest. In addition, the Company made cash payments to the state of Delaware for franchise taxes in the amount of $38 thousand, $29 thousand and $42 thousand during the years ended December 31, 1999, 1998 and 1997, respectively. 51 40 18. TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $11,311 $10,914 $10,167 $9,427 $8,759 $8,185 $6,695 $4,677 $2,250 Basic earnings per share 3.35 3.09 2.88 2.65 2.43 2.19 1.71 1.22 0.59 Cash dividends declared per share 1.11 1.02 0.88 1/2 0.69 0.54 3/4 0.45 0.34 0.26 1/2 0.22 3/4 Book value per share, at year end 30.65 31.58 29.06 25.75 24.84 20.09 20.46 18.37 17.54 Return on average assets 1.20% 1.17% 1.12% 1.08% 1.04% 0.96% 0.79% 0.61% 0.60% Return on average realized equity(1) 11.35% 11.08% 11.11% 11.01% 10.81% 10.62% 8.98% 6.79% 3.39% ====================================================================================================================================
- ----------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1990 - ----------------------------------------------- Net income $ 725 Basic earnings per share 0.16 Cash dividends declared per share 0.22 Book value per share, at year end 16.20 Return on average assets 0.23% Return on average realized equity(1) 1.03% ===============================================
(1) Excludes average net unrealized gains or losses on securities available for sale. 19. QUARTERLY DATA (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER - ----------------------------------------------------------------------------------------------------------------------- Interest and dividend income $14,758 $14,730 $14,345 $14,373 $14,721 $14,995 $15,025 $15,093 Interest expense 8,365 8,391 8,215 8,233 8,534 8,703 8,562 8,521 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 6,393 6,339 6,130 6,140 6,187 6,292 6,463 6,572 Provision for loan losses 15 15 60 50 88 15 45 45 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,378 6,324 6,070 6,090 6,099 6,277 6,418 6,527 Non-interest income 1,154 1,089 1,578 1,741 1,447 796 1,101 1,246 Non-interest expense 3,210 3,066 3,122 3,168 3,269 2,871 3,119 3,256 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes 4,322 4,347 4,526 4,663 4,277 4,202 4,400 4,517 Income tax expense 1,573 1,564 1,660 1,750 1,598 1,507 1,694 1,683 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 2,749 $ 2,783 $ 2,866 $ 2,913 $ 2,679 $ 2,695 $ 2,706 $ 2,834 - ----------------------------------------------------------------------------------------------------------------------- Earnings per share (in dollars):(1) Basic $ 0.83 $ 0.83 $ 0.85 $ 0.84 $ 0.77 $ 0.76 $ 0.76 $ 0.80 Diluted 0.81 0.80 0.82 0.82 0.74 0.73 0.73 0.77 - ----------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding:(1) Basic 3,318 3,352 3,380 3,451 3,487 3,548 3,546 3,535 Diluted 3,389 3,466 3,496 3,567 3,610 3,692 3,709 3,697 =======================================================================================================================
(1) Computation of earnings per share is further described in Note 1. 52 41 MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA YEARS ENDED DECEMBER 31, 1999 AND 1998 MASSBANK Corp.'s common stock is currently traded on the Nasdaq Stock Market under the symbol "MASB." At December 31, 1999 there were 3,311,243 shares outstanding and 871 shareholders of record. Shareholders of record do not reflect the number of persons or entities who hold their stock in nominee or "street" name. The following table includes the quarterly ranges of high and low sales prices for the common stock, as reported by Nasdaq, and dividends declared per share for the periods indicated.
- --------------------------------------------------------------------------------------------------- PRICE PER SHARE CASH ------------------------------------------- DIVIDENDS HIGH LOW DECLARED - --------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1999 - --------------------------------------------------------------------------------------------------- Fourth Quarter 35 1/4 29 1/2 $0.285 Third Quarter 38 35 11/16 0.285 Second Quarter 38 1/4 36 3/4 0.27 First Quarter 39 1/2 37 0.27 - --------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 - --------------------------------------------------------------------------------------------------- Fourth Quarter 40 1/2 29 1/2 $ 0.27 Third Quarter 50 3/4 38 3/4 0.25 Second Quarter 54 1/4 47 1/2 0.25 First Quarter 51 1/4 43 3/4 0.25 - ---------------------------------------------------------------------------------------------------
53 42 MASSBANK BRANCH OFFICES d/b/a MASSBANK of Reading* 123 Haven Street Reading, MA 01867 (781) 942-8188 (978) 446-9200 MASSBANK of Chelmsford 296 Chelmsford Street Eastgate Plaza Chelmsford, MA 01824 (978) 256-3751 17 North Road Chelmsford, MA 01824 (978) 256-3733 MASSBANK of Dracut 45 Broadway Road Dracut, MA 01826 (978) 441-0040 MASSBANK of Everett 738 Broadway Everett, MA 02149 (617) 387-5115 MASSBANK of Lowell 50 Central Street Lowell, MA 01852 (978) 446-9200 755 Lakeview Avenue Lowell, MA 01850 (978) 446-9216 MASSBANK of Medford 4110 Mystic Valley Parkway Wellington Circle Plaza Medford, MA 02155 (781) 395-4899 MASSBANK of Melrose 476 Main Street Melrose, MA 02176 (781) 662-0100 27 Melrose Street Towers Plaza Melrose, MA 02176 (781) 662-0165 MASSBANK of Stoneham 240 Main Street Stoneham, MA 02180 (781) 662-0177 MASSBANK of Tewksbury 1800 Main Street Tewksbury, MA 01876 (978) 851-0300 MASSBANK of Westford 203 Littleton Road Westford, MA 01886 (978) 692-3467 MASSBANK of Wilmington 370 Main Street Wilmington, MA 01887 (978) 658-4000 219 Lowell Street Lucci's Plaza Wilmington, MA 01887 (978) 658-5775 *Main Office 54 43 CORPORATE INFORMATION MASSBANK Corp. 123 Haven Street Reading, MA 01867 (781) 662-0100 (978) 446-9200 FAX (781) 942-1022 Savings and Mortgage 24-Hour-Rate Lines (781) 662-0154 (978) 446-9285 Notice of Shareholders' Meeting The Annual Meeting of the Shareholders of MASSBANK Corp. will be held at 10:00 A.M. on Tuesday, April 18, 2000 at the Sheraton Ferncroft Resort 50 Ferncroft Road Danvers, MA 01923 Trademark MASSBANK and its logo are registered trademarks of the Company Form 10-K Shareholders may obtain without charge a copy of the Company's 1999 Form 10-K. Written requests should be addressed to: Shareholder Services MASSBANK Corp. 159 Haven Street Reading, MA 01867 Dividend Reinvestment and Stock Purchase Plan Shareholders may obtain a brochure containing a detailed description of the plan by writing to: Shareholder Services MASSBANK Corp. 159 Haven Street Reading, MA 01867 Transfer Agent EquiServe Boston EquiServe Division Shareholder Services P.O. Box 644 Boston, MA 02102-0644 Independent Auditors KPMG LLP 99 High Street Boston, MA 02110 Legal Counsel Goodwin, Procter & Hoar LLP Exchange Place Boston, MA 02109 Reports on Effectiveness of Internal Control Structure Over Financial Reporting Shareholders may obtain without charge a copy of Management's and the Independent Auditors' 1999 Reports on the Effectiveness of the Company's Internal Control Structure Over Financial Reporting. Written requests should be addressed to: Shareholder Services MASSBANK Corp. 159 Haven Street Reading, MA 01867 55 44 OFFICERS AND DIRECTORS MASSBANK CORP. OFFICERS Gerard H. Brandi Chairman, President and Chief Executive Officer Reginald E. Cormier Senior Vice President, Treasurer and Chief Financial Officer Robert S. Cummings Secretary Donna H. West Assistant Secretary BOARD OF DIRECTORS Samuel Altschuler Retired, Sanmina Corp. *Mathias B. Bedell Retired, Bedell Brothers Insurance Agency, Inc. *Gerard H. Brandi Chairman, President and Chief Executive Officer, MASSBANK Corp. Allan S. Bufferd Treasurer, Massachusetts Institute of Technology +Peter W. Carr Retired, Guilford Transportation Industries +Alexander S. Costello Editorial Page Editor, Lowell Sun Publishing Co., Inc. *Robert S. Cummings Senior Counsel, Nixon Peabody LLP Leonard Lapidus Banking and Bank Regulation Consultant *Stephen E. Marshall President, C.H. Cleaves Insurance Agency, Inc. Nancy L. Pettinelli Executive Director, Visiting Nurse Association +*Herbert G. Schurian Certified Public Accountant *Dr. Donald B. Stackhouse Dentist *Member, Executive Committee +Member, Audit Committee OFFICERS AND DIRECTORS MASSBANK OFFICERS Gerard H. Brandi Chairman, President and Chief Executive Officer Donald R. Washburn Senior Vice President, Lending Donna H. West Senior Vice President, Community Banking Reginald E. Cormier Senior Vice President, Treasurer and Chief Financial Officer David F. Carroll Vice President, Operations Richard J. Flannigan Vice President and President Thomas J. Queeney Vice President and Senior Trust Officer Janet L. Daniels Director of Audit and Compliance Aunali Dohadwala Director of Information Technology Gerard F. Frechette Director of Human Resources Marilyn H. Abbott Assistant Treasurer Andrea S. Bradford Assistant Vice President Gregory W. Bowe Assistant Vice President Ernest G. Campbell, Jr. Collections and Security Officer Marianne J. Carpenter Assistant Treasurer Charles F. Coupe Information Officer Keri L. DeRosa Mortgage Origination Officer Karen L. Flammia Assistant Vice President Melissa J. Flanagan Assistant Treasurer Rachael E. Garneau Assistant Treasurer Brian W. Hurley Assistant Vice President Kenneth A. Masson Assistant Vice President Elkin Z. Montoya Mortgage Origination Officer Karen L. O'Rourke Assistant Treasurer Mindy S. Peloquin Assistant Treasurer Renald A. Robillard Assistant Treasurer Lisa A. Sawyer Assistant Treasurer Alice B. Sweeney Assistant Comptroller Richard A. Tatarczuk Assistant Vice President and Comptroller Francis J. Walsh Operations Officer Margaret E. White Assistant Treasurer Patricia A. Witts Assistant Treasurer Michael J. Woods Assistant Vice President BOARD OF DIRECTORS AND EXECUTIVE COMMITTEE Mathias B. Bedell Gerard H. Brandi, Chairman Robert S. Cummings, Clerk Stephen E. Marshall Herbert G. Schurian Dr. Donald B. Stackhouse Donna H. West 56 EX-22 3 LIST OF SUBSIDIARIES 1 Exhibit 22 List of Subsidiaries of MASSBANK Corp. MASSBANK Corp. is the parent company of: MASSBANK (the "Bank") MASSBANK has three wholly-owned subsidiaries: Readibank Properties, Inc. Readibank Investment Corporation Melbank Investment Corporation EX-23 4 INDEPENDENTS ACCOUNTANTS CONSENT 1 Exhibit 23 INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors MASSBANK Corp.: We consent to incorporation by reference in the Registration Statements (No. 33-11949 and No. 33-82110) on Form S-8 of MASSBANK Corp. of our report dated January 11, 2000, relating to the consolidated balance sheets of MASSBANK Corp. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, which report is incorporated by reference into the December 31, 1999 annual report on Form 10-K of MASSBANK Corp. /s/KPMG LLP Boston, Massachusetts March 17, 2000 1299EX23 EX-27 5 FINANCIAL DATA SCEDULE
9 0000799166 MASSBANK CORP. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 10,476 3,841 86,211 6,042 457,502 230 230 325,265 2,555 924,716 818,057 1,477 3,235 468 0 0 7,407 94,072 924,716 22,772 28,020 7,414 58,206 33,204 33,204 25,002 140 4,033 12,566 17,858 17,858 0 0 11,311 3.35 3.25 2.72 795 0 0 795 2,450 76 41 2,555 2,058 0 497
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