-----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, AaoChYg/s3k/xgUSAHzRSLajzJZ8XvUrnt3Jnm9hk2hnAW7+CFXDlii68BBafbxM v6KbmHuupx/rEy/qyt4LLA== 0000950135-01-000891.txt : 20010327 0000950135-01-000891.hdr.sgml : 20010327 ACCESSION NUMBER: 0000950135-01-000891 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010326 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: 1578369 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 b38181mce10-k.txt 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, 2000 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 9, 2001 as reported by NASDAQ, was $93,017,288. As of March 9, 2001, there were 3,146,243 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of MASSBANK Corp.'s 2000 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 2001 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 statements in other documents we file with the Securities and Exchange Commission ("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. (sometimes referred to as 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 Board of Governors of the Federal Reserve System (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. In addition, MASSBANK Corp. may elect to become a financial holding company and to engage in activities permissible to financial holding companies. See "Supervision and Regulation of the Company and its subsidiaries." 2 3 The principal sources of revenues for MASSBANK Corp. 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 only assets at December 31, 2000 were represented by its investment in the Bank of $108.0 million and other assets of $0.8 million. The Company's liabilities consisted of loan indebtedness of $0.3 million and other liabilities of $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, 2000 MASSBANK Corp. on a consolidated basis had total assets of $938.7 million, deposits of $823.6 million, and stockholders' equity of $108.2 million which represents 11.5% of total assets. Book value per share at December 31, 2000 stood at $34.25, an all time high, as opposed to $30.65 at the end of 1999. 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 $1.185 per share in 2000 compared to $1.11 per share in 1999 and $1.02 per share in 1998. The Company's dividend payout ratios (cash dividends paid divided by net income) for 2000, 1999 and 1998 were 34%, 33% and 33%, respectively. Stock Repurchase Program During 2000, the Company continued its aggressive program of share repurchases by purchasing 191,100 shares of its common stock pursuant to its stock repurchase program. The Company's most recent repurchase program was completed as of year end 2000. On January 17, 2001 the Company's Board of Directors approved a further repurchase program authorizing the Company to repurchase up to 150,000 shares of its common stock in the open market or in private transactions over the next twelve months. 3 4 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 with and 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 of Massachusetts ("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. 4 5 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 $307.6 million at December 31, 2000. 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, 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Mortgage loans: Residential: Conventional $ 269,859 $ 286,429 $ 280,681 $ 243,482 $ 216,832 FHA and VA 471 740 1,181 1,843 2,515 Commercial 3,117 2,471 2,257 3,861 4,121 Construction 683 232 730 492 1,388 - ----------------------------------------------------------------------------------------------- Total mortgage loans 274,130 289,872 284,849 249,678 224,856 Premium on loans 105 159 259 343 325 Deferred mortgage loan origination fees (1,284) (1,451) (1,454) (1,223) (1,042) - ----------------------------------------------------------------------------------------------- Mortgage loans, net 272,951 288,580 283,654 248,798 224,139 - ----------------------------------------------------------------------------------------------- Other loans: Consumer: Installment 1,829 1,418 1,547 2,199 1,967 Guaranteed education 6,266 7,037 7,967 8,934 9,729 Other secured 1,169 1,318 1,366 1,600 1,611 Home equity lines of credit 12,624 11,737 10,159 10,470 11,316 Unsecured 224 225 235 266 271 - ----------------------------------------------------------------------------------------------- Total consumer loans 22,112 21,735 21,274 23,469 24,894 Commercial 15,084 15,050 61 36 628 - ----------------------------------------------------------------------------------------------- Total other loans 37,196 36,785 21,335 23,505 25,522 - ----------------------------------------------------------------------------------------------- Total loans 310,147 325,365 304,989 272,303 249,661 Allowance for loan losses (2,594) (2,555) (2,450) (2,334) (2,237) - ----------------------------------------------------------------------------------------------- Net loans $ 307,553 $ 322,810 $ 302,539 $ 269,969 $ 247,424 - -----------------------------------------------------------------------------------------------
5 6 The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 2000: Maturity/Scheduled Payments (1)
Within One to Five to After (In thousands) one year five years ten years ten years Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $ 629 $ 9,833 $76,176 $182,527 $269,165 Commercial & construction 214 165 492 2,915 3,786 - ------------------------------------------------------------------------------------------- Total mortgage loans 843 9,998 76,668 185,442 272,951 Other loans 16,300 2,421 4,266 14,209 37,196 - ------------------------------------------------------------------------------------------- Total loans $17,143 $12,419 $80,934 $199,651 $310,147 - -------------------------------------------------------------------------------------------
(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 $229,086 $39,450 $268,536 Commercial & construction 700 2,872 3,572 - ---------------------------------------------------------------------------- Total mortgage loans 229,786 42,322 272,108 Other loans 2,015 18,881 20,896 - ---------------------------------------------------------------------------- Total loans $231,801 $61,203 $293,004 - ---------------------------------------------------------------------------- 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 32.7% and 34.9% of the Company's total assets at December 31, 2000, and 1999, 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. As mortgage rates increased in 2000 the demand for mortgages and refinancings dropped. As a result, the Bank's mortgage activity in 2000 decreased with originations at $33.0 million for the year, compared to $82.4 million (including a $15.0 million commercial loan to a single borrower with AAA rated credit) the prior year. In 2000, the Bank's total loan portfolio decreased slightly to $310.1 million from $325.4 million at year end 1999. 6 7 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 2000 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 criteria. The Bank has also introduced the "Home Town Advantage" mortgage program which has produced some good results. This program offers home buyers 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 retail branch. At December 31, 2000, 1-4 family residential mortgage loans totaled $269.2 million, or 86.8% of the total loan portfolio, compared to $285.9 million, or 87.9% of the total loan portfolio, at December 31, 1999. Residential mortgage loan originations amounted to $19.9 million during 2000, down from $55.2 million in 1999. Origination volumes are sensitive to interest rates and are affected by the interest rate environment. The upturn in interest rates in the first half of 2000 significantly reduced the demand for mortgage refinancings in 2000. 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, 2000, commercial and multifamily real estate mortgages and construction loans totaled approximately $3.8 million, or 1.2% of the total loan portfolio, compared to $2.7 million, or 0.8% of the total loan portfolio, at December 31, 1999. In 2000, commercial and multifamily real estate mortgage loan and construction loan originations amounted to $1.8 million. 7 8 Mortgage Lending (continued) The total amount of first mortgage loans held by the Bank at December 31, 2000 was $273.0 million as indicated in the maturity distribution table appearing on page six. Of this amount, $42.6 million was subject to interest rate adjustments. The remaining $230.4 million in fixed rate mortgage loans represents 24.5% 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 $22.1 million at December 31, 2000 representing 7.1% of the Bank's total loan portfolio. Of this amount $6.3 million or 2.0% 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 $15.8 million at December 31, 2000, representing 5.1% of the Bank's total loan portfolio. At December 31, 2000, 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, 2000, the Bank had issued commitments on residential first mortgage loans totaling $1,920,000, and had commitments to advance funds on construction loans and unused credit lines, including unused portions of home equity lines of credit, of $421,000 and $30,918,000, 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 90 days or more past due. Loans delinquent for 90 or more days, as shown in the table on the following page, totaled $565,000 at December 31, 2000. 8 9 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 2000, MASSBANK had no real estate acquired through foreclosure on 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, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------ Nonaccrual loans: Mortgage loans: Residential: Conventional $ 386 $ 655 $ 845 $1,536 $1,468 FHA and VA 8 -- -- 9 13 Commercial -- -- -- -- -- Consumer 171 140 159 226 120 - ------------------------------------------------------------------------------------------------ Total nonaccrual loans 565 795 1,004 1,771 1,601 - ------------------------------------------------------------------------------------------------ Real estate acquired through foreclosure: Residential: Conventional -- 62 86 -- 503 - ------------------------------------------------------------------------------------------------ Total real estate acquired through foreclosure -- 62 86 -- 503 - ------------------------------------------------------------------------------------------------ Total non-performing assets $ 565 $ 857 $1,090 $1,771 $2,104 - ------------------------------------------------------------------------------------------------ Percent of non-performing loans to total loans 0.18% 0.24% 0.33% 0.65% 0.64% Percent of non-performing assets to total assets 0.06% 0.09% 0.12% 0.19% 0.24% The reduction in interest income associated with nonaccrual loans is as follows: - ------------------------------------------------------------------------------------------------ (In thousands) Years Ended December 31, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------ Interest income that would have been recorded under original terms $ 48 $ 64 $ 84 $ 163 $ 149 Interest income actually recorded 36 51 61 97 78 - ------------------------------------------------------------------------------------------------ Reduction in interest income $ 12 $ 13 $ 23 $ 66 $ 71 - ------------------------------------------------------------------------------------------------
9 10 Allowance for Loan Losses. The Bank maintains an allowance for probable losses that are inherent in the Bank's loan portfolio. The allowance for loan losses is increased by provisions charged to operations based on the estimated loan loss exposure inherent in the portfolio. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114, general loss allocations for various loan types based on loss experience factors and an unallocated allowance which is maintained based on management's assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. 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. The following table sets forth the activity in the allowance for loan losses during the years indicated:
- ------------------------------------------------------------------------------------------------------ (In thousands) Years ended December 31, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Balance at beginning of year $ 2,555 $ 2,450 $ 2,334 $ 2,237 $ 2,529 Glendale Co-Operative Bank acquisition -- -- -- 105 -- Provision for loan losses 60 140 193 260 160 Charge-offs: Residential real estate -- (62) (81) (221) (480) Consumer loans (24) (14) (22) (12) (25) Other loans -- -- -- (94) (37) Recoveries: Residential real estate 2 39 17 34 83 Commercial real estate -- -- -- 20 -- Consumer loans 1 2 6 1 7 Other Loans -- -- 3 4 -- - ------------------------------------------------------------------------------------------------------ Net charge-offs (21) (35) (77) (268) (452) - ------------------------------------------------------------------------------------------------------ Balance at end of year $ 2,594 $ 2,555 $ 2,450 $ 2,334 $ 2,237 - ------------------------------------------------------------------------------------------------------ Net loan charge offs as a percent of average loans outstanding during the period 0.01% 0.01% 0.03% 0.10% 0.18% Allowance for loan losses as a percent of total loans outstanding at year-end 0.84% 0.79% 0.80% 0.86% 0.90% Allowance for loan losses as a percent of nonaccrual loans 459.1% 321.4% 244.0% 131.8% 139.7% - ------------------------------------------------------------------------------------------------------
10 11 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, net." When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings. 11 12 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, 2000, the Company's investments, which consist 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 $607.1 million, representing 64.7% of the Company's total assets. 12 13 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, 2000 1999 1998 - --------------------------------------------------------------------------------- Federal funds sold: Overnight federal funds $112,711 $ 86,211 $123,207 Term federal funds 30,000 -- 25,000 - --------------------------------------------------------------------------------- Total federal funds sold 142,711 86,211 148,207 Money market funds 131 24,717 24,569 Interest-bearing deposits in bank 1,678 3,841 2,033 - --------------------------------------------------------------------------------- Total federal funds sold and other short-term investments $144,520 $114,769 $174,809 - --------------------------------------------------------------------------------- Percent of total assets 15.4% 12.4% 18.5% - --------------------------------------------------------------------------------- (In thousands) At December 31, 2000 1999 1998 - --------------------------------------------------------------------------------- Securities held to maturity: (a) Other bonds and obligations $ 230 $ 230 $ 354 - --------------------------------------------------------------------------------- Total securities held to maturity 230 230 354 Securities available for sale: (b) U.S. Treasury obligations 126,456 137,615 114,981 U.S. Government agency obligations 9,133 16,015 8,992 Marketable equity securities 19,750 21,537 21,580 Mortgage-backed securities 287,213 282,335 272,573 - --------------------------------------------------------------------------------- Total securities available for sale 442,552 457,502 418,126 Trading securities: (b) U.S. Treasury obligations 19,791 4,956 29,707 Investments in mutual funds 3 1,086 1,086 - --------------------------------------------------------------------------------- Total trading securities 19,794 6,042 30,793 - --------------------------------------------------------------------------------- Total securities $462,576 $463,774 $449,273 - --------------------------------------------------------------------------------- Percent of total assets 49.3% 50.2% 47.5% - --------------------------------------------------------------------------------- Total investments $607,096 $578,543 $624,082 Total investments as a percent of total assets 64.7% 62.6% 65.9% - ---------------------------------------------------------------------------------
(a) At amortized cost. (b) At market value. 13 14 The following tables present the amortized cost of debt securities held to maturity and available for sale at December 31, 2000 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 within 1 year Amount $ 230 $ 230 Yield 6.80% 6.80% - ------------------------------------------------------------------------------ Total Amount $ 230 $ 230 Yield 6.80% 6.80% Average life in years 0.29 0.29 Debt Securities Available for Sale
U.S. Mortgage- U. S. Government backed Treasury agency securities (2) (Dollars in thousands) obligations obligations Total - ---------------------------------------------------------------------------------------------- Maturing within 1 year Amount $ 81,841 $9,000 $ 287 $ 91,128 Yield 6.20% 5.46% 6.37% 6.13% Maturing after 1 but within 5 years Amount 43,789 -- 2,166 45,955 Yield 6.20% -- 8.61% 6.31% Maturing after 5 but within 10 years Amount -- -- 66,188 66,188 Yield -- -- 6.91% 6.91% Maturing after 10 but within 15 years Amount -- -- 211,830 211,830 Yield -- -- 6.95% 6.95% Maturing after 15 years Amount -- 147 2,996 3,143 Yield -- 8.90% 6.35% 6.47% - ---------------------------------------------------------------------------------------------- Total Amount $125,630 $ 9,147 $283,467 $418,244 Yield 6.20% 5.52% 6.94% 6.69% - ---------------------------------------------------------------------------------------------- Average life in years 0.89 0.49 Average contractual maturity in years 11.55
14 15 (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, 2000, 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. 15 16 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 Automated Teller Machine ("ATM") network. The Bank is a member of the Transaxion ("TX"), "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. Deposits increased by $5.6 million during the twelve months ended December 31, 2000, from $818.0 million at year-end 1999 to $823.6 million at the end of 2000. 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 Bank did not have any borrowed funds in 2000 or 1999. 16 17 DEPOSITS The following table shows the composition of the deposits as of the dates indicated:
(In thousands) at December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Percent Percent Percent of of of Amount Deposits Amount Deposits Amount Deposits Demand and NOW NOW $ 51,390 6.24% $ 48,422 5.92% $ 52,324 6.35% Demand accounts (non interest-bearing) 28,562 3.47 24,516 3.00 23,849 2.89 -------- ------ -------- ------ -------- ------ Total demand and NOW 79,952 9.71 72,938 8.92 76,173 9.24 Savings: Regular savings and special notice accounts 317,926 38.60 333,535 40.77 326,192 39.59 Money market accounts 17,022 2.07 19,555 2.39 21,857 2.65 -------- ------ -------- ------ -------- ------ Total savings 334,948 40.67 353,090 43.16 348,049 42.24 Time Certificates of deposit: Fixed rate certificates 309,245 37.54 302,423 36.97 318,491 38.65 Variable rate certificates 99,736 12.11 90,093 11.01 82,033 9.96 -------- ------ -------- ------ -------- ------ Total time certificates of deposit 408,981 49.65 392,516 47.98 400,524 48.61 Deposit acquisition premium, net of amortization (256) (.03) (487) (.06) (715) (.09) -------- ------ -------- ------ -------- ------ Total deposits $823,625 100.00% $818,057 100.00% $824,031 100.00%
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, 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate NOW accounts $ 49,860 0.97% $ 49,559 1.01% $ 48,006 1.15% Demand (non interest-bearing) accounts 24,945 -- 24,189 -- 21,011 -- Escrow deposits of borrowers 1,151 0.21 1,185 0.19 1,142 0.18 Money market accounts 17,941 2.97 20,519 2.96 22,299 3.07 Regular savings and special notice accounts 325,138 3.44 333,332 3.44 327,338 3.44 Time certificates of deposit 399,554 5.81 397,935 5.19 391,816 5.57 -------- ---- -------- ---- -------- ---- $818,589 4.32% $826,719 4.02% $811,612 4.23%
17 18 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, 2000 the Trust Division had approximately $33.5 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. 18 19 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 Federal Reserve Board under the federal Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to statutes, regulations and policies administered by the Federal Reserve Board 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 "FDIC" (and, with respect to any deposits in excess of FDIC limits, by the DIF), the Bank is subject to regulation, supervision and examination by federal and state regulatory authorities, including the FDIC and the Division. The Bank is also subject to certain requirements established by the Federal Reserve Board. 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 and reporting and recordkeeping. 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, 2000, the Bank was "well capitalized" as defined under the prompt corrective action guidelines issued pursuant to FDICIA. For a discussion of the Bank's capital adequacy, see Note 14 to the Company's Consolidated Financial Statements, on page 46. 19 20 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, 2000, the Bank's operations were in substantial compliance with all applicable safety and soundness standards promulgated under FDICIA. 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 Riegle-Neal Interstate Bank and Branching Act of 1994 ("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. The Gramm-Leach-Bliley Act 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 restricted 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 Board 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 permits 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. 20 21 Supervision and Regulation of the Company and its Subsidiaries (continued) Generally, the Gramm-Leach-Bliley Act and its implementing regulations: - repeal historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; - permit investment in non-financial enterprises, subject to significant operational, holding period and other restrictions; - provide a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; - broaden the activities that may be conducted by national banks (and derivatively state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries; - require all financial institutions to provide notice of their privacy policies at specified times to their retail customers and customers of their financial products or services, and permit retail customers and consumers, under certain circumstances, to prohibit financial institutions from sharing certain nonpublic information pertaining to them by opting out of such sharing. - establish guidelines for safeguarding the security, confidentiality and integrity of customer information. - adopt a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system; - modify the laws governing the implementation of the Community Reinvestment Act of 1977; and - address 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 Federal Reserve Board which generally is acted on within thirty days. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized 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 any of its banks fail to maintain the required capital and management ratings, including entering into an agreement with the Federal Reserve Board 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. 21 22 Section 24 of the Federal Deposit Insurance Act ("FDIA") generally limits the activities as principal and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. In 1999, the FDIC substantially revised its regulations implementing Section 24 to ease the ability of state banks to engage in certain activities not permissible for national banks, and to expedite FDIC review of bank applications and notice to engage in such activities. In response to a Massachusetts law enacted in 1996, in 1997 and 1999, the Division finalized rules that generally give Massachusetts banks, and their subsidiaries, many powers equivalent to those of national banks. The Division also has adopted regulations and procedures expediting the approval process for well- capitalized banks to establish branches or to engage in certain activities. Further, the Gramm-Leach-Bliley Act, which includes new sections of the National Bank Act and the FDIA governing the establishment and operation of financial subsidiaries, permits national banks and state banks, to the extent permitted under state law, to engage in certain new activities which are permissible for subsidiaries of a financial holding company. In addition, it expressly preserves the ability of national banks and state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a national bank or state bank must be well-capitalized, and such banks would be subject to certain capital deduction, risk management and affiliate transaction rules. Also, the FDIC recently issued final rules governing the establishment of financial subsidiaries by insured state nonmember banks. The final rules restate the FDIC's position that activities that a national bank could only engage in through a financial subsidiary, such as securities underwriting, only may be conducted in a financial subsidiary by a state nonmember bank. However, activities that a national bank could not engage in through a financial subsidiary, such as real estate development or investment, will continue to be governed by the FDIC's standard activities rules. Moreover, to mirror the Federal Reserve Board's actions with respect to state member banks, the final rules provide that a state bank subsidiary that engages only in activities that the bank could engage in directly (regardless of the nature of the activities) will not be deemed a financial subsidiary. 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, 2000, the Bank had 117 full-time employees, including 29 officers, and 68 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 $141.8 million and $141.6 million, respectively, at December 31, 2000. Readibank Properties, Inc. incorporated primarily for the purpose of real estate development, had total assets of $622 thousand at December 31, 2000. Executive Officers of the Registrant The executive officers of the Company and the Bank and the age of each officer as of March 4, 2001 are as follows: Name Age Office Gerard H. Brandi 52 Chairman of the Board of Directors, President and Chief Executive Officer of the Company and the Bank David F. Carroll 53 Vice President of the Bank Reginald E. Cormier 53 Senior Vice President, Treasurer and Chief Financial Officer of the Company and the Bank Thomas J. Queeney 38 Vice President and Senior Trust Officer of the Bank Donald R. Washburn 57 Senior Vice President of the Bank Donna H. West 55 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, 2000, 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 (3) 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 exercised its option to buy this branch facility. The transaction is expected to be completed in 2001. (2) The Bank is a tenant at will. (3) The Bank intends to enter into a new lease agreement in 2001. 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, 2000, 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 2000 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 2000 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 2000 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 2000 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 2000 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, the Company's independent auditors, contained in the Registrant's 2000 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 2001 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 2001 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 2001 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 2000 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 2000 Annual Report to Stockholders (Pages) Independent Auditors' Report 25 Consolidated Balance Sheets at December 31, 2000 and 1999 26 Consolidated Statements of Income for the three years ended December 31, 2000 27 Consolidated Statements of Cash Flows for the three years ended December 31, 2000 28-29 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 2000 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 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. 10.5 Amended Deferred Compensation Plan for Directors of MASSBANK Corp. adopted March 8, 2000. 11 The computation of per share earnings can be readily determined from the material contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 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 2000 Annual Report to Stockholders - except for those portions of the 2000 Annual Report to Stockholders which are expressly incorporated by reference in this report, such 2000 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. 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 14, 2001 -------------- /s/ Reginald E. Cormier Senior Vice President, Treasurer - ---------------------- and Chief Financial Officer Reginald E. Cormier (Principal Financial and Accounting Officer) MARCH 14, 2001 -------------- /s/ Samuel Altschuler Director MARCH 19, 2001 - ------------------------------ -------------- Samuel Altschuler /s/ Mathias B. Bedell Director MARCH 14, 2001 - ------------------------------ -------------- Mathias B. Bedell /s/ Allan S. Bufferd Director MARCH 15, 2001 - ------------------------------ -------------- Allan S. Bufferd Director - ------------------------------ Peter W. Carr /s/ Alexander S. Costello Director MARCH 15, 2001 - ------------------------------ -------------- Alexander S. Costello 31 32 /s/ Robert S. Cummings Director MARCH 20, 2001 - ------------------------------ -------------- Robert S. Cummings /s/ Leonard Lapidus Director MARCH 15, 2001 - ------------------------------ -------------- Leonard Lapidus /s/ Stephen E. Marshall Director MARCH 14, 2001 - ------------------------------ -------------- Stephen E. Marshall /s/ NANCY L. PETTINELLI Director MARCH 15, 2001 - -------------------------------- -------------- Nancy L. Pettinelli /s/ Herbert G. Schurian Director MARCH 14, 2001 - ------------------------------- -------------- Herbert G. Schurian /s/ Donald B. Stackhouse Director MARCH 20, 2001 - ------------------------------- -------------- Donald B. Stackhouse 32 EX-10.5 2 b38181mcex10-5.txt AMENDED DEFERRED COMPENSATION PLAN FOR DIRECTORS 1 Exhibit 10.5 AMENDMENT TO DIRECTORS' DEFERRED COMPENSATION PLAN OF MASSBANK CORP. A. The Directors' Deferred Compensation Plan of MASSBANK Corp. (the "Plan") is hereby amended by deleting the last sentence of Article VII and by substituting therefor the following sentence: "To the extent any deferred compensation of any director is deemed to be invested in the common stock of MASSBANK Corp., all benefit payments to such director shall be payable in the form of shares of common stock of MASSBANK Corp. B. This Amendment shall be effective as of March 8, 2000. IN WITNESS WHEREOF, MASSBANK Corp. has caused this Amendment to be executed by its duly authorized officer this 8th day of March, 2000. MASSBANK By /s/ Reginald E. Cormier --------------------------- Sr. V.P., Treasurer and CFO 2 DIRECTORS' DEFERRED COMPENSATION PLAN OF MASSBANK CORP. ARTICLE I. ESTABLISHMENT OF PLAN MASSBANK Corp., a Massachusetts corporation with a principal place of business in Reading, Massachusetts (the "Company"), hereby establishes the Directors' Deferred Compensation Plan of MASSBANK Corp. (the "Plan"). The Plan is an unfunded deferred compensation arrangement for the directors of the Company and is effective for deferrals of compensation for calendar years beginning on and after January 1, 1988 (the "Effective Date"). ARTICLE II. ELIGIBILITY; PARTICIPATION All directors of the Company on the Effective Date and all persons who become directors of the Company thereafter shall be eligible to participate in the Plan and shall participate by timely executing and submitting a deferred compensation election form as described in Article III. ARTICLE III. DEFERRED COMPENSATION ELECTIONS Each eligible director shall be given the opportunity to defer receipt of all or a portion of his/her director's compensation by executing a deferred compensation election form provided by the Company. The election form must be executed and returned prior to the beginning of the first calendar year to which it relates. Amendments or revocations of the election form shall be effective only for calendar years beginning after the execution and submission to the Company of the amendment or revocation, as the case may be; provided, however, that the form of benefit payment cannot be amended as provided in Article V. ARTICLE IV. PARTICIPANTS' ACCOUNTS; INVESTMENT REQUIREMENTS For each director who elects to participate in the Plan (a "Participant"), the Company shall establish and maintain a memorandum account (for bookkeeping purposes only) which shall be used to measure the benefits to be paid hereunder. As part of the deferred compensation election form, each Participant shall be given the opportunity to choose whether his/her deferred compensation shall be measured as if it had been invested either in the MASSBANK for Savings Variable IRA Account or the common stock of MASSBANK Corp. If the common stock of MASSBANK Corp. is elected, any dividends paid shall be treated as reinvested in such shares. The election of the investment measurement is to be made on the first deferred compensation election form submitted by a Participant pursuant to Article III. Such election shall apply to all compensation deferred under the Plan and cannot be changed. The following credits shall be made to each Participant's account: a. All compensation deferred pursuant to the Plan. b. To the extent any deferred compensation is deemed to be invested in the MASSBANK for Savings Variable IRA Account, such interest as may be earned by such investment. c. To the extent any deferred compensation is deemed to be invested in the common stock of MASSBANK Corp., the increase in value of such shares and any dividends paid thereon. 3 The following debits shall be made to each Participant's account: a. To the extent any deferred compensation is deemed to be invested in the common stock of MASSBANK Corp., the decrease in value of such shares. b. Any payments made under the Plan to the Participant or his/her beneficiaries. ARTICLE V. BENEFIT PAYMENTS OTHER THAN DEATH BENEFITS Except as provided in the last paragraph of this Article, a Participant shall be entitled to benefits under the Plan as soon as practicable after the earlier of (i) the Participant's attaining age 72, or (ii) his/her termination as a director of the Company. At the election of the Participant, benefits shall be paid either in one lump sum or in quarterly installments over a five (5) year period. If a lump sum is elected, the benefit payable shall be the balance of the Participant's account under the Plan on the payment date. If installment payments are elected, the first installment shall equal 1/20 of the account balance on the payment date, and each installment thereafter shall be calculated by multiplying the account balance on the payment date by a fraction of which the numerator is one and the denominator is one whole number less than the denominator of the fraction used in calculating the immediately preceding quarterly installment payment. The election of the form of benefit payment is to be made on the first deferred compensation election form submitted by a Participant pursuant to Article III. Such election shall apply to all compensation deferred under the Plan and cannot be changed. Notwithstanding the foregoing, in the event the Company or its assets are merged or acquired, payment of all account balances shall promptly be made to all Participants in one lump sum. ARTICLE VI DEATH BENEFITS In the event of the death of a Participant while amounts are held for his/her benefit under the Plan and regardless of whether installment payments have been elected or have commenced, a death benefit shall be paid as soon as practicable to his/her beneficiaries in one lump sum. The amount of the death benefit shall be the balance of the Participant's account under the Plan on the payment date. Each Participant shall have the right to designate beneficiaries who are to succeed to his/her right to receive payments in the event of his/her death. In the case of a failure of a Participant to designate a beneficiary or of the death of a designated beneficiary without a designated successor, the death benefit shall be paid to the Participant's estate. No designation of beneficiaries shall be valid unless in writing signed by the Participant, dated and filed with the Company. Beneficiaries may be changed without the consent of any prior beneficiaries. 4 ARTICLE VII. NATURE OF PARTICIPANTS' INTERESTS The Plan is intended to constitute an unfunded deferred compensation arrangement for a select group of management. The Participants shall have no right, title or interest whatsoever in meeting its obligations under the Plan. All such investments shall at all times remain solely the Company's property. To the extent that any person acquires a right to receive payments from the Company under the Plan, no such right shall be greater than an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company, and no special or separate fund shall be established, and no segregation of assets shall be made, to assure payments of such amounts. ARTICLE VIII, AMENDMENT, SUSPENSION AND TERMINATION OF PLAN The Company's Board of Directors reserves the right at any time to amend, suspend or terminate the Plan in whole or in part, for any reason, without the consent of any Participant or beneficiary. No such amendment shall decrease any interest of any Participant or beneficiary existing immediately prior to such amendment. AMENDMENT IX. GENERAL The benefit payments described in Articles V and VI are the only benefits payable under the Plan, and the Participants and their beneficiaries are responsible for any federal, state or local income taxes that may be due thereon. Any income tax benefits the Company may derive from deducting these benefit payments when made shall not be passed through to the Participants and their beneficiaries. To the extent permitted by law, the right of any Participant or any beneficiary to any benefit hereunder shall not be subject in any manner to attachment or other legal process for the debts of such Participant or beneficiary; and any such benefit shall not be subject to anticipation, alienation, sale, transfer, assignment or encumbrance. Nothing contained in the Plan and no action taken pursuant to its provisions shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and any Participant or any other person. The Company shall not be considered a trustee by reason of the Plan. Nothing contained in the Plan and no action taken pursuant to its provisions shall create or be construed to create an agreement of employment or as giving or conferring on any Participant the right to continue service on the Company's Board of Directors. The Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns and each participant and his/her respective heirs, personal representatives and beneficiaries. The Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the Company has caused the Plan to be executed by its officer thereunto duly authorized as of the Effective Date. MASSBANK Corp. By /s/ John H. Wood ------------------- its: President and CEO EX-13 3 b38181mcex13.txt 2000 ANNUAL REPORT TO STOCKHOLDERS 1 Exhibit 13 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 2000 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 increased $14.0 million to $938.7 million as of December 31, 2000, as a result of an increase in total investments of $28.6 million partially offset by a decrease in the bank's loan portfolio, net of allowance for loan losses, of $15.3 million. Other assets reflect an increase of $0.7million as of December 31, 2000 from year-end 1999. The Company's total investments consisting of investment securities and other short-term investments, including term federal funds sold and interest-bearing bank deposits increased $28.6 million from $578.5 million at December 31, 1999 to $607.1 million at year-end 2000. The increase is attributable to an increase in term federal funds sold, trading securities and short-term investments of $30.0 million, $13.8 million and $1.9 million, respectively. These were partially offset by a decrease in longer-term investments. One of the primary components of the Bank's investment securities portfolio, U.S. Treasury and Government agency securities decreased by $18.0 million in 2000. This decrease was partially offset by an increase of $4.9 million in mortgage-backed securities. Other investments decreased by $4.0 million in 2000. During the second half of 2000 the interest rate curve was either flat or inverted. As a result of long-term rates being either the same as or lower than short-term rates during this period, the Company's investments shifted toward short-term investments, ending the year 2000 with an increase in short-term investments compared to year-end 1999. The increase in the Company's total investments was also positively affected by an increase in the market value of its securities available for sale portfolio. The net unrealized gains on the Company's securities available for sale portfolio increased $6.3 million to $10.0 million at December 31, 2000 from $3.7 million at December 31, 1999. The increase in market value of the securities portfolio is directly related to the upward movement in bond prices. The loan portfolio at December 31, 2000, net of allowance for loan losses, amounted to $307.5 million compared to $322.8 million at December 31, 1999, a decrease of $15.3 million or 4.7%. This decrease resulted primarily from a decrease in fixed rate residential mortgage loans. The rising interest rates in the first half of 2000 significantly reduced the demand for mortgage refinancings. As a result, total loan originations decreased to $33.0 million in 2000, from $82.4 million the prior year. Loan origination totals for 1999 include a $15.0 million commercial loan to a single borrower with AAA rated credit. 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 increased a modest $5.6 million during 2000 to $823.6 million at December 31, 2000, from $818.0 at year-end 1999. Total stockholders' equity increased $6.7 million to $108.2 million at December 31, 2000, representing a book value of $34.25 per share, from $101.5 million representing a book value of $30.65 per share at December 31, 1999. This represents an increase in book value per share of $3.60 or 11.7% over the prior year. Contributing to the increase in total stockholders' equity was the Company's net income of $11.1 million in 2000, an increase in net unrealized gains, net of tax, on the Company's securities available for sale of $4.0 million and the issuance of common stock under the Company's stock option plan. These were partially offset by the payment of $3.8 million in dividends to stockholders and the cost of shares of treasury stock repurchased during the year in the amount of $5.8 million. The Company's book value per share was positively affected by the Company's purchase of 191,100 shares of its common stock, at less than current book value, during 2000 pursuant to its stock repurchase program. 13 2 ASSET QUALITY Asset quality remains strong. Nonaccrual loans, generally those loans which are 90 days or more delinquent, decreased to $0.6 million at December 31, 2000, from $0.9 million at December 31, 1999. The bank's provision for loan losses, which amounted to $140 thousand in 1999, decreased by $80 thousand to $60 thousand in 2000. Loan charge-offs, net of recoveries, amounted to $21 thousand in 2000, down from $35 thousand in 1999, which continued the trend of recent years. The Bank added a modest $39 thousand to its allowance for loan losses in 2000 due to a low level of net loan charge-offs and the high quality of its loan portfolio. The bank's allowance for loan losses at December 31, 2000 totaled approximately $2.6 million, representing 459% of nonaccrual loans and 0.84% of total loans. The bank believes that its allowance for loan losses is adequate to cover the risks inherent in the loan portfolio under current conditions. The Bank had no real estate acquired through foreclosure at year-end 2000. RESULTS OF OPERATIONS Comparison of the years 2000 and 1999 Massbank Corp. reported consolidated net income of $11.1 million or $3.37 in diluted earnings per share in 2000 compared to net income of $11.3 million or $3.25 in diluted earnings per share in 1999. This is the ninth consecutive year of record diluted earnings per share for the Company. Basic earnings per share for 2000 increased to $3.45 from $3.35 in the prior year. Return on average assets and return on average realized equity were 1.20% and 10.95%, respectively, in 2000, compared to 1.20% and 11.35%, respectively, in 1999. The Company reported operating net income of $11.3 million or $3.43 in diluted operating earnings per share ($3.51 in basic operating earnings per share) for the year ended December 31, 2000. This compares to operating net income of $11.3 million or $3.25 in diluted operating earnings per share ($3.35 in basic operating earnings per share) earned in 1999. The Company's operating net income for the year ended December 31, 2000 excludes $363,000 of net litigation expenses (pre-tax) or $211,000 (after tax) incurred in connection with Massbank's prosecution of a trademark case. The Company was successful in protecting its trademarks against infringement by another financial institution and was granted some compensation for legal fees in the final judgement. The decrease in net income in 2000 compared to 1999 primarily reflects a decrease in securities gains of $508 thousand, a decrease in net interest income of $119 thousand and a decrease in non-interest income (exclusive of securities gains) of $66 thousand. These were partially offset by a decrease in the provision for loan losses of $80 thousand, a decrease in non-interest expense of $53 thousand and the Company's lower effective income tax rate. Additionally, the earnings per share increase in 2000 was positively effected by the reduced number of average common shares outstanding as a result of the Company's purchase of 191,100 shares of its common stock during 2000 pursuant to its stock repurchase program. NET INTEREST INCOME Net interest income on a fully taxable equivalent basis totaled $25.0 million for 2000 and $25.1 million for 1999. This decrease was principally attributable to a decrease in average earning assets, partially offset by an improvement in net interest margin. Average earning assets decreased $17.0 million to $905.7 million in 2000, from $922.7 million in 1999. The Company's net interest margin for 2000 was 2.76%, an improvement from 2.72% reported in 1999. The tables on pages 22 and 23 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 $60.4 million for the year ended December 31, 2000, compared to $58.3 million for the year ended December 31, 1999. The yield on average earning assets increased to 6.67% in 2000, from 6.32% in the prior year. The average total earning assets of the Company decreased $17.0 million in 2000. As shown in the rate/volume analysis table on page 23, the improvement in yield on average earning assets resulted in an increase in interest and dividend income in 2000 of $3.1 million over 1999. Conversely, the total effect of lower average earning assets on interest and dividend income in 2000 was a $1.0 million decrease from 1999, resulting in a net increase in total interest and dividend income of $2.1 million over 1999. 14 3 INTEREST EXPENSE Total interest expense increased $2.2 million or 6.6% to $35.4 million for the year ended December 31, 2000 from $33.2 million for the year ended December 31, 1999. This increase is due to an increase in the Company's average cost of funds from 4.02% in 1999 to 4.32% in 2000, partially offset by the decrease in interest expense resulting from a decrease in the Company's average total deposits, from $826.7 million in 1999 to $818.6 million in 2000. The Company's higher cost of funds in 2000 was the result of rising market interest rates in 2000. As shown in the rate/volume analysis table on page 23, the effect on total interest expense from changes in interest- bearing deposit rates was a $2.5 million increase over 1999. Conversely, the total effect of lower average total deposits on interest expense in 2000 was a $0.3 million decrease from 1999, resulting in a net increase in total interest expense of $2.2 million over 1999. 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 2000 was $60 thousand compared to $140 thousand in 1999. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114, general loss allocations for various loan types based on loss experience factors and an unallocated allowance which is maintained based on management's assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. At December 31, 2000, the allowance for loan losses was $2.6 million representing 459% of nonaccrual loans. The Bank's nonaccrual loans totaled $565 thousand at December 31, 2000 down from $857 thousand a year earlier. Net charge-offs also declined to $21 thousand in 2000 from $35 thousand in the prior year. Management believes that the allowance for loan losses as of year-end 2000 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 decreased $0.6 million to $5.0 million for the year ended December 31, 2000, from $5.6 million for the year ended December 31, 1999. This decrease is primarily due to a decrease in securities gains in 2000 compared to 1999. Net securities gains totaled $3.5 million in 2000 compared to $4.0 million in the prior year. The securities gains are primarily attributable to the favorable performance of the Company's equity securities portfolio which has produced strong returns in recent years. Management does not expect this trend to continue. Management believes that the equity markets, which have corrected in recent months, will provide returns in the future that represent more closely the historical norms. All other non-interest income combined decreased $66 thousand to less than $1.5 million in 2000, from over $1.5 million in the prior year. This decrease is due to a decrease in deposit account service fees and miscellaneous other non-interest income of $36 thousand and $30 thousand, respectively. NON-INTEREST EXPENSE Non-interest expense totaled $12.5 million for 2000, a decrease of $53 thousand compared with $12.6 million in 1999. The Company's total non-interest expense in 2000 includes net litigation expenses of $363 thousand that the bank incurred in connection with its trademark case. Excluding these litigation expenses, non-interest expense would have decreased $416 thousand or 3.3% to $12.2 million in 2000, from $12.6 million in the prior year. The decrease of $53 thousand in non-interest expense for the year ended December 31, 2000 is primarily due to a decrease in salaries and employee benefit expenses. Salaries and employee benefits, the largest component of non-interest expense, decreased $436,000 or 5.9% to $7.0 million in 2000 from $7.4 million in 1999. Part of this improvement resulted from the fact that the bank operated with fewer people in 2000 due in part to the tight labor market in Massachusetts. Offsetting this decrease was an increase of over 100% in professional services expenses, from $481 thousand in 1999 to $959 thousand in 2000, due largely to the aforementioned litigation expenses that the bank incurred in protecting its trademarks against infringement by another financial institution. Excluding the aforementioned litigation expenses, the Company's efficiency ratio, which measures how much it costs to generate one dollar of revenue, showed modest improvement in 2000, reaching 40.5% from the previous year's milestone of 40.9%. 15 4 INCOME TAX EXPENSE The Company recorded income tax expense of $6.2 million in 2000, a decrease of $360 thousand when compared to the prior year. The decrease in income tax expense is due primarily to lower pretax earnings and a reduction in the Company's effective income tax rate. The effective income tax rate for the year ended December 31, 2000 was 35.77%, down from 36.66% in the prior year. The decrease in the Company's effective income tax rate in 2000 is due, in part, 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 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 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 22 and 23 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 23, 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. 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 23, 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. 16 5 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. 17 6 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 purposes. 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, 2000, the Bank had $112.7 million or 12.0% of total assets and $155.4 million or 16.6% 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 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, 2000, the Bank had a leverage Tier I capital to average assets ratio of 10.89%, a Tier I capital to risk-weighted assets ratio of 34.14% and a total capital to risk-weighted assets ratio of 35.86%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to average assets of 10.94%, Tier I capital to risk-weighted assets of 34.30% and total capital to risk-weighted assets of 36.02% at December 31, 2000. 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 Risk Management and Asset/Liability Committee (the"Committee"). The Committe 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. 18 7 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 the Risk Management and Asset/Liability Committee. 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 while positive as of year end 2000 has been negative in recent years 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 future. 19 8 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, 2000. As of this date, the Company's one-year cumulative GAP position was positive $33.4 million, or approximately 3.6% 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 $ 46,229 $ 12,464 $ 27,163 $ 134,978 $ 89,313 $ 310,147 Short-term investments: Federal funds sold 112,711 -- -- -- -- 112,711 Investment in money market funds 131 -- -- -- -- 131 Term federal funds sold 20,000 10,000 -- -- -- 30,000 Interest-bearing deposits in banks 3 -- 1,205 470 -- 1,678 Securities held to maturity -- 230 -- -- -- 230 Securities available for sale 57,898 49,968 51,383 190,452 92,851 442,552 Trading securities 19,794 -- -- -- -- 19,794 - --------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 256,766 $ 72,662 $ 79,751 $ 325,900 $ 182,164 $ 917,243 - --------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Deposits(1) (2) $ 206,789 $ 83,763 $ 85,222 $ 54,867 $ 365,809 $ 796,450 - --------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 206,789 $ 83,763 $ 85,222 $ 54,867 $ 365,809 $ 796,450 - --------------------------------------------------------------------------------------------------------------------------- GAP for period $ 49,977 $ (11,101) $ (5,471) $ 271,033 $(183,645) $ 120,793 Cumulative GAP - December 31, 2000 $ 49,977 $ 38,876 $ 33,405 $ 304,438 $ 120,793 Cumulative GAP as a percent of total assets 5.3% 4.1% 3.6% 32.4% 12.9% - --------------------------------------------------------------------------------------------------------------------------- Cumulative GAP - December 31, 1999 $ 13,011 $ (40,032) $ (27,489) $ 243,343 $ 108,890 ===========================================================================================================================
(1) Excludes non-interest bearing demand accounts of $28,562. (2) Includes escrow deposits of borrowers of $1,387. 20 9 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, 2000.
- ----------------------------------------------------------------------------------------------------------------------------------- EXPECTED MATURITY DATE AT DECEMBER 31, 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Fair Value (In thousands) 2001 2002 2003 2004 2005 Thereafter Total at 12/31/00 - ----------------------------------------------------------------------------------------------------------------------------------- Interest sensitive assets: Fixed rate securities $138,466 $ 78,280 $49,892 $33,520 $28,760 $ 92,851 $421,769 $421,769 Average interest rate(1) 6.24% 6.41% 6.42% 6.43% 6.42% 6.45% 6.37% Variable rate securities(2) 39,543 -- -- -- -- 1,264 40,807 40,807 Average interest rate(1) 4.05% -- -- -- -- 6.01% 4.11% Fixed rate loans 40,236 32,847 29,541 24,759 20,503 85,751 233,637 232,786 Average interest rate 6.90% 6.87% 6.89% 6.89% 6.86% 6.86% 6.88% Variable rate loans 23,567 7,470 6,083 4,979 4,238 30,173 76,510 77,045 Average interest rate 7.18% 7.64% 7.69% 7.72% 7.77% 8.66% 7.92% Other fixed rate assets(4) 31,093 582 -- -- -- -- 31,675 31,675 Average interest rate 6.54% 6.02% -- -- -- -- 6.53% Other variable rate assets(3) 112,845 -- -- -- -- -- 112,845 112,845 Average interest rate 6.44% -- -- -- -- -- 6.44% - ----------------------------------------------------------------------------------------------------------------------------------- Total interest sensitive assets $385,750 $119,179 $85,516 $63,258 $53,501 $210,039 $917,243 $916,927 =================================================================================================================================== Interest sensitive liabilities: Savings and money market deposit accounts $ 2,970 $ 2,693 $ 2,452 $ 2,242 $ 2,058 $322,533 $334,948 $334,948 Average interest rate 3.16% 3.18% 3.19% 3.21% 3.23% 3.43% 3.42% Fixed rate certificates of deposit 257,072 45,134 5,230 1,209 106 494 309,245 309,935 Average interest rate 5.78% 5.88% 5.81% 5.25% 5.44% 5.34% 5.79% Variable rate certificates of deposit 33,925 38,476 18,952 8,383 -- -- 99,736 99,736 Average interest rate 7.40% 7.41% 7.66% 6.80% -- -- 7.40% NOW accounts -- -- -- -- -- 51,390 51,390 51,390 Average interest rate -- -- -- -- -- 0.96% 0.96% Escrow deposits of borrowers 1,387 -- -- -- -- -- 1,387 1,387 Average interest rate 0.25% -- -- -- -- -- 0.25% Deposit acquisition premium, net of amortization (230) (26) -- -- -- -- (256) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total interest sensitive liabilities $295,124 $ 86,277 $26,634 $11,834 $ 2,164 $374,417 $796,450 $797,396 ===================================================================================================================================
(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. (4) Consists of term Federal funds sold 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 $19.8 million at December 31, 2000. The net unrealized gains on these securities totaled $5.4 million at year-end 2000. 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. 21 10 AVERAGE BALANCE SHEETS
================================================================================================================================= (In thousands) YEARS ENDED DECEMBER 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- 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 $135,728 $ 8,595 6.33% $128,124 $ 6,294 4.91% $137,123 $ 7,316 5.34% Short-term investments(2) 7,646 441 5.77 22,600 1,105 4.89 26,792 1,440 5.37 Investment securities 166,264 9,332 5.61 164,117 8,931 5.44 145,863 8,473 5.81 Mortgage-backed securities 273,464 19,015 6.95 275,361 18,735 6.80 299,368 20,496 6.85 Trading securities 5,020 310 6.18 10,760 495 4.60 16,460 819 4.98 Mortgage loans(1) 280,732 19,670 7.01 292,172 20,516 7.02 264,898 19,413 7.33 Other loans(1) 36,838 3,035 8.24 29,516 2,256 7.64 22,375 2,021 9.03 - -------------------------------------------------- ------------------- ------------------- Total earning assets 905,692 60,398 6.67% 922,650 58,332 6.32% 912,879 59,978 6.56% ================================================================================================================================= Allowance for loan losses (2,571) (2,498) (2,375) - --------------------------------------------------------------------------------------------------------------------------------- Total earning assets less allowance for loan losses 903,121 920,152 910,504 Other assets 20,450 19,923 19,512 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $923,571 $940,075 $ 930,016 ================================================================================================================================= LIABILITIES: Deposits: Demand and NOW $ 75,956 488 0.64% $ 74,933 504 0.67% $ 70,159 554 0.79% Savings 343,079 11,711 3.41 353,851 12,060 3.41 349,637 11,959 3.42 Time certificates of deposit 399,554 23,198 5.81 397,935 20,640 5.19 391,816 21,807 5.57 - -------------------------------------------------- ------------------- ------------------- Total deposits 818,589 35,397 4.32% 826,719 33,204 4.02% 811,612 34,320 4.23% - --------------------------------------------------------------------------------------------------------------------------------- Other liabilities 3,310 7,209 9,776 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 821,899 833,928 821,388 ================================================================================================================================= STOCKHOLDERS' EQUITY: 101,672 106,147 108,628 Total liabilities and stockholders' equity $923,571 $940,075 $930,016 ================================================================================================================================= Net interest income (tax- equivalent basis) 25,001 25,128 25,658 Less adjustment of tax- exempt interest income 118 126 144 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income $24,883 $25,002 $25,514 - --------------------------------------------------------------------------------------------------------------------------------- Interest rate spread 2.35% 2.30% 2.33% - --------------------------------------------------------------------------------------------------------------------------------- Net interest margin(3) 2.76% 2.72% 2.81% =================================================================================================================================
(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. 22 11 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.
- ---------------------------------------------------------------------------------------------------------- 2000 COMPARED TO 1999 1999 COMPARED TO 1998 (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 $ 392 $ 1,909 $ 2,301 $ (463) $ (559) $(1,022) Short-term investments (834) 170 (664) (212) (123) (335) Investment securities 116 293 409 1,000 (524) 476 Trading securities (319) 134 (185) (266) (58) (324) Mortgage-backed securities (130) 410 280 (1,634) (127) (1,761) Mortgage loans (801) (45) (846) 1,939 (836) 1,103 Other loans 593 186 779 578 (343) 235 - ---------------------------------------------------------------------------------------------------------- Total interest and dividend income (983) 3,057 2,074 942 (2,570) (1,628) - ---------------------------------------------------------------------------------------------------------- Interest expense: Deposits: Demand and NOW 7 (23) (16) 36 (86) (50) Savings (368) 19 (349) 144 (43) 101 Time certificates of deposit 84 2,474 2,558 336 (1,503) (1,167) - ---------------------------------------------------------------------------------------------------------- Total interest expense (277) 2,470 2,193 516 (1,632) (1,116) - ---------------------------------------------------------------------------------------------------------- Net interest income $ (706) $ 587 $ (119) $ 426 $ (938) $ (512) ==========================================================================================================
23 12 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," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These Statements establish comprehensive accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair market value. Under these Statements, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The Company adopted these Statements on January 1, 2001. The adoption of these Statements did not have a material effect on the Company's consolidated financial statements. 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Boston, Massachusetts /s/ KPMG LLP January 9, 2001 25 14 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 2000 1999 - ----------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $ 9,179 $ 10,476 Short-term investments (Note 2) 112,842 110,928 - ----------------------------------------------------------------------------------------------- Total cash and cash equivalents 122,021 121,404 - ----------------------------------------------------------------------------------------------- Term federal funds sold 30,000 -- Interest-bearing deposits in banks 1,678 3,841 Securities held to maturity, at amortized cost (market value of $230 in 2000 and in 1999) (Note 3) 230 230 Securities available for sale, at market value (amortized cost of $432,567 in 2000 and $453,844 in 1999) (Note 3) 442,552 457,502 Trading securities, at market value (Note 4) 19,794 6,042 Loans (Notes 5, 7 and 11): Mortgage loans 272,951 288,580 Other loans 37,196 36,785 - ----------------------------------------------------------------------------------------------- Total loans 310,147 325,365 Allowance for loan losses (Note 6) (2,594) (2,555) - ----------------------------------------------------------------------------------------------- Net loans 307,553 322,810 - ----------------------------------------------------------------------------------------------- Premises and equipment (Note 9) 3,932 4,127 Real estate acquired through foreclosure (Note 7) -- 62 Accrued interest receivable 5,755 5,045 Goodwill 1,189 1,288 Current income tax asset, net 284 292 Other assets 3,714 2,073 - ----------------------------------------------------------------------------------------------- Total assets $ 938,702 $ 924,716 =============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits (Notes 10 and 11): Demand and NOW $ 79,952 $ 72,938 Savings 334,948 353,090 Time certificates of deposit 408,981 392,516 Deposit acquisition premium, net of amortization (256) (487) - ----------------------------------------------------------------------------------------------- Total deposits 823,625 818,057 Escrow deposits of borrowers 1,387 1,477 Employee stock ownership plan liability (Note 15) 312 468 Deferred income taxes (Note 12) 2,418 199 Other liabilities 2,717 3,036 - ----------------------------------------------------------------------------------------------- Total liabilities 830,459 823,237 - ----------------------------------------------------------------------------------------------- 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, 7,447,982 and 7,407,432 shares issued, respectively 7,448 7,407 Additional paid-in capital 61,674 60,591 Retained earnings 93,165 85,873 - ----------------------------------------------------------------------------------------------- 162,287 153,871 Treasury stock at cost, 4,300,489 and 4,096,189 shares, respectively (59,704) (53,890) Accumulated other comprehensive income (Note 1) 5,972 1,966 Common stock acquired by ESOP (Note 15) (312) (468) - ----------------------------------------------------------------------------------------------- Total stockholders' equity 108,243 101,479 - ----------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 938,702 $ 924,716 ===============================================================================================
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, 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Interest and dividend income: Mortgage loans $ 19,670 $ 20,516 $ 19,413 Other loans 3,035 2,256 2,021 Securities available for sale: Mortgage-backed securities 19,015 18,735 20,496 Other securities 9,203 8,790 8,310 Trading securities 310 495 819 Federal funds sold 8,595 6,294 7,316 Other investments 452 1,120 1,459 - ------------------------------------------------------------------------------------------------ Total interest and dividend income 60,280 58,206 59,834 - ------------------------------------------------------------------------------------------------ Interest expense: Deposits: NOW 488 504 554 Savings 11,711 12,060 11,959 Time certificates of deposit 23,198 20,640 21,807 - ------------------------------------------------------------------------------------------------ Total interest expense 35,397 33,204 34,320 - ------------------------------------------------------------------------------------------------ Net interest income 24,883 25,002 25,514 Provision for loan losses (Note 6) 60 140 193 - ------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 24,823 24,862 25,321 - ------------------------------------------------------------------------------------------------ Non-interest income: Deposit account service fees 688 724 811 Gains on securities, net 3,525 4,033 2,893 Other 775 805 886 - ------------------------------------------------------------------------------------------------ Total non-interest income 4,988 5,562 4,590 - ------------------------------------------------------------------------------------------------ Non-interest expense: Salaries and employee benefits 7,000 7,436 7,426 Occupancy and equipment 2,079 2,146 2,059 Data processing 473 486 510 Professional services 959 481 461 Advertising and marketing 198 198 171 Amortization of intangibles 330 327 302 Deposit insurance 185 114 116 Contributions 28 21 14 Other 1,261 1,357 1,456 - ------------------------------------------------------------------------------------------------ Total non-interest expense 12,513 12,566 12,515 - ------------------------------------------------------------------------------------------------ Income before income taxes 17,298 17,858 17,396 Income tax expense (Note 12) 6,187 6,547 6,482 - ------------------------------------------------------------------------------------------------ Net income $ 11,111 $ 11,311 $ 10,914 ================================================================================================ Weighted average common shares outstanding: Basic 3,220,390 3,374,623 3,528,817 Diluted 3,293,968 3,478,944 3,676,642 Earnings per share (in dollars): Basic $ 3.45 $ 3.35 $ 3.09 Diluted 3.37 3.25 2.97 ================================================================================================
See accompanying notes to consolidated financial statements. 27 16 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 11,111 $ 11,311 $ 10,914 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 866 993 928 Loan interest capitalized (46) (58) (88) Amortization of ESOP shares committed to be released 93 163 243 (Increase) decrease in accrued interest receivable (710) 13 337 (Decrease) increase in other liabilities (319) 478 (734) Decrease in current income taxes payable -- (723) (517) Decrease (increase) in current income tax asset, net 8 (292) -- Accretion of discounts on securities, net of amortization of premiums (847) (961) (1,152) Net trading securities activity (13,228) 25,174 (8,671) Gains on securities available for sale (3,049) (3,954) (2,798) Gains on trading securities (476) (79) (95) (Decrease) increase in deferred mortgage loan origination fees, net of amortization (167) (3) 231 Deferred income tax (benefit) expense (103) (161) 146 (Increase) decrease in other assets (1,213) (327) 85 Loans originated for sale -- -- (129) Loans sold -- -- 129 Provision for loan losses 60 140 193 Gains on sales of real estate acquired through foreclosure (8) -- (5) Gains on sales of premises and equipment -- (2) -- (Decrease) increase in escrow deposits of borrowers (90) 39 (64) - ---------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (8,118) 31,751 (1,047) - ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of term federal funds (50,000) -- (35,000) Proceeds from maturities of term federal funds 20,000 25,000 30,000 Net decrease (increase) in interest-bearing bank deposits 2,163 (1,808) 50 Proceeds from sales of investment securities available for sale 55,063 72,582 26,580 Proceeds from maturities of investment securities held to maturity and available for sale 56,000 65,800 43,650 Purchases of investment securities available for sale (89,621) (169,020) (59,291) Purchases of mortgage-backed securities (43,750) (88,397) (10,043) Principal repayments of mortgage-backed securities 47,002 68,430 70,203 Principal repayments of securities held to maturity -- 44 18 Principal repayments of securities available for sale 4 124 4 Loans originated (32,989) (82,415) (105,103) Loan principal payments received 48,346 62,254 71,687 Loans purchased -- (345) -- Purchases of premises and equipment (288) (376) (508) Proceeds from sale of premises and equipment -- 2 -- Proceeds from sale of real estate acquired through foreclosure 70 86 316 Net advances on real estate acquired through foreclosure -- (4) (20) - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 12,000 (48,043) 32,543 - ----------------------------------------------------------------------------------------------------------
(Continued) 28 17 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- -------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in deposits 5,337 (6,202) 13,978 Payments to acquire treasury stock (5,814) (7,618) (4,703) Purchase of company stock for deferred compensation plan 366 -- -- Issuance of common stock under stock option plan 415 351 741 Tax benefit resulting from stock options exercised 250 97 329 Cash dividends paid on common stock (3,829) (3,759) (3,605) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 10 13 15 - -------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (3,265) (17,118) 6,755 - -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 617 (33,410) 38,251 Cash and cash equivalents at beginning of year 121,404 154,814 116,563 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 122,021 $ 121,404 $ 154,814 - -------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosures: Cash transactions: Cash paid during the year for interest $ 35,382 $ 33,204 $ 34,319 Cash paid during the year for taxes, net of refunds 6,022 7,617 6,185 Purchases of securities executed but not settled at beginning of year which settled during the year 117 129 32 Sales of securities executed but not settled at beginning of year which settled during the year 202 583 -- Non-cash transactions: SFAS 115: (Decrease) increase in stockholders' equity 4,006 (9,725) 2,620 (Decrease) increase in deferred tax liabilities 2,322 (6,401) 1,688 Securities reclassified from available for sale to trading -- -- 1,111 Transfers from loans to real estate acquired through foreclosure -- 58 377 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 60 117 129 Sales of securities executed but not settled as of year-end 573 202 583 - --------------------------------------------------------------------------------------------------------
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, 2000, 1999 AND 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Common Additional other stock Common paid-in Retained Treasury comprehensive acquired stock capital earnings stock income by ESOP Total - ------------------------------------------------------------------------------------------------------------------------------------ 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 Net Income -- -- 11,111 -- -- -- 11,111 Other comprehensive income, net of tax: Unrealized (gains) on securities, net of reclassification adjustment (Note 1) -- -- -- -- 4,006 -- 4,006 Comprehensive income -- -- -- -- -- -- 15,117 Cash dividends declared ($1.185 per share) -- -- (3,829) -- -- -- (3,829) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 10 -- -- -- 10 Net decrease in liability to ESOP -- -- -- -- -- 156 156 Amortization of ESOP shares committed to be released -- 93 -- -- -- -- 93 Purchase of treasury stock -- -- -- (5,448) -- -- (5,448) Purchase of company stock for deferred compensation plan -- 366 -- (366) -- -- -- Exercise of stock options and related tax benefits 41 624 -- -- -- -- 665 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 $ 7,448 $ 61,674 $ 93,165 $ (59,704) $ 5,972 $ (312) $ 108,243 ====================================================================================================================================
See accompanying notes to consolidated financial statements. 30 19 MASSBANK CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 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 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 1/2nancial 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, 2000, stockholders' equity included approximately $6.0 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. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These Statements establish comprehensive accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair market value. Under these Statements, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determing the ineffective aspect of the hedge. The Company adopted these Statements on January 1, 2001. The adoption of these Statements did not have a material effect on the Company's consolidated financial statements. 31 20 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 the estimated loan loss exposure inherent in the portfolio. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114, general loss allocations for various loan types based on loss experience factors and an unallocated allowance which is maintained based on management's assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. 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. 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) GOODWILL AND OTHER INTANGIBLES 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. 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. Goodwill and other intangible assets are reviewed for possible impairment when it is determined that events or changed circumstances may affect the underlying basis of the asset. 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. EARNINGS PER COMMON SHARE Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year reduced by the weighted average number of unallocated shares held by the Employee Stock Ownership Plan ("ESOP"). Diluted EPS reflects the effect on the weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method. The treasury shares acquired in connection with the Company's directors deferred compensation plan are considered outstanding in the computation of earnings per share and book value per share. A reconciliation of the weighted average shares outstanding for the years ended December 31, 2000, 1999 and 1998 follows: - -------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998 - -------------------------------------------------------------------- Basic shares 3,220 3,375 3,529 Dilutive impact of stock options 74 104 148 - -------------------------------------------------------------------- Diluted shares 3,294 3,479 3,677 - -------------------------------------------------------------------- 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, 2000 and the year ended December 31, 1999 is as follows:
- --------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 - --------------------------------------------------------------------------------------------------------------- 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 $ 9,377 $ (3,613) $ 5,764 $(12,171) $ 4,716 $ (7,455) Less: reclassification adjustment for gains realized in net income 3,049 (1,291) 1,758 (3,954) 1,684 (2,270) - --------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) 6,328 (2,322) 4,006 (16,125) 6,400 (9,725) - --------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) $ 6,328 $ (2,322) $ 4,006 $(16,125) $ 6,400 $ (9,725) - ---------------------------------------------------------------------------------------------------------------
33 22 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The amount of this reserve requirement, included in "Cash and Due from Banks," was $8.7 million and $7.4 million at December 31, 2000 and 1999, respectively. 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. 2. SHORT-TERM INVESTMENTS Short-term investments consist of the following: - ---------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2000 1999 - ---------------------------------------------------------------------- Federal funds sold (overnight) $112,711 $ 86,211 Money market funds 131 24,717 - ---------------------------------------------------------------------- Total short-term investments $112,842 $ 110,928 ====================================================================== 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, 2000 Cost Gains Losses Value - ------------------------------------------------------------------------------------------- Securities held to maturity: Other bonds and obligations $ 230 $ -- $ -- $ 230 - ------------------------------------------------------------------------------------------- Total securities held to maturity 230 -- -- 230 - ------------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations 125,630 827 (1) 126,456 U.S. Government agency obligations 9,147 -- (14) 9,133 - ------------------------------------------------------------------------------------------- Total 134,777 827 (15) 135,589 - ------------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 30,847 543 (3) 31,387 Federal Home Loan Mortgage Corporation 247,925 3,322 (125) 251,122 Federal National Mortgage Association 2,230 43 (9) 2,264 Collateralized mortgage obligations 2,465 12 (37) 2,440 - ------------------------------------------------------------------------------------------- Total mortgage-backed securities 283,467 3,920 (174) 287,213 - ------------------------------------------------------------------------------------------- Total debt securities 418,244 4,747 (189) 422,802 - ------------------------------------------------------------------------------------------- Equity securities 14,323 7,132 (1,705) 19,750 - ------------------------------------------------------------------------------------------- Total securities available for sale 432,567 $ 11,879 $ (1,894) $442,552 - ------------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 9,985 - ------------------------------------------------------------------------------------------- Total securities available for sale, net 442,552 - ------------------------------------------------------------------------------------------- Total investment securities, net $442,782 ===========================================================================================
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, 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 ===========================================================================================
During the years ended December 31, 2000, 1999 and 1998, the Company realized gains and losses on sales of securities available for sale as follows:
- ------------------------------------------------------------------------------------------------- (In thousands) At December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------- Realized Realized Realized Gains Losses Gains Losses Gains Losses - ------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 66 $ (328) $ 2 $ (576) $ 180 $ -- Marketable equity securities 4,130 (819) 5,099 (571) 3,577 (959) - ------------------------------------------------------------------------------------------------- Total realized gains (losses) $ 4,196 $(1,147) $ 5,101 $(1,147) $ 3,757 $ (959) =================================================================================================
Proceeds from sales of debt securities available for sale during 2000, 1999 and 1998 were $38.7 million, $48.4 million and $13.1 million, respectively. Proceeds from sales of equity securities available for sale during 2000, 1999 and 1998, were $21.7 million, $24.1 million and $13.7 million, respectively. There were no sales of investment securities held-to-maturity during 2000, 1999 and 1998. 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, 2000 1999 - ------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------ Total debt securities held to maturity 230 230 230 230 ================================================================================================ Investment securities available for sale: U.S. Treasury obligations: Maturing within 1 year 81,841 82,036 52,845 52,825 Maturing after 1 year but within 5 years 43,789 44,420 82,707 81,919 Maturing after 5 years but within 10 years -- -- 2,966 2,871 - ------------------------------------------------------------------------------------------------ Total 125,630 126,456 138,518 137,615 - ------------------------------------------------------------------------------------------------ U.S. Government agency obligations: Maturing within 1 year 9,000 8,989 6,992 6,971 Maturing after 1 year but within 5 years -- -- 9,000 8,899 Maturing after 15 years 147 144 151 145 - ------------------------------------------------------------------------------------------------ Total 9,147 9,133 16,143 16,015 - ------------------------------------------------------------------------------------------------ Mortgage-backed securities: Maturing within 1 year 287 283 523 518 Maturing after 1 year but within 5 years 2,166 2,209 3,869 3,922 Maturing after 5 years but within 10 years 66,188 67,292 56,571 56,227 Maturing after 10 years but within 15 years 211,830 214,467 221,202 217,629 Maturing after 15 years, 2,996 2,962 4,103 4,039 - ------------------------------------------------------------------------------------------------ Total 283,467 287,213 286,268 282,335 - ------------------------------------------------------------------------------------------------ Total debt securities available for sale 418,244 422,802 440,929 435,965 ================================================================================================ Net unrealized gains on debt securities available for sale 4,558 -- (4,964) -- - ------------------------------------------------------------------------------------------------ Total debt securities available for sale, net carrying value $ 422,802 $ 422,802 $ 435,965 $ 435,965 ================================================================================================
Maturities of mortgage-backed securities are based on contractual maturities with scheduled amortization. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. 36 25 4. TRADING SECURITIES The amortized cost and market values of trading securities are as follows: - -------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2000 1999 - -------------------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value - -------------------------------------------------------------------- U.S. Treasury obligations $19,784 $19,791 $ 4,960 $ 4,956 Investments in mutual funds 2 3 1,112 1,086 - -------------------------------------------------------------------- Total trading securities $19,786 $19,794 $ 6,072 $ 6,042 ==================================================================== During the years ended December 31, 2000, 1999 and 1998, the Company realized gains and losses on sales of trading securities as follows: - -------------------------------------------------------------------------------- (In thousands) Years ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Realized Realized Realized Gains Losses Gains Losses Gains Losses - -------------------------------------------------------------------------------- U.S. Treasury obligations $ -- $ (1) $ 4 $(11) $ 48 $ -- Investments in mutual funds -- (33) -- -- 11 (35) Marketable equity securities 500 (29) 132 (25) 55 (20) - -------------------------------------------------------------------------------- Total realized gains (losses) $500 $(63) $136 $(36) $114 $(55) ================================================================================ Proceeds from sales of trading securities during 2000, 1999 and 1998 were $10.8 million, $13.8 million and $50.2 million, respectively. Unrealized gains or (losses) included in income in 2000, 1999 and 1998 were $39 thousand, $(21) thousand and $36 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, 2000 1999 - ------------------------------------------------------------------ Mortgage loans: Residential: Conventional: Fixed rate $ 230,323 $ 247,512 Variable rate 39,536 38,917 FHA and VA 471 740 Commercial 3,117 2,471 Construction 683 232 - ------------------------------------------------------------------ Total mortgage loans 274,130 289,872 Premium on loans 105 159 Deferred mortgage loan origination fees (1,284) (1,451) - ------------------------------------------------------------------ Mortgage loans, net 272,951 288,580 - ------------------------------------------------------------------ Other loans: Consumer: Installment 1,829 1,418 Guaranteed education 6,266 7,037 Other secured 1,169 1,318 Home equity lines of credit 12,624 11,737 Unsecured 224 225 - ------------------------------------------------------------------ Total consumer loans 22,112 21,735 Commercial 15,084 15,050 - ------------------------------------------------------------------ Total other loans 37,196 36,785 - ------------------------------------------------------------------ Total loans $ 310,147 $ 325,365 ================================================================== 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, 2000 follows: - ------------------------------------------------------------------ (IN THOUSANDS) - ------------------------------------------------------------------ Balance at December 31, 1999 $613 Additions 397 Repayments (322) - ------------------------------------------------------------------ Balance at December 31, 2000 $688 ================================================================== 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, 2000 1999 1998 - -------------------------------------------------------------------------- Balance at beginning of year $ 2,555 $ 2,450 $ 2,334 Provision for loan losses 60 140 193 Recoveries of loans previously charged-off 3 41 26 - -------------------------------------------------------------------------- Total 2,618 2,631 2,553 - -------------------------------------------------------------------------- Charge-offs: Mortgage loans -- (62) (81) Other loans (24) (14) (22) - -------------------------------------------------------------------------- Balance at end of year $ 2,594 $ 2,555 $ 2,450 ========================================================================== The following table shows the allocation of the allowance for loan losses by category of loans at December 31, 2000, 1999 and 1998. - ----------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2000 1999 1998 - ----------------------------------------------------------------------------- Percentage Percentage Percentage of Loans of Loans of Loans Amount to Total Amount to Total Amount to Total - ----------------------------------------------------------------------------- Mortgage loans: Residential $1,317 87% $1,535 88% $1,786 92% Commercial 9 1 7 1 2 1 Consumer loans 162 7 215 7 153 7 Commercial loans 324 5 301 4 25 -- Unallocated 782 -- 497 -- 484 -- - ----------------------------------------------------------------------------- Total $2,594 100% $2,555 100% $2,450 100% ============================================================================= An integral component of the Company's risk management process is to ensure the proper allocation of the allowance for loan losses based upon an analysis of risk characteristics, demonstrated losses and other factors. The unallocated component of the allowance for loan losses represents management's view that given the complexities of the loan portfolio, there are probable losses that have been incurred within the portfolio but have not yet been specifically identified. The unallocated portion of the allowance for loan losses is based on management's assessment of many factors including the risk characteristics of the loan portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. The unallocated portion of the allowance for loan losses may change periodically after evaluating factors impacting assumptions utilized in the calculation of the allocated portion of the allowance for loan losses. 7. NON-PERFORMING ASSETS The following schedule summarizes non-performing assets at the dates shown:
- ----------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------- Total nonaccrual loans $ 565 $ 795 $1,004 Total real estate acquired through foreclosure -- 62 86 - ----------------------------------------------------------------------------------------------- Total non-performing assets $ 565 $ 857 $1,090 =============================================================================================== Percent of non-performing loans to total loans 0.18% 0.24% 0.33% Percent of non-performing assets to total assets 0.06% 0.09% 0.12% The reduction in interest income associated with nonaccrual loans is as follows: - ----------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------- Interest income that would have been recorded under original terms $ 48 $ 64 $ 84 Interest income actually recorded 36 51 61 - ----------------------------------------------------------------------------------------------- Reduction in interest income $ 12 $ 13 $ 23 ===============================================================================================
During 2000, 1999 and 1998 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, 2000 1999 - ---------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to originate residential mortgage loans $ 1,920 $ 2,829 Unadvanced portions of construction loans 421 65 Unused credit lines, including unused portions of equity lines of credit 30,918 31,693 ==============================================================================================
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, 2000 1999 (IN YEARS) - -------------------------------------------------------------------------------- Premises: Land $ 1,227 $ 1,227 -- Buildings 3,686 3,637 15-45 Building and leasehold improvements 2,078 2,030 1-30 Equipment 4,080 3,889 1-30 - ----------------------------------------------------------------------------- 11,071 10,783 Less: accumulated depreciation and amortization 7,139 6,656 - ----------------------------------------------------------------------------- Total premises and equipment, net $ 3,932 $ 4,127 ============================================================================= 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, 2000, 1999 and 1998 amounted to $533 thousand, $521 thousand and $518 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, 2000, are as follows: - ------------------------------------------------------------------ (IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS - ------------------------------------------------------------------ 2001 $269 2002 168 2003 109 2004 39 2005 32 2006 27 - ------------------------------------------------------------------ Total $644 ================================================================== 40 29 10. DEPOSITS Deposits are summarized as follows:
- ------------------------------------------------------------------------------------------------ (IN THOUSANDS) AT DECEMBER 31, 2000 1999 - ------------------------------------------------------------------------------------------------ Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------ Demand and NOW: NOW accounts $ 51,390 0.96% $ 48,422 0.98% Demand accounts 28,562 -- 24,516 -- - ------------------------------------------------------------------------------------------------ Total demand and NOW 79,952 0.62 72,938 0.65 - ------------------------------------------------------------------------------------------------ Savings: Regular savings and special notice accounts 317,926 3.44 333,535 3.45 Money market accounts 17,022 2.99 19,555 2.97 - ------------------------------------------------------------------------------------------------ Total savings 334,948 3.42 353,090 3.42 - ------------------------------------------------------------------------------------------------ Time certificates: Fixed rate certificates 309,245 5.79 302,423 4.98 Variable rate certificates 99,736 7.40 90,093 6.56 - ------------------------------------------------------------------------------------------------ Total time certificates 408,981 6.18 392,516 5.35 - ------------------------------------------------------------------------------------------------ Deposit acquisition premium, net of amortization (256) -- (487) -- - ------------------------------------------------------------------------------------------------ Total deposits $ 823,625 4.52% $ 818,057 4.10% ================================================================================================
The maturity distribution and related rate structure of the Bank's time certificates at December 31, 2000 follows: - ------------------------------------------------ (IN THOUSANDS) AT DECEMBER 31, 2000 - ------------------------------------------------ Average Amount Interest Rate - ------------------------------------------------ Due within 3 months $ 99,489 5.77% Due within 3-6 months 89,450 5.91 Due within 6-12 months 102,058 6.22 Due within 1-2 years 83,610 6.58 Due within 2-3 years 24,182 7.26 Due within 3-5 years 9,698 6.59 Thereafter 494 5.34 - ------------------------------------------------ Total $408,981 6.18% ================================================ At December 31, 2000 and 1999, the Bank had individual time certificates of deposit of $100 thousand or more maturing as follows: - ---------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2000 1999 - ---------------------------------------------------- Due within 3 months $19,421 $19,152 Due within 3-6 months 15,616 12,615 Due within 6-12 months 24,705 16,393 Due within 1-2 years 17,026 15,309 Due within 2-3 years 8,038 9,760 Due within 3-5 years 3,202 223 Thereafter 284 270 - ---------------------------------------------------- Total $88,292 $73,722 ==================================================== 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, 2000 and 1999 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, 2000 1999 - ------------------------------------------------------------------------------- Carrying Calculated Carrying Calculated Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------- Securities held to maturity $ 230 $ 230 $ 230 $ 230 Securities available for sale 442,552 442,552 457,502 457,502 Trading securities 19,794 19,794 6,042 6,042 - ------------------------------------------------------------------------------- Total securities $462,576 $462,576 $463,774 $463,774 =============================================================================== 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, 2000 1999 - --------------------------------------------------------------------------- Carrying Calculated Carrying Calculated Amount Fair Value Amount Fair Value - --------------------------------------------------------------------------- Real estate: Residential: Variable $ 39,668 $ 40,055 $ 38,844 $ 38,259 Fixed 230,178 229,365 247,273 243,483 Commercial: Variable 2,889 2,922 2,463 2,454 Fixed 216 208 -- -- Consumer 22,112 22,208 21,735 21,899 Commercial 15,084 15,073 15,050 15,050 - --------------------------------------------------------------------------- Total loans 310,147 309,831 325,365 321,145 Allowance for loan losses (2,594) -- (2,555) -- - --------------------------------------------------------------------------- Net loans $ 307,553 $ 309,831 $ 322,810 $ 321,145 =========================================================================== 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, 2000 and 1999. 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, 2000 1999 - -------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------------------------- Demand accounts $ 28,562 $ 28,562 $ 24,516 $ 24,516 NOW accounts 51,390 51,390 48,422 48,422 Regular savings and special notice accounts 317,926 317,926 333,535 333,535 Money market accounts 17,022 17,022 19,555 19,555 Time certificates 408,981 409,671 392,516 392,158 Deposit acquisition premium, net of amortization (256) -- (487) -- - -------------------------------------------------------------------------------------------------- Total deposits 823,625 824,571 818,057 818,186 - -------------------------------------------------------------------------------------------------- Escrow deposits of borrowers 1,387 1,387 1,477 1,477 - -------------------------------------------------------------------------------------------------- Total $ 825,012 $ 825,958 $ 819,534 $ 819,663 ==================================================================================================
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, 2000 and 1999 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, 2000 1999 1998 - ------------------------------------------------------------------------ Current income tax expense: Federal $ 5,934 $ 6,134 $ 5,565 State 356 574 771 - ------------------------------------------------------------------------ Total current tax expense 6,290 6,708 6,336 ======================================================================== Deferred income tax (benefit) expense: Federal (79) (121) 110 State (24) (40) 40 Change in valuation reserve -- -- (4) - ------------------------------------------------------------------------ Total deferred tax (benefit) expense (103) (161) 146 - ------------------------------------------------------------------------ Total income tax expense $ 6,187 $ 6,547 $ 6,482 ======================================================================== 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, 2000 1999 1998 - ------------------------------------------------------------------------------------------ Computed "expected" income tax expense at statutory rate $ 6,054 $ 6,250 $ 6,089 Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal benefit 216 347 527 Dividends received deduction (75) (79) (87) Other (8) 29 (43) Change in valuation reserve -- -- (4) - ------------------------------------------------------------------------------------------ Income tax expense $ 6,187 $ 6,547 $ 6,482 - ------------------------------------------------------------------------------------------ Effective income tax rate 35.77% 36.66% 37.26% ==========================================================================================
44 33 12. INCOME TAXES (CONTINUED) At December 31, 2000 and 1999, the Bank had gross deferred tax assets and gross deferred tax liabilities as follows: - ---------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 - ---------------------------------------------------------- Deferred tax assets: Loan losses $ 740 $ 609 Deferred loan fees, net 9 8 Deferred compensation and pension cost 512 502 Depreciation 2 14 Purchase accounting 411 415 Other 31 41 - ---------------------------------------------------------- Gross deferred tax asset 1,705 1,589 - ---------------------------------------------------------- Deferred tax liabilities: Valuation of securities 4,013 1,691 Other unrealized securities gains 109 93 Other 1 4 - ---------------------------------------------------------- Gross deferred tax liability 4,123 1,788 - ---------------------------------------------------------- Net deferred tax liability $2,418 $ 199 ========================================================== 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, 2000. The primary sources of recovery of the gross federal deferred tax asset are federal income taxes paid in 2000, 1999 and 1998 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, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) Basic Diluted Basic Diluted Basic Diluted - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 11,111 $ 11,111 $ 11,311 $ 11,311 $ 10,914 $ 10,914 Average shares outstanding 3,245,299 3,245,299 3,408,280 3,408,280 3,571,298 3,571,298 Dilutive stock options -- 73,578 -- 104,321 -- 147,825 Unallocated Employee Stock Ownership Plan ("ESOP") shares not committed to be released (24,909) (24,909) (33,657) (33,657) (42,481) (42,481) - ---------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 3,220,390 3,293,968 3,374,623 3,478,944 3,528,817 3,676,642 Earnings per share (in dollars) $ 3.45 $ 3.37 $ 3.35 $ 3.25 $ 3.09 $ 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, 2000. 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, 2000 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1) - ------------------------------------------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------ TIER I CAPITAL (TO AVERAGE ASSETS): Massbank Corp. (consolidated) $100,826 10.94% $ 27,639 3.00% N/A -- Massbank (the "Bank") 100,295 10.89 27,639 3.00 $46,065 5.00% TIER I CAPITAL (TO RISK-WEIGHTED ASSETS): Massbank Corp. (consolidated) 100,826 34.30 11,757 4.00 N/A -- Massbank (the "Bank") 100,295 34.14 11,750 4.00 17,625 6.00 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): Massbank Corp. (consolidated) 105,862 36.02 23,515 8.00 N/A -- Massbank (the "Bank") 105,331 35.86 23,500 8.00 29,376 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, 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. 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, 2000, 1999, and 1998, the plan's latest valuation dates:
- ----------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------- Actuarial present value of vested benefits $ 4,787 $ 4,690 $ 4,442 Total accumulated benefit obligation 4,811 4,724 4,481 Change in benefit obligation: Projected benefit obligation at beginning of year $ 5,906 $ 5,788 $ 4,990 Service cost 386 440 443 Interest cost 458 375 362 Actuarial loss (gain) 95 (463) 283 Benefits paid (413) (234) (290) - ----------------------------------------------------------------------------------------- Projected benefit obligation at end of year $ 6,432 $ 5,906 $ 5,788 ========================================================================================= Change in plan assets: Fair value of plan assets at beginning of year $ 7,175 $ 6,243 $ 5,810 Actual return on plan assets 1,023 1,166 469 Employer contribution -- -- 254 Benefits paid (413) (234) (290) - ----------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 7,785 $ 7,175 $ 6,243 - ----------------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation $ 1,353 $ 1,269 $ 455 ========================================================================================= 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 $ 1,654 $ 1,535 $ 487 Transition asset 148 169 190 Accrued benefit cost (449) (435) (222) - ----------------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation $ 1,353 $ 1,269 $ 455 ========================================================================================= Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: Discount rate 7.75% 7.75% 6.75% Rate of compensation increase 5.00% 4.50% 4.50% Assumptions used to develop the net periodic benefit cost data were: Discount rate 7.75% 6.75% 7.25% Expected return on plan assets 8.00% 8.00% 8.00% Rate of compensation increase 4.50% 4.00% 4.50% Components of net periodic benefit cost: Service cost $ 386 $ 440 $ 443 Interest cost 458 375 362 Expected return on plan assets (574) (499) (465) Transition obligation (21) (21) (21) Recognized net actuarial (gain) loss (236) (82) (119) - ----------------------------------------------------------------------------------------- Net periodic benefit cost $ 13 $ 213 $ 200 =========================================================================================
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 objec- tives by certain key officers. Payments of $302 thousand, $426 thousand and $399 thousand were awarded under the plans in 2000, 1999 and 1998, 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, 2000 and 1999, such outstanding liabilities totaled $312 thousand and $468 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, 2000, the ESOP held 17,600 unallocated shares and 139,948 shares which have been allocated to participants. The fair value of the unallocated shares at December 31, 2000 was approximately $515 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 $289 thousand, $366 thousand and $462 thousand for the years ended December 31, 2000, 1999 and 1998, 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 $173 thousand, $139 thousand and $105 thousand in 2000, 1999 and 1998, 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 plan. As of December 31, 2000, there were 135,010.7 non-qualified stock options and 211,340.0 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. DIRECTORS DEFERRED COMPENSATION PLAN In 1988, the Company established a deferred compensation plan for its directors. The plan allows the Company's directors to defer receipt of all or a portion of their compensation until the earlier of: (1) their attaining the age of 72, or (2) their termination as a director of the Company. In 2000, the plan was amended to allow the directors compensation to be invested in Company stock held in an irrevocable trust. At December 31, 2000 the trust held 13,200 shares of Massbank Corp. stock that the Company has classified as treasury stock. The treasury shares are considered outstanding in the computation of earnings per share and book value per share. 48 37 15. EMPLOYEE BENEFITS (CONTINUED) A summary of the status of the Company's fixed stock option plan as of December 31, 2000, 1999 and 1998, and changes during the years ended on those dates is presented below:
- ------------------------------------------------------------------------------------------------------ YEARS ENDED DECEMBER 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------ 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 363,317.3 $ 22.74 347,917.3 $ 20.62 360,200 $ 17.65 Granted 36,000 28.50 40,000 37.50 35,250 44.25 Exercised (40,550) 10.24 (23,100) 15.17 (47,532) 15.59 Forfeited (12,416.6) 36.54 (1,500) 40.88 (0.7) 30.09 - ------------------------------------------------------------------------------------------------------ Outstanding at end of year 346,350.7 $ 24.31 363,317.3 $ 22.74 347,917.3 $ 20.62 ====================================================================================================== Options exercisable at year-end 346,350.7 363,317.3 347,917.3 ======================================================================================================
The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 2000:
- --------------------------------------------------------------------------------------------- AT DECEMBER 31, 2000 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 - --------------------------------------------------------------------------------------------- $10.75 to $16.88 99,516.7 2.0 years $ 15.06 99,516.7 $ 15.06 17.25 to 23.25 103,417.3 4.0 years 19.22 103,417.3 19.22 24.56 to 30.09 77,666.7 7.3 years 29.09 77,666.7 29.09 37.50 to 44.25 65,750 7.6 years 40.68 65,750 40.68 - --------------------------------------------------------------------------------------------- $10.75 to $44.25 346,350.7 4.8 years $ 24.31 346,350.7 $ 24.31 =============================================================================================
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 2000. 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 2000, 1999 and 1998:
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------- Net income As reported $11,111 $11,311 $10,914 Pro forma 10,967 11,095 10,743 - ------------------------------------------------------------------------------------------------------------- Basic earnings per share As reported $ 3.45 $ 3.35 $ 3.09 Pro forma 3.41 3.29 3.04 - ------------------------------------------------------------------------------------------------------------- Diluted earnings per share As reported $ 3.37 $ 3.25 $ 2.97 Pro forma 3.33 3.19 2.92 ============================================================================================================= Weighted average fair value $ 6.69 $ 9.01 $ 8.23 Expected life 7.4 years 7.3 years 7.3 years Risk-free interest rate 6.70% 4.80% 5.53% Expected volatility 22.7% 23.0% 23.0% Expected dividend yield 4.1% 2.9% 2.7% ==============================================================================================================
49 38 16. SHAREHOLDER RIGHTS PLAN On January 18, 2000, the Board of Directors adopted a new Shareholder Rights Plan to replace the Company Plan that expired on January 16, 2000. In connection with the adoption of the new Shareholder Rights Plan, the Board of Directors authorized the issuance of one preferred stock purchase right for each share of common stock of the Company outstanding as of January 19, 2000. Under the Plan, the Rights initially are attached to and trade with the Company's shares of common stock. Although the Rights are not exercisable initially, they separate from the shares of common stock and become exercisable if a person becomes an "acquiring person" by acquiring 11% or more of the Company's common stock or if a person commences a tender offer that could result in that person owning 11% or more of the common stock of Massbank Corp. In the event that a person becomes an "acquiring person," each holder of a Right (other than the acquiring person) would be entitled to acquire such number of shares of preferred stock which are equivalent to Massbank common stock having a value of twice the exercise price of the Right. The exercise price of a Right initially is $136.00 per one one-thousandth of a share of the Company's preferred stock. If Massbank Corp. is acquired in a merger or other business combination transaction after any such event, each holder of a Right would be entitled to purchase, at the then-current exercise price, shares of the acquiring company's common stock having a value of twice the exercise price of the Right. The Rights will expire on January 19, 2010, but may be redeemed at the option of the Board of Directors for $0.01 per Right at any time prior to the time at which any person becomes an acquiring person or until the expiration date of the Shareholder Rights 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, 2000 1999 - --------------------------------------------------------------------------------------------------------------- Assets: Cash $ -- $ 2 Interest-bearing deposits in banks 553 706 Investment in subsidiaries 108,024 101,386 Due from subsidiaries 84 104 Other assets 190 70 - --------------------------------------------------------------------------------------------------------------- Total assets $ 108,851 $ 102,268 =============================================================================================================== Liabilities: Employee stock ownership plan liability (Note 15) $ 312 $ 468 Other liabilities 296 321 - --------------------------------------------------------------------------------------------------------------- Total liabilities 608 789 =============================================================================================================== 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, 7,447,982 and 7,407,432 shares issued, respectively 7,448 7,407 Additional paid-in capital 61,674 60,591 Retained earnings 93,165 85,873 - --------------------------------------------------------------------------------------------------------------- 162,287 153,871 Treasury stock at cost, 4,300,489 and 4,096,189 shares, respectively (59,704) (53,890) Accumulated other comprehensive income (Note 1) 5,972 1,966 Common stock acquired by ESOP (Note 15) (312) (468) - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 108,243 101,479 - --------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 108,851 $ 102,268 ===============================================================================================================
50 39 17. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME - ----------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998 - ----------------------------------------------------------------------------------- Income: Dividends received from subsidiaries $ 8,800 $ 9,200 $ 6,400 Interest and dividend income 23 23 96 - ----------------------------------------------------------------------------------- Total interest and dividend income 8,823 9,223 6,496 Non-interest expense 115 92 99 - ----------------------------------------------------------------------------------- Income before income taxes 8,708 9,131 6,397 Income tax benefit 23 53 28 - ----------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiaries 8,731 9,184 6,425 Equity in undistributed earnings of subsidiaries 2,380 2,127 4,489 - ----------------------------------------------------------------------------------- Net income $11,111 $11,311 $10,914 ===================================================================================
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, 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 11,111 $ 11,311 $ 10,914 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (2,380) (2,127) (4,489) (Decrease) increase in accrued income taxes payable (116) (17) 25 Deferred income tax benefit (4) -- (1) (Decrease) increase in other liabilities (25) 288 4 Decrease (increase) in amount due from subsidiaries 20 (59) (45) - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 8,606 9,396 6,408 - ------------------------------------------------------------------------------------------------ Cash flow from financing activities: Payments to acquire treasury stock (5,814) (7,618) (4,703) Purchase of company stock for deferred compensation plan 366 -- -- Issuance of common stock under stock option plan 415 351 741 Tax benefit resulting from stock options exercised 91 -- 66 Dividends paid on common stock (3,829) (3,759) (3,605) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 10 13 15 - ------------------------------------------------------------------------------------------------ Net cash used in financing activities (8,761) (11,013) (7,486) - ------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents (155) (1,617) (1,078) Cash and cash equivalents at beginning of year 708 2,325 3,403 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 553 $ 708 $ 2,325 ================================================================================================
During the years ended December 31, 2000, 1999 and 1998, the Company made cash payments for income taxes of $44 thousand, $16 thousand and $24 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 $31 thousand, $38 thousand and $29 thousand during the years ended December 31, 2000, 1999 and 1998, respectively. 51 40 18. TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 11,111 $11,311 $10,914 $ 10,167 $9,427 $ 8,759 $8,185 $6,695 $ 4,677 $ 2,250 Basic earnings per share 3.45 3.35 3.09 2.88 2.65 2.43 2.19 1.71 1.22 0.59 Cash dividends declared per share 1.18 1/2 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 34.25 30.65 31.58 29.06 25.75 24.84 20.09 20.46 18.37 17.54 Return on average assets 1.20% 1.20% 1.17% 1.12% 1.08% 1.04% 0.96% 0.79% 0.61% 0.60% Return on average realized equity(1) 10.95% 11.35% 11.08% 11.11% 11.01% 10.81% 10.62% 8.98% 6.79% 3.39% ====================================================================================================================================
(1) Excludes average net unrealized gains or losses on securities available for sale. 19. QUARTERLY DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------- (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 $15,429 $15,226 $14,915 $14,710 $14,758 $14,730 $14,345 $14,373 Interest expense 9,276 9,079 8,621 8,421 8,365 8,391 8,215 8,233 - ------------------------------------------------------------------------------------------------------------------- Net interest income 6,153 6,147 6,294 6,289 6,393 6,339 6,130 6,140 Provision for loan losses 15 15 15 15 15 15 60 50 - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,138 6,132 6,279 6,274 6,378 6,324 6,070 6,090 Non-interest income 1,438 945 1,293 1,312 1,154 1,089 1,578 1,741 Non-interest expense 3,114 2,894 3,325 3,180 3,210 3,066 3,122 3,168 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 4,462 4,183 4,247 4,406 4,322 4,347 4,526 4,663 Income tax expense 1,593 1,486 1,530 1,578 1,573 1,564 1,660 1,750 - ------------------------------------------------------------------------------------------------------------------- Net income $ 2,869 $ 2,697 $ 2,717 $ 2,828 $ 2,749 $ 2,783 $ 2,866 $ 2,913 =================================================================================================================== Earnings per share (in dollars):(1) Basic $ 0.90 $ 0.84 $ 0.84 $ 0.87 $ 0.83 $ 0.83 $ 0.85 $ 0.84 Diluted 0.88 0.82 0.82 0.85 0.81 0.80 0.82 0.82 - ------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding:(1) Basic 3,173 3,217 3,229 3,263 3,318 3,352 3,380 3,451 Diluted 3,242 3,292 3,305 3,337 3,389 3,466 3,496 3,567 ===================================================================================================================
(1) Computation of earnings per share is further described in Note 1. 52 41 MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA YEARS ENDED DECEMBER 31, 2000 AND 1999 Massbank Corp.'s common stock is currently traded on the Nasdaq Stock Market under the symbol "MASB." At December 31, 2000 there were 3,160,693 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, 2000 - ------------------------------------------------------------- Fourth Quarter 29 1/2 27 7/8 $ 0.30 Third Quarter 29 3/4 28 1/16 0.30 Second Quarter 29 7/8 27 1/2 0.30 First Quarter 29 1/2 27 0.285 ============================================================= - ------------------------------------------------------------- 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 ============================================================= (1) Stock prices have been adjusted to reflect the 4-for-3 split of the Company's common stock effective September 15, 1997. 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 NorthRoad 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 17, 2001 at the Crowne Plaza Woburn 2 Forbes Road Woburn, MA 01801 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 2000 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 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' 2000 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 Senior Trust Officer Thomas J. Queeney Vice President and Senior Trust Officer Gerard F. Frechette Director of Human Resources Marilyn H. Abbott Assistant Treasurer Andrea S. Bradford Assistant Vice President Ernest G. Campbell, Jr. Collections and Security Officer Marianne J. Carpenter Assistant Treasurer Keri L. DeRosa Mortgage Origination Officer Karen L. Flammia Assistant Vice President Melissa J. Flanagan Information Technology Officer Scott A. Forbes Mortgage Origination Officer Rachael E. Garneau Assistant Treasurer Kathleen M. Hardy Assistant Treasurer Scott H. Hilfiker Portfolio Manager Brian W. Hurley Assistant Vice President Kimberly A. Judge Assistant Treasurer Kenneth A. Masson Assistant Vice President Joseph P. Orefice Information Technology Officer Karen L. O'Rourke Assistant Treasurer Mindy S. Peloquin Assistant Vice President Renald A. Robillard Assistant Treasurer Alice B. Sweeney Assistant Comptroller Richard A. Tatarczuk Assistant Vice President and Comptroller 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 4 b38181mcex22.txt SUBSIDIARIES OF THE REGISTRANT 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 5 b38181mcex23.txt CONSENT OF KPMG LLP 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 9, 2001, relating to the consolidated balance sheets of MASSBANK Corp. and subsidiaries as of December 31, 2000 and 1999 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, 2000, which report is incorporated by reference into the December 31, 2000 annual report on Form 10-K of MASSBANK Corp. /s/ KPMG LLP Boston, Massachusetts March 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----