-----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, S2zGfvcr7Nt0lI9oeuK/hjcRlDhVzzteUF2ZCO5axi1lxDzb+trddioOtgZU8sXu gsrgDzouKb3/7Gose9ie4A== 0000950135-02-001586.txt : 20020415 0000950135-02-001586.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950135-02-001586 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020325 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: 1934 Act SEC FILE NUMBER: 000-15137 FILM NUMBER: 02583891 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 b42256mbe10-k.txt MASSBANK CORPORATION 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________to____________ Commission File Number 0-15137 MASSBANK Corp. (Exact name of registrant as specified in its charter) Delaware 04-2930382 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 123 HAVEN STREET Reading, Massachusetts 01867 (Address of principal executive offices) (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 13, 2002 as reported by NASDAQ, was $136,342,143. As of March 13, 2002, there were 3,166,315 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of MASSBANK Corp.'s 2001 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 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. Forward-Looking Statement Disclosure. This Annual Report on Form 10-K may contain forward-looking information, including information concerning the Company's expectations of future business prospects. These forward-looking statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The Company may also make written or oral forward-looking statements in other documents filed with the Securities and Exchange Commission ("SEC"), in annual reports to stockholders, in press releases and other written materials, and in oral statements made by the Company's officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "will," "should," and other expressions which predict or indicate future events and trends and which do not relate to historical matters. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the Company's actual results or performance to be materially different from the results and performance expressed or implied by the forward-looking statements Forward-looking statements include, but are not limited to, statements concerning the Company's belief, expectations, or intentions concerning the Company's future performance, the financial outlook of the markets it serves and the performance and activities of its competitors. These statements reflect the Company's current views, are based on numerous assumptions and are subject to numerous risks, uncertainties and other factors including but not limited to the following: - Unexpected fluctuations in market interest rates - Unexpected fluctuations in the market for equities, bonds, federal funds and other financial instruments - An increase in the level of non-performing assets - An increase in competitive pricing pressures within the Company's market which may result in the following: - An increase in the Company's cost of funds - Changes in volume of loan originations - Limit the ability of the Company to attract and retain banking customers - Adverse legislative or regulatory developments - Adverse impacts resulting from the continuing war on terrorism - An increase in medical insurance and other employee-related costs - The impact of inflation, and other factors described in the Company's annual report. 2 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." 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 repurchase of stock pursuant to the Company's stock repurchase program. MASSBANK Corp.'s only assets at December 31, 2001 were represented by its investment in the Bank of $110.9 million, interest-bearing bank deposits of $4.3 million and other assets of $0.2 million. The Company's liabilities consisted of loan indebtedness of $0.2 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, 2001 MASSBANK Corp. on a consolidated basis had total assets of $971.2 million, deposits of $849.7 million, and stockholders' equity of $114.9 million which represents 11.8% of total assets. Book value per share at December 31, 2001 stood at $36.51, up from $34.25 at year-end 2000. 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. 3 Employees MASSBANK Corp. does not employ any persons other than its management which 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 $1.26 per share in 2001 compared to $1.185 per share in 2000. The Company's dividend payout ratios (cash dividends paid divided by net income) for 2001 and 2000 were 37% and 34%, respectively. Stock Repurchase Program During 2001, the Company continued its program of share repurchases by repurchasing 60,200 shares of its common stock pursuant to its stock repurchase program. On January 16, 2002 the Company's Board of Directors extended for another year, the stock repurchase program that it authorized in January 2001. Additionally, the Board approved an increase of 125,000 in the number of shares of the Company's common stock authorized for repurchase in the current program, bringing the total shares available for repurchase to 214,800 shares. 3-For-2 Stock Split On January 16, 2002 the Company's Board of Directors approved a three- for-two stock split of the Company's common stock to be effected in the form of a stock dividend payable on April 19, 2002 to stockholders of record at the close of business on March 29, 2002. The Company's per share amounts and weighted average common shares outstanding will be restated in the second quarter 2002 to reflect the Company's three-for-two stock split. 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, Inc. ("DIF"), a private industry-sponsored deposit insurer. The Bank recognizes that loan and investment opportunities change over time and that yields derived from such opportunities can vary significantly even when the risks associated with those opportunities are comparable. By developing a relatively liquid loan and investment portfolio, the Bank has attempted to position itself so as to be able to take advantage of these changing opportunities. Consequently, the Bank expects that the relative mix of its loan and investment portfolios will change over time in response to changing market conditions. 5 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 $328.4 million at December 31, 2001. 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, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------- Mortgage loans: Residential: Conventional $293,764 $269,859 $286,429 $280,681 $243,482 FHA and VA 259 471 740 1,181 1,843 Commercial 2,641 3,117 2,471 2,257 3,861 Construction 993 683 232 730 492 - ------------------------------------------------------------------------------------------- Total mortgage loans 297,657 274,130 289,872 284,849 249,678 Premium on loans 51 105 159 259 343 Deferred mortgage loan origination fees (1,239) (1,284) (1,451) (1,454) (1,223) - ------------------------------------------------------------------------------------------- Mortgage loans, net 296,469 272,951 288,580 283,654 248,798 - ------------------------------------------------------------------------------------------- Other loans: Consumer: Installment 1,178 1,829 1,418 1,547 2,199 Guaranteed education 4,937 6,266 7,037 7,967 8,934 Other secured 873 1,169 1,318 1,366 1,600 Home equity lines of credit 12,271 12,624 11,737 10,159 10,470 Unsecured 201 224 225 235 266 - ------------------------------------------------------------------------------------------- Total consumer loans 19,460 22,112 21,735 21,274 23,469 Commercial 15,088 15,084 15,050 61 36 - ------------------------------------------------------------------------------------------- Total other loans 34,548 37,196 36,785 21,335 23,505 - ------------------------------------------------------------------------------------------- Total loans 331,017 310,147 325,365 304,989 272,303 Allowance for loan losses (2,643) (2,594) (2,555) (2,450) (2,334) - ------------------------------------------------------------------------------------------- Net loans $328,374 $307,553 $322,810 $302,539 $269,969 - -------------------------------------------------------------------------------------------
6 The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 2001:
Maturity/Scheduled Payments(1) ------------------------------------------------------------ Within One to Five to After (In thousands) one year five years ten years ten years Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $ 616 $ 9,928 $74,817 $207,486 $292,847 Commercial & construction 245 153 323 2,901 3,622 - ------------------------------------------------------------------------------------------- Total mortgage loans 861 10,081 75,140 210,387 296,469 Other loans 15,967 2,068 4,222 12,291 34,548 - ------------------------------------------------------------------------------------------- Total loans $16,828 $12,149 $79,362 $222,678 $331,017 - -------------------------------------------------------------------------------------------
(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 $255,932 $36,299 $292,231 Commercial & construction 1,047 2,330 3,377 - ------------------------------------------------------------------------------------------- Total mortgage loans 256,979 38,629 295,608 Other loans 1,167 17,414 18,581 - ------------------------------------------------------------------------------------------- Total loans $258,146 $56,043 $314,189 - -------------------------------------------------------------------------------------------
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 33.8% and 32.8% of the Company's total assets at December 31, 2001, and 2000, 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. In spite of the competition, the Bank in 2001 originated $103.2 million in loans, a 213% increase over the $33.0 million originated in the year 2000. Much of this volume was due to mortgage refinancing in an historically low rate environment, which also resulted in significant loan payoffs. The net result was that the Bank added $20.9 million to its loan portfolio, a 6.7% increase over last year. The Bank's loan portfolio was $331.0 million and $310.1 million at December 31, 2001 and 2000, respectively. 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 2001 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 addition to its traditional mortgage products, the Bank offers several other loan programs which have been well received by customers. It offers 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, 2001, 1-4 family residential mortgage loans totaled $292.8 million, or 88.5% of the total loan portfolio, compared to $269.2 million, or 86.8% of the total loan portfolio, at December 31, 2000. Residential mortgage loan originations amounted to $91.0 million during 2001, a significant increase from $19.9 million in 2000. Origination volumes are sensitive to interest rates and are affected by the interest rate environment. The low interest rate environment in 2001 significantly increased the demand for mortgage refinancings in 2001. As a result, the Bank was able to far exceed 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, 2001, commercial and multifamily real estate mortgages and construction loans totaled approximately $3.6 million, or 1.1% of the total loan portfolio, compared to $3.8 million, or 1.2% of the total loan portfolio, at December 31, 2000. In 2001, commercial and multifamily real estate mortgage loan and construction loan originations amounted to $2.0 million. 8 Mortgage Lending (continued) The total amount of first mortgage loans held by the Bank at December 31, 2001 was $296.5 million as indicated in the maturity distribution table appearing on page seven. Of this amount, $38.8 million was subject to interest rate adjustments. The remaining $257.7 million in fixed rate mortgage loans represents 26.5% 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 $19.5 million at December 31, 2001 representing 5.9% of the Bank's total loan portfolio. Of this amount $4.9 million or 1.5% of the total loan portfolio are education loans made under the Massachusetts Higher Education Assistance Corporation. The balance of the Bank's consumer loan portfolio consists of home equity lines of credit and installment consumer credit contracts such as automobile loans, home improvement loans and other secured and unsecured financings. These loans totaled $14.5 million at December 31, 2001, representing 4.4% of the Bank's total loan portfolio. At December 31, 2001, 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, 2001, the Bank had issued commitments on residential first mortgage loans totaling $17,710,000, and had commitments to advance funds on construction loans and unused credit lines, including unused portions of home equity lines of credit, of $457,000 and $37,804,000, 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 $644,000 at December 31, 2001. 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. At year-end 2001, 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, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Nonaccrual loans: Mortgage loans: Residential: Conventional $ 477 $ 386 $ 655 $ 845 $1,536 FHA and VA 4 8 -- -- 9 Commercial -- -- -- -- -- Consumer 163 171 140 159 226 - ------------------------------------------------------------------------------------------------ Total nonaccrual loans 644 565 795 1,004 1,771 - ------------------------------------------------------------------------------------------------ Real estate acquired through foreclosure: Residential: Conventional -- -- 62 86 -- - ------------------------------------------------------------------------------------------------ Total real estate acquired through foreclosure -- -- 62 86 -- - ------------------------------------------------------------------------------------------------ Total non-performing assets $ 644 $ 565 $ 857 $1,090 $1,771 - ------------------------------------------------------------------------------------------------ Percent of non-performing loans to total loans 0.19% 0.18% 0.24% 0.33% 0.65% Percent of non-performing assets to Total assets 0.07% 0.06% 0.09% 0.12% 0.19%
The reduction in interest income associated with nonaccrual loans is as follows:
- ------------------------------------------------------------------------------------------------ (In thousands) Years Ended December 31, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Interest income that would have been recorded under original terms $ 60 $ 48 $ 64 $ 84 $163 Interest income actually recorded 37 36 51 61 97 - ------------------------------------------------------------------------------------------------ Reduction in interest income $ 23 $ 12 $ 13 $ 23 $ 66 - ------------------------------------------------------------------------------------------------
10 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 Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan", general loss allocations for various loan types based on loss experience factors and an unallocated allowance which is maintained based on management's assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the current 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, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Balance at beginning of year $2,594 $2,555 $2,450 $2,334 $2,237 Glendale Co-Operative Bank acquisition -- -- -- -- 105 Provision for loan losses 40 60 140 193 260 Charge-offs: Residential real estate -- -- (62) (81) (221) Consumer loans (22) (24) (14) (22) (12) Other loans -- -- -- -- (94) Recoveries: Residential real estate 25 2 39 17 34 Commercial real estate 5 -- -- -- 20 Consumer loans 1 1 2 6 1 Other Loans -- -- -- 3 4 - ------------------------------------------------------------------------------------------------ Net recoveries (charge-offs) 9 (21) (35) (77) (268) - ------------------------------------------------------------------------------------------------ Balance at end of year $2,643 $2,594 $2,555 $2,450 $2,334 - ------------------------------------------------------------------------------------------------ Net loan charge offs as a percent of average loans outstanding during the period -- 0.01% 0.01% 0.03% 0.10% Allowance for loan losses as a percent of total loans outstanding at year-end 0.80% 0.84% 0.79% 0.80% 0.86% Allowance for loan losses as a percent of nonaccrual loans 410.4% 459.1% 321.4% 244.0% 131.8% - ------------------------------------------------------------------------------------------------
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. 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, 2001, the Company's investments, which consist of securities available for sale (including mortgage-backed securities), trading securities, short-term investments (including federal funds sold) and interest-bearing deposits in banks totaled $618.5 million, representing 63.7% of the Company's total assets. 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, 2001 2000 1999 - --------------------------------------------------------------------------------------------- Federal funds sold: Overnight federal funds $204,294 $112,711 $ 86,211 Term federal funds -- 30,000 -- - --------------------------------------------------------------------------------------------- Total federal funds sold 204,294 142,711 86,211 Money market funds 32,088 131 24,717 Interest-bearing deposits in bank 6,490 1,678 3,841 - --------------------------------------------------------------------------------------------- Total federal funds sold and other short-term investments $242,872 $144,520 $114,769 - --------------------------------------------------------------------------------------------- Percent of total assets 25.0% 15.4% 12.4% - --------------------------------------------------------------------------------------------- (In thousands) At December 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------- Securities held to maturity: (a) Other bonds and obligations $ -- $ 230 $ 230 - --------------------------------------------------------------------------------------------- Total securities held to maturity -- 230 230 Securities available for sale: (b)(c) U.S. Treasury obligations 80,883 126,456 137,615 U.S. Government agency obligations 10,253 9,133 16,015 Equity securities 16,417 19,750 21,537 Mortgage-backed securities 265,031 287,213 282,335 - --------------------------------------------------------------------------------------------- Total securities available for sale 372,584 442,552 457,502 Trading securities: (b) U.S. Treasury obligations 3,086 19,791 4,956 Investments in mutual funds 3 3 1,086 - --------------------------------------------------------------------------------------------- Total trading securities 3,089 19,794 6,042 - --------------------------------------------------------------------------------------------- Total securities $375,673 $462,576 $463,774 - --------------------------------------------------------------------------------------------- Percent of total assets 38.7% 49.3% 50.2% - --------------------------------------------------------------------------------------------- Total investments $618,545 $607,096 $578,543 Total investments as a percent of total assets 63.7% 64.7% 62.6% - ---------------------------------------------------------------------------------------------
(a) At amortized cost. (b) At market value. (c) The market value of callable securities included in securities available for sale totaled $10.1 million as of December 31, 2001. 14 The following table presents the amortized cost of debt securities available for sale at December 31, 2001 maturing within stated periods with the weighted average interest yield from securities falling within the range of maturities: Debt Securities Available for Sale
U.S. U. S. Government Mortgage- Treasury agency backed (Dollars in thousands) obligations obligations (2) securities (1) Total - ---------------------------------------------------------------------------------------------- Maturing within 1 year Amount $ 29,984 $ -- $ 300 $ 30,284 Yield 6.31% -- 8.11% 6.33% Maturing after 1 but within 5 years Amount 49,948 10,000 1,021 60,969 Yield 4.01% 4.04% 8.70% 4.10% Maturing after 5 but within 10 years Amount -- -- 88,871 88,871 Yield -- -- 6.83% 6.83% Maturing after 10 but within 15 years Amount -- -- 164,731 164,731 Yield -- -- 6.68% 6.68% Maturing after 15 years Amount -- 142 1,977 2,119 Yield -- 5.50% 6.40% 6.34% - ---------------------------------------------------------------------------------------------- Total Amount $ 79,932 $10,142 $256,900 $346,974 Yield 4.88% 4.06% 6.74% 6.23% - ---------------------------------------------------------------------------------------------- Average life in years 1.72 2.50 Average contractual maturity in years 11.20
(1) Mortgage-backed securities are based on contractual maturities. Actual maturities will differ from contractual maturities due to scheduled amortization and prepayments. (2) The amortized cost of callable securities included in securities available for sale totaled $10.0 million as of December 31, 2001. At December 31, 2001, 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 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 $26.1 million during the twelve months ended December 31, 2001, from $823.6 million at year-end 2000 to $849.7 million at year-end 2001. 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 2001 or 2000. 16 DEPOSITS The following table shows the composition of the deposits as of the dates indicated:
(In thousands) at December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------ Percent Percent Percent of of of Amount Deposits Amount Deposits Amount Deposits Demand and NOW NOW $ 53,476 6.29% $ 51,390 6.24% $ 48,422 5.92% Demand accounts (non interest-bearing) 28,667 3.37 28,562 3.47 24,516 3.00 -------- ------ -------- ------ -------- ------ Total demand and NOW 82,143 9.66 79,952 9.71 72,938 8.92 Savings: Regular savings and special notice accounts 368,631 43.39 317,926 38.60 333,535 40.77 Money market accounts 15,329 1.80 17,022 2.07 19,555 2.39 -------- ------ -------- ------ -------- ------ Total savings 383,960 45.19 334,948 40.67 353,090 43.16 Time Certificates of deposit: Fixed rate certificates 287,773 33.87 309,245 37.54 302,423 36.97 Variable rate certificates 95,837 11.28 99,736 12.11 90,093 11.01 -------- ------ -------- ------ -------- ------ Total time certificates of deposit 383,610 45.15% 408,981 49.65 392,516 47.98 Deposit acquisition premium, net of amortization (29) -- (256) (.03) (487) (.06) -------- ------ -------- ------ -------- ------ Total deposits $849,684 100.00% $823,625 100.00% $818,057 100.00% 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, 2001 2000 1999 - ------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate NOW accounts $ 51,689 0.89% $ 49,860 0.97% $ 49,559 1.01% Demand (non interest-bearing) accounts 28,070 -- 24,945 -- 24,189 -- Escrow deposits of borrowers 1,089 0.19 1,151 0.21 1,185 0.19 Money market accounts 16,402 2.44 17,941 2.97 20,519 2.96 Regular savings and special notice accounts 337,220 3.29 325,138 3.44 333,332 3.44 Time certificates of deposit 402,155 5.08 399,554 5.81 397,935 5.19 -------- ---- -------- ---- -------- ----- $836,625 3.87% $818,589 4.32% $826,719 4.02%
17 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, 2001 the Trust Division had approximately $28.1 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 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, 2001, 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 48. 19 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, 2001, the Bank's operations were in substantial compliance with all applicable safety and soundness standards promulgated under FDICIA. The Riegle-Neal Interstate Bank and Branching Act of 1994 and applicable 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 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. To date, the Company has not elected to become a financial holding company. 21 Supervision and Regulation of the Company and its Subsidiaries (continued) 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. The Federal Change in Bank Control Act prohibits a person or group of persons from acquiring `control' of a bank holding company unless the Federal Reserve Board has been given at least 60 days to review the proposal. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company, such as the Company, with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended would, under the circumstances set forth in the presumption, constitute the acquisition of control. In addition, any company, as that term is broadly defined in the statute, would be required to obtain the approval of the Federal Reserve Board before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more, or such lesser percentage of the Company's outstanding common stock as the Federal Reserve Board deems to constitute control over the Company. 22 The Federal Reserve Board, the FDIC and other bank regulatory agencies have adopted final guidelines (the `Guidelines') for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Graham-Leach-Bliley Act requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires the Company and the Bank to explain to consumers its policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, the Company and the Bank are prohibited from disclosing such information except as provided in its policies and procedures. The USA Patriot Act of 2001 (the `Patriot Act'), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates or will require financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, suspicious activities, currency transaction reporting, and currency crimes. 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. 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, 2001, the Bank had 123 full-time employees (including 31 officers) and 75 part-time employees (including 1 officer). 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 $149.7 million and $149.3 million, respectively, at December 31, 2001. Readibank Properties, Inc. incorporated primarily for the purpose of real estate development, had total assets of $623 thousand at December 31, 2001. Executive Officers of the Registrant The executive officers of the Company and the Bank and the age of each officer as of March 4, 2002 are as follows: Name Age Office Gerard H. Brandi 53 Chairman of the Board of Directors, President and Chief Executive Officer of the Company and the Bank David F. Carroll 54 Vice President of the Bank Reginald E. Cormier 54 Senior Vice President, Treasurer and Chief Financial Officer of the Company and the Bank Thomas J. Queeney 39 Vice President and Senior Trust Officer of the Bank Donald R. Washburn 58 Senior Vice President of the Bank Donna H. West 56 Senior Vice President of the Bank and Assistant Secretary of the Company 24 Executive Officers of the Registrant (continued) 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. 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, 2001, 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 291 Chelmsford Street, Chelmsford, MA Owned ---- ---- OFFICES: 17 North Road, Chelmsford, MA Owned ---- ---- 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 2002 ---- 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 Owned ---- ---- 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, 2001, none of these actions individually or in the aggregate is believed by management to be material to the financial condition of MASSBANK Corp. or the Bank. Item 4. Submission of Matters to a Vote of Security Holders None. 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 2001 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 2001 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 2001 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 2001 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 2001 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's consolidated financial statements and notes thereto, together with the report of KPMG LLP, contained in the Registrant's 2001 Annual Report to Stockholders are incorporated herein by reference. The unaudited quarterly financial data set forth on page 54 of such Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure None. 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 2002 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 2002 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 2002 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 2001 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 2001 Annual Report to Stockholders (Pages) Independent Auditors' Report 27 Consolidated Balance Sheets at December 31, 2001 and 2000 28 Consolidated Statements of Income for the three years ended December 31, 2001 29 Consolidated Statements of Cash Flows for the three years ended December 31, 2001 30-31 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 2001 32 Notes to Consolidated Financial Statements 33-54 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. 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. 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. 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 - incorporated by reference to Exhibit 10.5 of the Registrant's annual report on Form 10-K for the year ended December 31, 2000. 10.6 Deferred Compensation Program for Bank employees dated November 14, 1994. 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, 2001. 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 2001 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 2001 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. 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, March 13, 2002 - ------------------------- Chief Executive Officer and Gerard H. Brandi Director /s/ Reginald E. Cormier Senior Vice President, Treasurer March 13, 2002 - ------------------------- and Chief Financial Officer Reginald E. Cormier (Principal Financial and Accounting Officer) /s/ Mathias B. Bedell Director March 13, 2002 - ------------------------- Mathias B. Bedell Director - ------------------------- Allan S. Bufferd /s/ Peter W. Carr Director March 21, 2002 - ------------------------- Peter W. Carr /s/ Alexander S. Costello Director March 19, 2002 - ------------------------- Alexander S. Costello 32 Director - ------------------------ Robert S. Cummings /s/ Leonard Lapidus Director March 20, 2002 - ------------------------ Leonard Lapidus /s/ Stephen E. Marshall Director March 13, 2002 - ------------------------ Stephen E. Marshall /s/ Nancy L. Pettinelli Director March 19, 2002 - ------------------------ Nancy L. Pettinelli /s/ Herbert G. Schurian Director March 13, 2002 - ------------------------ Herbert G. Schurian /s/ Donald B. Stackhouse Director March 19, 2002 - ------------------------ Donald B. Stackhouse 33 EX-10.6 3 b42256mbex10-6.txt DEFERRED COMPENSATION PROGRAM FOR BANK EMPLOYEES Exhibit 10.6 MASSBANK FOR SAVINGS TERMS AND CONDITIONS OF DEFERRED COMPENSATION PROGRAM ----------------------------------------------------- 1. Eligibility in the Program shall be limited to the employees of the MASSBANK for Savings (the "Bank") whose Taxable Compensation exceeds the IRC Section 401(a)(17) annual compensation limit (the "Participants"). 2. (a) Each Participant who is actively employed by the Bank on October 31, beginning October 31, 1994, shall receive a deferred compensation award in an amount equal to 20% of his Taxable Compensation during the prior twelve-month period that is in excess of the IRC Section 401(a)(17) annual compensation limit. All amounts awarded to a Participant under this Paragraph 2(a) shall be credited to a separate book account (a "Deferred Compensation Account") in his name as of October 31 of each year. (b) The term "Taxable Compensation" shall mean the eligible Participant's annual compensation paid by the Bank and recognized as such under the Bank's qualified retirement plan ("SBERA"), but without regard to the IRC Section 401(a)(17) annual compensation limit or any indirect noncash compensation and contributions to this Program. (c) The IRC Section 401(a)(17) annual compensation limit is $235,840 for the year ending October 31, 1994, and $150,000 for the year ending October 31, 1995, as adjusted by the Secretary for increases in the cost-of-living in accordance with Section 401(a)(17)(B) if the Internal Revenue Code of 1986, as amended. 3. The amount standing to the credit of a Participant's Deferred Compensation Account shall be deemed invested in one or more the mutual funds chosen by the Participant from time to time in accordance with such rules and regulations adopted by the Administrator. From time to time and no less often than once a year, the amount standing to the credit of a Participant's Deferred Compensation Account shall be adjusted on an equitable basis for deemed earnings or losses. The reasonable determination of such adjustment by the Administrator shall be conclusive and binding on all Participants and their beneficiaries. 4. During his period of active employment, no Participant shall have any rights to the amounts which he has been awarded hereunder. Participation in the Program, and any actions taken pursuant to the Program, shall not create or be deemed to create a trust or fiduciary relationship of any kind between the Bank and the Participant. The Bank may, but shall have no obligation to, establish any separate fund, reserve, or escrow or to provide security with respect to any amounts awarded under the Plan. Any assets of the Bank which are set aside in any separate fund, reserve or escrow shall continue for all purposes to be a part of the general assets of the Bank, with title to the beneficial ownership of any such assets remaining at all times in the Bank. No Participant, his legal representatives, or any of his beneficiaries shall have any right, other than the right of an unsecured general creditor of the Bank, in respect of the Deferred Compensation Account established hereunder, and such persons shall have no property interest whatsoever in any specific assets of the Bank. 5. (a) Except as otherwise provided in Paragraph 6 below, upon the termination of a Participant's employment with the Bank, the Participant shall be entitled to receive a percentage of the amount standing to the credit of his Deferred Compensation Account. Such percentage shall be calculated according to the vesting schedule provided in SBERA. (b) Such payment shall be made within 60 days of the Participant's termination of employment. The vested amount standing to the credit of the Participant's Deferred Compensation Account as of the preceding October 31 shall be adjusted for earnings or losses based on the total investment return on the Participant's investment choice from November 1 of the year of termination until the end of the month immediately preceding the date of distribution. Such payment shall completely discharge the Bank's obligation under the Program and the Participant shall forfeit the non-vested portion of his Deferred Compensation Account. The Board of Directors of the Bank (the "Board") shall have full power and discretion to award additional vesting to any Participant. 6. Notwithstanding anything to the contrary contained herein, in the event of a good faith determination by the Board that a Participant (a) committed fraud in respect of any matter involving the Bank in any respect whatsoever, (b) misappropriated an asset or assets of the Bank, whether tangible or intangible, (c) committed gross misconduct, or (d) has been convicted of a crime involving moral turpitude, then the Participant shall immediately forfeit all rights to amounts credited to such Participant's Deferred Compensation Account, and the Participant, his estate, or beneficiaries shall have no further rights with respect thereto or any claims against the Bank under this Program. 7. Any distribution of deferred compensation payments will be reduced by the amounts required to be withheld pursuant to any governmental law or regulation with respect to taxes or similar provisions. 8. If a Participant who has deferred compensation under the Program dies before he has received full payment of the amount credited to his account, such unpaid portion shall be paid to the Participant's beneficiary as designated by the Participant in writing. If no beneficiary has been designated or if a designated beneficiary has predeceased the Participant, such unpaid portion shall be paid to the Participant's surviving spouse, if any; otherwise to the Participant's estate. 9. The deferred compensation payable under this Program shall not be subject to alienation, assignment, garnishment, execution, or levy of any kind, and any attempt to cause any compensation to be so subjected shall not be recognized. 10. All expenses incurred, or taxes paid by the Bank, and attributable to a Participant's Deferred Compensation Account shall be borne by the Bank and shall not reduce the amount credited to such Deferred Compensation Account. 11. Nothing in this Program shall be construed as giving any Participant the right to be retained in the employ of the Bank in any capacity. The Bank expressly reserves the right to dismiss any employee, at any time, without liability for the effect which such dismissal may have upon such employee hereunder. 12. This Program may be amended in any way or may be terminated, in whole or in part, at any time, and from time to time, by the Board. The foregoing provisions of this paragraph notwithstanding, no amendment or termination of the Program shall adversely affect the amounts payable hereunder on account of compensation awarded under the Program prior to the effective date of such amendment or termination. 2 13. The Board shall delegate the administration of this Program to an individual who shall serve as the Administrator. The Administrator shall have full power and authority to interpret, construe, and administer this Program, and the Administrator's interpretations and construction thereof, and actions hereunder, including any determination of any amount credited or charged to the Participant's Deferred Compensation Account or the amount or recipient of any payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. 14. All notices, elections, or designations by a Participant to the Bank shall be delivered in person or by registered mail, postage prepaid, and noted to be brought to the attention of the Administrator. 15. The terms of this Program shall be binding upon and shall inure to the benefit of the Bank and its successors or assigns and each Participant and his beneficiaries, heirs, executors, and administrators. 16. Subject to its obligation to pay the amount credited to the Participant's Deferred Compensation Account at the time distribution is called, neither the Bank, any person acting on behalf of the Bank nor the Administrator shall be liable for any act performed or the failure to perform any act with respect to the terms of the Program, except in the event that there has been a judicial determination of willful misconduct on the part of the Bank, such person or the Administrator. 17. This Program, and all actions taken hereunder, shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, except as such laws may be superseded by any applicable Federal laws. 18. This Program shall be effective as of October 31, 1994. 19. (a) All claims for benefits under this Program shall be filed in writing with the Administrator in accordance with such procedures as the Administrator shall reasonably establish. (b) The Administrator shall, within 90 days of submission of a claim, provide adequate notice in writing to any claimant whose claim for benefits under the Program has been denied. Such notice shall contain the specific reason or reasons for the denial and references to specific Program provisions on which the denial is based. The Administrator shall also provide the claimant with a description of any material or information which is necessary in order for the claimant to perfect his claim and an explanation of why such information is necessary. If special circumstances require an extension of time for processing the claim, the Administrator shall furnish the claimant a written notice of such extension prior to the expiration of the 90-day period. The extension notice shall indicate the reasons for the extension and the expected date for a final decision, which date shall not be more than 180 days from the initial claim. (c) The Administrator shall, upon written request by a claimant within 60 days of receipt of the notice that his claim has been denied, afford a reasonable opportunity to such claimant for a full and fair review by the Administrator of the decision denying the claim. The Administrator will afford the claimant an opportunity to review pertinent documents and submit issues and comments in writing. The claimant shall have the right to be represented. 3 (d) The Administrator shall, within 60 days of receipt of a request for a review, render a written decision on his review. If special circumstances require extra time for the Administrator to review his decision, the Administrator will attempt to make his decision as soon as practicable, and in no event will the Administrator take more than 120 days to send the claimant a written notice of his decision. IN WITNESS WHEREOF, this Program has been signed and sealed for and on behalf of the Bank by its duly authorized officer this 15th day of November, 1994. MASSBANK FOR SAVINGS /s/ Reginald E. Cormier -------------------------------- Sr. Vice President, Treasurer And CFO 4 EX-13 4 b42256mbex13.txt 2001 ANNUAL REPORT TO STOCKHOLDERS Exhibit 13 1987 - 2001 FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------ MASSBANK CORP. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS) AT DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA: Total assets $971,168 $938,702 $924,716 $946,625 $925,403 $888,237 $854,542 $843,647 Mortgage loans 296,469 272,951 288,580 283,654 248,798 224,139 220,603 220,269 Other loans 34,548 37,196 36,785 21,335 23,505 25,522 28,582 30,547 Allowance for loan losses 2,643 2,594 2,555 2,450 2,334 2,237 2,529 2,566 Investments(1) 618,545 607,096 578,543 624,082 635,694 622,645 586,768 568,635 Real estate acquired through foreclosure -- -- 62 86 -- 503 255 129 Deposits 849,684 823,625 818,057 824,031 809,850 788,350 753,657 759,676 Stockholders' equity 114,904 108,243 101,479 110,489 103,779 92,250 90,817 74,504 - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING DATA: Interest and dividend income $ 55,117 $ 60,280 $ 58,206 $ 59,834 $ 60,733 $ 58,109 $ 56,611 $ 51,451 Interest expense 32,391 35,397 33,204 34,320 34,681 33,062 30,896 26,152 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 22,726 24,883 25,002 25,514 26,052 25,047 25,715 25,299 Provision for loan losses 40 60 140 193 260 160 170 705 Gains on securities, net 4,363 3,525 4,033 2,893 1,939 868 92 (533) Other non-interest income 1,450 1,463 1,529 1,697 1,859 1,797 1,856 3,070 Non-interest expense 11,721 12,513 12,566 12,515 13,425 12,124 13,178 14,213 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 16,778 17,298 17,858 17,396 16,165 15,428 14,315 12,918 Income tax expense 6,019 6,187 6,547 6,482 5,998 6,001 5,556 4,733 Change in accounting principle -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 10,759 $ 11,111 $ 11,311 $ 10,914 $ 10,167 $ 9,427 $ 8,759 $ 8,185 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ YEARS ENDED DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER DATA: Yield on average interest-earning assets 5.88% 6.67% 6.32% 6.56% 6.81% 6.84% 6.90% 6.22% Cost of average interest-bearing liabilities 3.87 4.32 4.02 4.23 4.30 4.27 4.11 3.41 Interest rate spread 2.01 2.35 2.30 2.33 2.51 2.57 2.79 2.81 Net interest margin 2.43 2.76 2.72 2.81 2.93 2.96 3.15 3.07 Non-interest expense to average assets(4) 1.23 1.35 1.34 1.35 1.47 1.40 1.57 1.67 Efficiency ratio(2)(4) 40.9 41.7 40.9 41.4 44.7 43.5 47.4 50.8 Return on assets (net income/average assets) 1.13 1.20 1.20 1.17 1.12 1.08 1.04 0.96 Return on equity (net income/average stockholders' equity) 9.53 10.93 10.66 10.05 10.51 10.65 10.65 10.62 Return on average realized equity(3) 10.25 10.95 11.35 11.08 11.11 11.01 10.81 10.62 Percent non-performing loans to total loans 0.20 0.18 0.24 0.33 0.65 0.64 0.97 0.84 Percent non-performing assets to total assets 0.07 0.06 0.09 0.12 0.19 0.24 0.31 0.26 Stockholders' equity to assets, at year-end 11.83 11.53 10.97 11.67 11.21 10.39 10.63 8.83 Book value per share, at year-end $ 36.51 $ 34.25 $ 30.65 $ 31.58 $ 29.06 $ 25.75 $ 24.84 $ 20.09 Earnings per share: Basic 3.44 3.45 3.35 3.09 2.88 2.65 2.43 2.19 Diluted 3.36 3.37 3.25 2.97 2.77 2.58 2.34 2.13 Cash dividends paid per share 1.26 1.18 1/2 1.11 1.02 0.88 1/2 0.69 0.54 3/4 0.45 Dividend payout ratio 37% 34% 33% 33% 31% 26% 23% 21% - ------------------------------------------------------------------------------------------------------------------------------------ MASSBANK CORP. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS) AT DECEMBER 31, 1993 1992 1991 1990 1989 1988 1987 - --------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Total assets $855,881 $839,103 $425,428 $331,400 $307,873 $314,128 $318,365 Mortgage loans 219,347 219,932 78,064 76,118 84,809 99,127 107,606 Other loans 29,699 33,824 20,060 19,892 18,469 15,954 12,802 Allowance for loan losses 2,261 2,056 375 308 1,225 275 275 Investments(1) 589,666 564,422 315,588 221,900 187,836 183,370 183,609 Real estate acquired through foreclosure 699 905 1,158 3,315 3,780 -- -- Deposits 766,363 761,879 356,082 260,512 230,729 228,484 235,152 Stockholders' equity 80,075 71,062 66,563 68,573 73,779 79,953 77,865 - --------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989 1988 1987 - --------------------------------------------------------------------------------------------------------------------------- OPERATING DATA: Interest and dividend income $ 51,541 $ 51,317 $ 29,040 $ 26,606 $ 25,877 $ 26,124 $ 26,703 Interest expense 27,485 30,991 18,644 16,898 15,763 14,630 14,957 - --------------------------------------------------------------------------------------------------------------------------- Net interest income 24,056 20,326 10,396 9,708 10,114 11,494 11,746 Provision for loan losses 671 884 83 312 1,445 (9) 34 Gains on securities, net 198 122 1 (1,647) 429 271 944 Other non-interest income 2,307 2,429 996 969 893 1,419 1,374 Non-interest expense 14,243 13,421 7,093 7,316 5,328 5,189 5,839 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 11,647 8,572 4,217 1,402 4,663 8,004 8,641 Income tax expense 4,711 3,895 1,967 677 1,995 3,087 3,120 Change in accounting principle (241) -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Net income $ 6,695 $ 4,677 $ 2,250 $ 725 $ 2,668 $ 4,917 $ 5,521 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989 1988 1987 - --------------------------------------------------------------------------------------------------------------------------- OTHER DATA: Yield on average interest-earning assets 6.25% 6.88% 8.06% 8.78% 8.76% 8.65% 8.53% Cost of average interest-bearing liabilities 3.57 4.48 6.11 6.91 6.93 6.26 6.16 Interest rate spread 2.68 2.40 1.95 1.87 1.83 2.39 2.37 Net interest margin 2.93 2.73 2.89 3.21 3.43 3.81 3.75 Non-interest expense to average assets(4) 1.68 1.75 1.90 2.31 1.73 1.64 1.78 Efficiency ratio(2)(4) 53.3 58.3 61.8 80.1 46.5 39.4 41.5 Return on assets (net income/average assets) 0.79 0.61 0.60 0.23 0.86 1.56 1.69 Return on equity (net income/average stockholders' equity) 8.98 6.79 3.39 1.03 3.38 6.20 6.79 Return on average realized equity(3) 8.98 6.79 3.39 1.03 3.38 6.20 6.79 Percent non-performing loans to total loans 0.51 0.59 1.06 0.60 1.99 1.30 0.07 Percent non-performing assets to total assets 0.23 0.29 0.52 1.17 1.90 0.48 0.03 Stockholders' equity to assets, at year-end 9.36 8.47 15.65 20.69 23.96 25.45 24.46 Book value per share, at year-end $ 20.46 $ 18.37 $ 17.54 $ 16.20 $ 15.16 $ 14.21 $ 13.24 Earnings per share: Basic 1.71 1.22 0.59 0.17 0.50 0.86 0.86 Diluted 1.67 1.19 0.58 0.17 0.50 0.86 0.86 Cash dividends paid per share 0.34 0.26 1/2 0.22 3/4 0.22 0.21 0.19 0.16 1/2 Dividend payout ratio 20% 22% 39% 136% 42% 22% 19% - ---------------------------------------------------------------------------------------------------------------------------
(1) Consists of securities held to maturity and available for sale, trading securities, short-term investments, term federal funds sold and interest-bearing deposits in banks. (2) Determined by dividing non-interest expense by fully taxable equivalent net interest income plus non-interest income. (3) Excludes average net unrealized gains or losses on securities available for sale. (4) Includes non-recurring non-interest expense of $363 thousand in 2000 related to the successful litigation to protect the Company's principal trademark. 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 2001 presentation. 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. FORWARD-LOOKING STATEMENT DISCLOSURE This annual report may contain forward-looking information, including information concerning the Company's expectations of future business prospects. These forward-looking statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results or performance to be materially different from the results and performance expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements concerning the Company's belief, expectations or intentions concerning the Company's future performance, the financial outlook of the markets it serves and the performance and activities of its competitors. These statements reflect the Company's current views, are based on numerous assumptions and are subject to numerous risks and uncertainties, including unexpected fluctuations in market interest rates, unexpected fluctuations in the markets for equities, bonds, federal funds and other financial instruments, an increase in the level of nonperforming assets, an increase in competitive pricing pressures within the Company's market, adverse legislative or regulatory developments, adverse impacts resulting from the continuing war on terrorism, an increase in medical insurance and other employee-related costs, the impact of inflation, and other factors described in the Company's annual report. FINANCIAL CONDITION The Company's total assets amounted to $971.2 million as of December 31, 2001, an increase of $32.5 million or 3.5% from $938.7 million at December 31, 2000. This reflects an increase in the Bank's loan portfolio, net of allowance for loan losses, of $20.8 million or 6.8% and an increase in total investments of $11.5 million or 1.9%. INVESTMENTS At December 31, 2001, the Company's investment portfolio, consisting of investment securities (including mortgage-backed securities), short-term investments, term federal funds sold and interest-bearing bank deposits totaled $618.5 million or 63.7% of total assets, compared to $607.1 million or 64.7% of total assets at December 31, 2000. The portfolio included U.S. government and agency obligations primarily maturing within five years, 15-year mortgage-backed securities and equity securities. For further information concerning the composition, maturity and market value of the Bank's investment securities, see Notes 3 and 4 of Notes to Consolidated Financial Statements. LOANS The loan portfolio, net of allowance for loan losses, increased $20.8 million or 6.8% year-over-year. At December 31, 2001, the loan portfolio, net of allowance for loan losses, was $328.4 million representing 33.8% of total assets compared to $307.6 million representing 32.8% of total assets at December 31, 2000. The majority of loans in the portfolio are residential mortgages. Residential mortgage loans amounted to $293.8 million at December 31, 2001, representing 88.7% of the loan portfolio. At year-end 2001, 87.6% and 12.4% of the Company's residential mortgage loans were fixed rate and variable rate loans, respectively. See note 5 of Notes to Consolidated Financial Statements for a table setting forth the composition of the loan portfolio at year-end 2001 and 2000. Lower interest rates in 2001 resulted in increased loan origination growth for the Bank. In 2001, the Bank originated loans of $103.2 million, an increase of $70.2 million or approximately triple the $33.0 million in loans originated in the year 2000. 15 ASSET QUALITY Asset quality remains strong. Non-accrual loans, generally those loans which are 90 days or more delinquent, were $644 thousand and $565 thousand, respectively, at December 31, 2001 and 2000. This represents 0.19% of total loans at December 31, 2001. The provision for loan losses, which amounted to $60 thousand in 2000, decreased by $20 thousand to $40 thousand in 2001. The Bank received net recoveries of $9 thousand in 2001 versus net charge-offs of $21 thousand the prior year. The Bank's allowance for loan losses at December 31, 2001 totaled approximately $2.6 million, representing 410% of non-accrual loans and 0.80% of total loans. The Bank believes that its allowance for loan losses is adequate to cover the risks inherent in the loan portfolio under current conditions. The Bank has no real estate acquired through foreclosure at year-end 2001. DEPOSITS Deposits have historically been the Bank's primary source of funds for lending and investment activities. Deposit flows vary significantly and are influenced by prevailing interest rates, market conditions, economic conditions and competition. The Bank's management attempts to manage its deposits through selective pricing and marketing. Deposits increased $26.1 million or 3.2% to $849.7 million at December 31, 2001, from $823.6 million at December 31, 2000. This increase was primarily the result of an increase in savings deposits of $49.0 million or 14.6%, partially offset by a decrease in time certificates of deposit of $25.4 million or 6.2%. Other deposits grew by $2.4 this past year. For information concerning deposit balances at year-end 2001 and 2000, their average cost and the maturity distribution and related rate structure of the Bank's time certificates of deposit, see Note 10 of Notes to Consolidated Financial Statements. STOCKHOLDERS' EQUITY Total stockholders' equity increased $6.7 million to $114.9 million at December 31, 2001, representing a book value per share of $36.51, from $108.2 million representing a book value per share of $34.25 at December 31, 2000. This represents an increase in book value per share of $2.26 or 6.6% year-over-year. The Company's book value per share was positively affected by the increase in the Company's retained earnings and unrealized gains on securities available for sale, net of tax effect. Also contributing to the increase in book value per share was the Company's repurchase of 60,200 shares of its common stock at below book value, during 2001, pursuant to its stock repurchase program. RESULTS OF OPERATIONS COMPARISON OF THE YEARS 2001 AND 2000 MASSBANK Corp. reported consolidated net income of $10.8 million or $3.36 in diluted earnings per share in 2001 compared to net income of $11.1 million or $3.37 in diluted earnings per share in 2000. Basic earnings per share for 2001 were $3.44 compared to $3.45 in the prior year. Return on average assets and return on average realized equity were 1.13% and 10.25%, respectively, in 2001, compared to 1.20% and 10.95%, respectively, in 2000. The decrease in net income in 2001 reflects the continued pressure throughout 2001 on the Company's net interest margin from declining interest rates and the Federal Reserve Bank's multiple interest rate reductions during the year. The Federal Open Market Committee of the Federal Reserve Bank lowered the Federal Funds Rate eleven times in 2001, from 6.50% to 1.75%, bringing the total decline in the targeted rate to 475 basis points for the year. Being asset-sensitive in 2001, MASSBANK was particularly susceptible to the negative effects of a falling interest rate environment. The Company's net interest margin in 2001 dropped to 2.43% from 2.76% in 2000. This drop contributed to lower than anticipated net interest income and reduced earnings per share for the year, despite higher than expected securities gains, effective cost control and loan growth of 6.7% year-over-year. However, the Company anticipates sequential margin expansion in the coming year. The Company expects that due to the current low interest rate environment in the overnight federal funds market, it will invest a greater portion of its funds in higher yielding alternate investments. Although these investments will necessarily bear greater interest rate risk, the Company believes that the incurrence of this additional risk is warranted by the higher margin opportunities available from alternative investments. Additionally, the Company's earnings per share performance in 2001 was positively affected by the reduced number of average common shares outstanding as a result of the Company's repurchase during 2001 of 60,200 shares of its common stock pursuant to its stock repurchase program. 16 NET INTEREST INCOME Net interest income on a fully taxable equivalent basis totaled $22.7 million in 2001 compared to $25.0 million in 2000. This decrease was primarily attributable to a decrease in net interest margin, as noted above, partially offset by an increase in average earning assets. Average earning assets increased $32.4 million to $938.1 million in 2001, from $905.7 million in 2000. 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 (2) changes in interest rates. INTEREST AND DIVIDEND INCOME Interest and dividend income on a fully taxable equivalent basis totaled $55.2 million for the year ended December 31, 2001, compared to $60.4 million for the year ended December 31, 2000. The yield on average earning assets dropped 79 basis points to 5.88% in 2001 from 6.67% the prior year. The average total earning assets of the Company increased $32.4 million in 2001. As shown in the rate/volume analysis table on page 23, the decline in yield on average earning assets in 2001 resulted in decreased interest and dividend income of $6.7 million from 2000 levels. Conversely, the total effect of higher average earning assets on interest and dividend income in 2001 was a $1.5 million increase from 2000, resulting in a net decrease in interest and dividend income of $5.2 million from the prior year. INTEREST EXPENSE Total interest expense decreased $3.0 million or 8.5% to $32.4 million for the year ended December 31, 2001 from $35.4 million for the year ended December 31, 2000. This decrease is due to a drop of 45 basis points in the Company's average cost of funds, from 4.32% in 2000 to 3.87% in 2001, resulting primarily from a falling interest rate environment in 2001. The Company's average deposits in 2001 increased $18.0 million to $836.6 million, from $818.6 million in the prior 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 decrease of $3.5 million from 2000 levels. Conversely, the total effect of higher average deposits on interest expense in 2001 was an increase of $0.5 over the prior year, resulting in a net decrease in total interest expense of $3.0 million from 2000. PROVISION FOR LOAN LOSSES The provision for loan losses represents a charge against current earnings and an addition to the allowance for loan losses. The provision for loan losses in 2001 was $40 thousand compared to $60 thousand in 2000. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired in accordance with the terms of Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan," general loss allocations for various loan types based on loss experience factors, and an unallocated allowance which is maintained based on management's assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. At December 31, 2001, the allowance for loan losses was $2.6 million representing 410% of non-accrual loans. Non-accrual loans totaled $644 thousand at December 31, 2001, up from $565 thousand a year earlier. The Bank received $9 thousand in net loan recoveries in 2001 compared to $21 thousand in net charge-offs in 2000. 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 $0.8 million to $5.8 million for the year ended December 31, 2001, from $5.0 million for the year ended December 31, 2000. The increase is due primarily to an increase in securities gains from $3.5 million in 2000 to $4.4 million in 2001. While the Company's equity securities portfolio has produced increased realized gains in recent years, management does not expect this trend to continue. Management believes that the equity markets will provide more moderate returns in the near future. This will result in lower realized equity securities gains in 2002. All other non-interest income combined declined modestly compared to the prior year. 17 NON-INTEREST EXPENSE Non-interest expense totaled $11.7 million in 2001, a decrease of $0.8 million or 6.3% compared with $12.5 million in 2000. Most of this expense decline was due to the net litigation expenses of $363 thousand that the Bank incurred in 2000 in connection with its successful litigation to protect its principal trademark and a decrease in salaries and employee benefit expenses. Salaries and employee benefits, the largest component of non-interest expense, decreased $277 thousand or 4.0% to $6.7 million in 2001 from $7.0 million in 2000. Part of this improvement resulted from a decrease of $144 thousand in payments awarded to employees under the Company's profit sharing and incentive compensation bonus plans as a result of the Company not achieving its net income performance objectives in 2001. Also contributing to the lower salaries and employee benefit expenses was an increase of $137 thousand in loan origination related salary expenses being deferred and amortized over the life of the loans. More loan origination expenses were deferred in 2001 than the prior year because of a significant increase in mortgage origination activity in 2001. INCOME TAX EXPENSE The Company recorded income tax expense of $6.0 million in 2001, a decrease of $168 thousand when compared to the prior year. The decrease in income tax expense is primarily due to lower pretax earnings. The Company's effective income tax rate for the year ended December 31, 2001 was 35.87%, up slightly from 35.77% in the prior year. 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. 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. 18 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%. 19 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. 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 and mortgage-backed securities amortization and prepayments, sales or maturities of investment securities and income on earning assets. In addition to loan payments and maturing investment securities, which are relatively predictable sources of funds, the Bank maintains a high percentage of its assets invested in overnight federal funds sold, which can be immediately converted into cash, and United States Treasury and Government agency securities, which can be sold or pledged to raise funds. At December 31, 2001, the Bank had $204.3 million or 21.0% of total assets and $94.2 million or 9.7% 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, 2001, the Bank had a leverage Tier I capital to average assets ratio of 10.93%, a Tier I capital to risk-weighted assets ratio of 29.47% and a total capital to risk-weighted assets ratio of 30.40%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to average assets of 11.40%, Tier I capital to risk-weighted assets of 30.62% and total capital to risk-weighted assets of 31.54% at December 31, 2001. 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 Committee 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. 20 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 2001 has been negative in many years past 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 reduce or raise rates or to reduce or raise rates by a modest amount on its savings and transaction-oriented accounts in response to a change 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. 21 INTEREST RATE RISK (continued) The Company's policy is to limit its one-year GAP position to 20.0% of total assets. This represents an increase from the 15% policy limit of the prior year. 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, 2001. As of this date, the Company's one-year cumulative GAP position was positive $78.7 million, or approximately 8.1% 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 $ 41,596 $ 14,622 $ 27,831 $ 182,465 $ 64,503 $ 331,017 Short-term investments: Federal funds sold 204,294 -- -- -- -- 204,294 Investment in money market funds 32,088 -- -- -- -- 32,088 Interest-bearing deposits in banks 3,019 1,622 630 1,219 -- 6,490 Securities available for sale 43,140 24,476 40,336 202,175 62,457 372,584 Trading securities 3,089 -- -- -- -- 3,089 - --------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 327,226 $ 40,720 $ 68,797 $ 385,859 $ 126,960 $ 949,562 - --------------------------------------------------------------------------------------------------------------------------- Interest-Bearing Liabilities: Deposits(1) (2) $ 199,290 $ 77,757 $ 81,016 $ 45,794 $ 418,563 $ 822,420 - --------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 199,290 $ 77,757 $ 81,016 $ 45,794 $ 418,563 $ 822,420 - --------------------------------------------------------------------------------------------------------------------------- GAP for period $ 127,936 $ (37,037) $ (12,219) $ 340,065 $(291,603) $ 127,142 Cumulative GAP - December 31, 2001 $ 127,936 $ 90,899 $ 78,680 $ 418,745 $ 127,142 Cumulative GAP as a percent of total assets 13.2% 9.4% 8.1% 43.1% 13.1% - --------------------------------------------------------------------------------------------------------------------------- Cumulative GAP - December 31, 2000 $ 49,977 $ 38,876 $ 33,405 $ 304,438 $ 120,793 ===========================================================================================================================
(1) Excludes non-interest bearing demand accounts of $28,667. (2) Includes escrow deposits of borrowers of $1,403. 22 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, 2001. Expected Maturity Date At December 31, 2001
FAIR VALUE (In thousands) 2002 2003 2004 2005 2006 THEREAFTER TOTAL AT 12/31/01 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVE ASSETS: Fixed rate securities $ 90,593 $ 65,595 $ 70,567 $ 43,411 $ 22,602 $ 62,457 $ 355,225 $ 355,225 Average interest rate(1) 6.11% 5.35% 3.29% 3.69% 5.62% 5.38 5.19% Variable rate securities(2) 19,507 -- -- -- -- 941 20,448 20,448 Average interest rate(1) 2.28% -- -- -- -- 2.94% 2.31% Fixed rate loans 45,031 42,213 38,806 35,144 34,155 64,459 259,808 262,331 Average interest rate 6.66% 6.65% 6.66% 6.65% 6.65% 6.72% 6.67% Variable rate loans 20,319 5,387 5,452 5,675 6,034 28,342 71,209 71,601 Average interest rate 4.22% 8.32% 8.01% 7.70% 7.34% 6.19% 6.14% Other fixed rate assets(4) 4,222 814 405 -- -- -- 5,441 5,441 Average interest rate 4.45% 4.22% 4.40% -- -- -- 4.41% Other variable rate assets(3) 237,431 -- -- -- -- -- 237,431 237,431 Average interest rate 1.62% -- -- -- -- -- 1.62% - ----------------------------------------------------------------------------------------------------------------------------------- Total interest sensitive assets $ 417,103 $ 114,009 $ 115,230 $ 84,230 $ 62,791 $ 156,199 $ 949,562 $ 952,477 =================================================================================================================================== INTEREST SENSITIVE LIABILITIES: Savings and money market deposit accounts $ 2,548 $ 2,348 $ 2,172 $ 2,015 $ 1,877 $ 373,000 $ 383,960 $ 383,960 Average interest rate 2.24% 2.26% 2.28% 2.31% 2.33% 2.77% 2.76% Fixed rate certificates of deposit 244,724 36,242 5,420 331 600 456 287,773 289,507 Average interest rate 4.15% 4.24% 4.31% 4.48% 4.82% 5.18% 4.17% Variable rate certificates of deposit 39,983 33,266 7,948 14,640 -- -- 95,837 95,837 Average interest rate 3.03% 2.87% 2.60% 2.60% -- -- 2.88% NOW accounts -- -- -- -- -- 53,476 53,476 53,476 Average interest rate -- D -- -- -- 0.68% 0.68% Escrow deposits of borrowers 1,403 -- -- -- -- -- 1,403 1,403 Average interest rate 0.25% -- -- -- -- -- 0.25% Deposit acquisition premium, net of amortization (29) -- -- -- -- -- (29) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total interest sensitive liabilities $ 288,629 $ 71,856 $ 15,540 $ 16,986 $ 2,477 $ 426,932 $ 822,420 $ 824,183 ===================================================================================================================================
(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 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 $16.4 million at December 31, 2001. The net unrealized gains on these securities totaled $1.3 million at year-end 2001. 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. 23 AVERAGE BALANCE SHEETS
(In thousands) Years ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- 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 $ 196,041 $ 7,444 3.80% $ 135,728 $ 8,595 6.33% $ 128,124 $ 6,294 4.91% Short-term investments(2) 30,215 1,217 4.03 7,646 441 5.77 22,600 1,105 4.89 Investment securities 106,478 5,596 5.26 166,264 9,332 5.61 164,117 8,931 5.44 Mortgage-backed securities 284,932 18,847 6.61 273,464 19,015 6.95 275,361 18,735 6.80 Trading securities 2,984 158 5.29 5,020 310 6.18 10,760 495 4.60 Mortgage loans(1) 281,492 19,631 6.97 280,732 19,670 7.01 292,172 20,516 7.02 Other loans(1) 35,964 2,315 6.44 36,838 3,035 8.24 29,516 2,256 7.64 - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 938,106 55,208 5.88% 905,692 60,398 6.67% 922,650 58,332 6.32% =================================================================================================================================== Allowance for loan losses (2,612) (2,571) (2,498) - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets less allowance for loan losses 935,494 903,121 920,152 Other assets 20,518 20,450 19,923 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 956,012 $ 923,571 $940,075 =================================================================================================================================== LIABILITIES: Deposits: Demand and NOW $ 80,848 461 0.57% $ 75,956 488 0.64% $ 74,933 504 0.67% Savings 353,622 11,495 3.25 343,079 11,711 3.41 353,851 12,060 3.41 Time certificates of deposit 402,155 20,435 5.08 399,554 23,198 5.81 397,935 20,640 5.19 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 836,625 32,391 3.87% 818,589 35,397 4.32% 826,719 33,204 4.02% - ----------------------------------------------------------------------------------------------------------------------------------- Other liabilities 6,545 3,310 7,209 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 843,170 821,899 833,928 =================================================================================================================================== STOCKHOLDERS' EQUITY: 112,842 101,672 106,147 Total liabilities and stockholders' equity $ 956,012 $ 923,571 $ 940,075 =================================================================================================================================== Net interest income (tax- equivalent basis) 22,817 25,001 25,128 Less adjustment of tax- exempt interest income 91 118 126 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 22,726 $ 24,883 $ 25,002 - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate spread 2.01% 2.35% 2.30% - ----------------------------------------------------------------------------------------------------------------------------------- Net interest margin(3) 2.43% 2.76% 2.72% ===================================================================================================================================
(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. 24 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.
2001 COMPARED TO 2000 2000 COMPARED TO 1999 (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 $3,015 $(4,166) $(1,151) $392 $1,909 $2,301 Short-term investments 945 (169) 776 (834) 170 (664) Investment securities (3,126) (583) (3,709) 116 293 409 Trading securities (112) (40) (152) (319) 134 (185) Mortgage-backed securities 779 (947) (168) (130) 410 280 Mortgage loans 53 (92) (39) (801) (45) (846) Other loans (70) (650) (720) 593 186 779 ------ ------- ------- ---- ------ ------ Total interest and dividend income 1,484 (6,647) (5,163) (983) 3,057 2,074 ------ ------- ------- ---- ------ ------ Interest expense: Deposits: Demand and NOW 30 (57) (27) 7 (23) (16) Savings 353 (569) (216) (368) 19 (349) Time certificates of deposit 150 (2,913) (2,763) 84 2,474 2,558 ------ ------- ------- ---- ------ ------ Total interest expense 533 (3,539) (3,006) (277) 2,470 2,193 ------ ------- ------- ---- ------ ------ Net interest income $951 $(3,108) $(2,157) $(706) $587 $(119) ====== ======= ======= ==== ====== ======
25 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. GOODWILL AND OTHER INTANGIBLE ASSETS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS 142 requires that upon adoption of the Statement, any goodwill recorded on an entity's balance sheet would no longer be amortized. This would include existing goodwill (i.e., recorded goodwill at the date the financial statement is issued), as well as goodwill arising subsequent to the effective date of the Statement. Goodwill will not be amortized but will be reviewed for impairment periodically or upon the occurrence of certain triggering events. This Statement is effective for fiscal years beginning after December 15, 2001. The Company adopted the new standard on January 1, 2002. At December 31, 2001, the Company had $1,090,000 of goodwill on its balance sheet that was being amortized at a rate of $99,000 annually. 26 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Boston, Massachusetts January 8, 2002 27 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 8,945 $ 9,179 Short-term investments (Note 2) 236,382 112,842 - ---------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 245,327 122,021 - ---------------------------------------------------------------------------------------------------------------- Term federal funds sold -- 30,000 Interest-bearing deposits in banks 6,490 1,678 Securities held to maturity, at amortized cost (market value of $230 in 2000) (Note 3) -- 230 Securities available for sale, at market value (amortized cost of $362,076 in 2001 and $432,567 in 2000) (Note 3) 372,584 442,552 Trading securities, at market value (Note 4) 3,089 19,794 Loans (Notes 5, 7 and 11): Mortgage loans 296,469 272,951 Other loans 34,548 37,196 - ---------------------------------------------------------------------------------------------------------------- Total loans 331,017 310,147 Allowance for loan losses (Note 6) (2,643) (2,594) - ---------------------------------------------------------------------------------------------------------------- Net loans 328,374 307,553 - ---------------------------------------------------------------------------------------------------------------- Premises and equipment (Note 9) 6,927 3,932 Accrued interest receivable 3,950 5,755 Goodwill 1,090 1,189 Current income tax asset, net 208 284 Other assets 3,129 3,714 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 971,168 $ 938,702 ================================================================================================================ Liabilities and Stockholders' Equity: Deposits (Notes 10 and 11): Demand and NOW $ 82,143 $ 79,952 Savings 383,960 334,948 Time certificates of deposit 383,610 408,981 Deposit acquisition premium, net of amortization (29) (256) - ---------------------------------------------------------------------------------------------------------------- Total deposits 849,684 823,625 Escrow deposits of borrowers 1,403 1,387 Employee stock ownership plan liability (Note 15) 156 312 Deferred income taxes (Note 12) 2,275 2,418 Other liabilities 2,746 2,717 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 856,264 830,459 - ---------------------------------------------------------------------------------------------------------------- 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, 7,494,980 and 7,447,982 shares issued, respectively 7,495 7,448 Additional paid-in capital 62,875 61,674 Retained earnings 99,996 93,165 - ---------------------------------------------------------------------------------------------------------------- 170,366 162,287 Treasury stock at cost, 4,362,289 and 4,300,489 shares, respectively (61,749) (59,704) Accumulated other comprehensive income (Note 1) 6,443 5,972 Common stock acquired by ESOP (Note 15) (156) (312) - ---------------------------------------------------------------------------------------------------------------- Total stockholders' equity 114,904 108,243 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 971,168 $ 938,702 ================================================================================================================
See accompanying notes to consolidated financial statements. 28 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- Interest and dividend income: Mortgage loans $ 19,631 $ 19,670 $ 20,516 Other loans 2,315 3,035 2,256 Securities available for sale: Mortgage-backed securities 18,847 19,015 18,735 Other securities 5,502 9,203 8,790 Trading securities 158 310 495 Federal funds sold 7,444 8,595 6,294 Other investments 1,220 452 1,120 - ----------------------------------------------------------------------------------------------------------- Total interest and dividend income 55,117 60,280 58,206 - ----------------------------------------------------------------------------------------------------------- Interest expense: Deposits: NOW 461 488 504 Savings 11,495 11,711 12,060 Time certificates of deposit 20,435 23,198 20,640 - ----------------------------------------------------------------------------------------------------------- Total interest expense 32,391 35,397 33,204 - ----------------------------------------------------------------------------------------------------------- Net interest income 22,726 24,883 25,002 Provision for loan losses (Note 6) 40 60 140 - ----------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 22,686 24,823 24,862 - ----------------------------------------------------------------------------------------------------------- Non-interest income: Deposit account service fees 638 688 724 Gains on securities, net 4,363 3,525 4,033 Other 812 775 805 - ----------------------------------------------------------------------------------------------------------- Total non-interest income 5,813 4,988 5,562 - ----------------------------------------------------------------------------------------------------------- Non-interest expense: Salaries and employee benefits 6,723 7,000 7,436 Occupancy and equipment 2,056 2,079 2,146 Data processing 494 473 486 Professional services 426 959 481 Advertising and marketing 192 198 198 Amortization of intangibles 327 330 327 Deposit insurance 173 185 114 Other 1,330 1,289 1,378 - ----------------------------------------------------------------------------------------------------------- Total non-interest expense 11,721 12,513 12,566 - ----------------------------------------------------------------------------------------------------------- Income before income taxes 16,778 17,298 17,858 Income tax expense (Note 12) 6,019 6,187 6,547 - ----------------------------------------------------------------------------------------------------------- Net income $ 10,759 $ 11,111 $ 11,311 =========================================================================================================== Weighted average common shares outstanding: Basic 3,123,915 3,220,390 3,374,623 Diluted 3,206,443 3,293,968 3,478,944 Earnings per share (in dollars): Basic $ 3.44 $ 3.45 $ 3.35 Diluted 3.36 3.37 3.25 ===========================================================================================================
See accompanying notes to consolidated financial statements. 29 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 10,759 $ 11,111 $ 11,311 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 892 866 993 Loan interest capitalized (37) (46) (58) Amortization of ESOP shares committed to be released 151 93 163 Decrease (increase) in accrued interest receivable 1,805 (710) 13 Increase (decrease) in other liabilities 29 (319) 478 Decrease in current income taxes -- -- (1,015) Decrease (increase) in current income tax asset, net 76 8 -- Accretion of discounts on securities, net of amortization of premiums (643) (847) (961) Net trading securities activity 17,389 (13,228) 25,174 Gains on securities available for sale (4,263) (3,049) (3,954) Gains on trading securities (100) (476) (79) Decrease in deferred mortgage loan origination fees, net of amortization (44) (167) (3) Deferred income tax benefit (195) (103) (161) Decrease (increase) in other assets 1,035 (1,213) (327) Provision for loan losses 40 60 140 Gains on sales of real estate acquired through foreclosure -- (8) -- Gains on sales of premises and equipment (4) -- (2) Increase (decrease) in escrow deposits of borrowers 16 (90) 39 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 26,906 (8,118) 31,751 - -------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of term federal funds (10,000) (50,000) -- Proceeds from maturities of term federal funds 40,000 20,000 25,000 Net (increase) decrease in interest-bearing bank deposits (4,812) 2,163 (1,808) Proceeds from sales of investment securities available for sale 32,819 55,063 72,582 Proceeds from maturities of investment securities held to maturity and available for sale 87,230 56,000 65,800 Purchases of investment securities available for sale (72,548) (89,621) (169,020) Purchases of mortgage-backed securities (54,143) (43,750) (88,397) Principal repayments of mortgage-backed securities 81,231 47,002 68,430 Principal repayments of securities held to maturity -- -- 44 Principal repayments of securities available for sale 4 4 124 Loans originated (103,246) (32,989) (82,415) Loan principal payments received 82,412 48,346 62,254 Loans purchased -- -- (345) Purchases of premises and equipment (3,507) (288) (376) Proceeds from sale of premises and equipment 4 -- 2 Proceeds from sale of real estate acquired through foreclosure -- 70 86 Net advances on real estate acquired through foreclosure -- -- (4) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 75,444 12,000 (48,043) - --------------------------------------------------------------------------------------------------------------------
(Continued) 30 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- ------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 25,832 5,337 (6,202) Payments to acquire treasury stock (2,045) (5,814) (7,618) Purchase of company stock for deferred compensation plan 56 366 -- Issuance of common stock under stock option plan 803 415 351 Tax benefit resulting from stock options exercised 238 250 97 Cash dividends paid on common stock (3,935) (3,829) (3,759) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 7 10 13 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 20,956 (3,265) (17,118) - ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 123,306 617 (33,410) Cash and cash equivalents at beginning of year 122,021 121,404 154,814 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 245,327 $ 122,021 $ 121,404 - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL CASH FLOW DISCLOSURES: CASH TRANSACTIONS: Cash paid during the year for interest $ 35,484 $ 35,382 $ 33,204 Cash paid during the year for taxes, net of refunds 5,898 6,022 7,617 Purchases of securities executed but not settled at beginning of year which settled during the year 60 117 129 Sales of securities executed but not settled at beginning of year which settled during the year 573 202 583 NON-CASH TRANSACTIONS: SFAS 115: Increase (decrease) in stockholders' equity 471 4,006 (9,725) Increase (decrease) in deferred tax liabilities 52 2,322 (6,401) Transfers from loans to real estate acquired through foreclosure -- -- 58 Purchases of securities executed but not settled as of year-end 46 60 117 Sales of securities executed but not settled as of year-end 1,009 573 202 - ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 31 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 - --------------------------------------------------------------------------------
Accumulated Common Additional other stock Common paid-in Retained Treasury comprehensive acquired stock capital earnings stock income by ESOP Total - ---------------------------------------------------------------------------------------------------------------------------------- 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 Net Income -- -- 10,759 -- -- -- 10,759 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 1) -- -- -- -- 471 -- 471 -------- Comprehensive income -- -- -- -- -- -- 11,230 Cash dividends declared ($1.26 per share) -- -- (3,935) -- -- -- (3,935) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 7 -- -- -- 7 Net decrease in liability to ESOP -- -- -- -- -- 156 156 Amortization of ESOP shares committed to be released -- 151 -- -- -- -- 151 Purchase of treasury stock -- -- -- (1,989) -- -- (1,989) Purchase of company stock for deferred compensation plan -- 56 -- (56) -- -- -- Exercise of stock options and related tax benefits 47 994 -- -- -- -- 1,041 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 $7,495 $62,875 $99,996 $(61,749) $6,443 $(156) $114,904 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 32 MASSBANK CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 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, Massachusetts 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 financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and income and expenses for the period. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses. Certain amounts in the prior years' consolidated financial statements were reclassified to facilitate 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, 2001, stockholders' equity included approximately $6.4 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 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. 33 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 Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan", general loss allocations for various loan types based on loss experience factors and an unallocated allowance which is maintained based on management's assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the information available in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. 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. 34 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. For 2001 and prior years, goodwill was being amortized using the straight-line method, over 15 years. The deposit acquisition premium arising from acquisitions was reported net of accumulated amortization. Such premium was being amortized on a straight-line basis over 10 years. Goodwill and other intangible assets were reviewed for possible impairment when it was determined that events or changed circumstances may affect the underlying basis of the asset. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS 142 requires that upon adoption of the Statement, any goodwill recorded on an entity's balance sheet would no longer be amortized. This would include existing goodwill (i.e., recorded goodwill at the date the financial statement is issued), as well as goodwill arising subsequent to the effective date of the Statement. Goodwill will not be amortized but will be reviewed for impairment periodically or upon the occurrence of certain triggering events. This Statement is effective for fiscal years beginning after December 15, 2001. The Company adopted the new standard on January 1, 2002. At December 31, 2001, the Company had $1,090,000 of goodwill on its balance sheet that was being amortized at a rate of $99,000 annually. 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, 2001, 2000 and 1999 follows:
----------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 ----------------------------------------------------------------------------- Basic shares 3,124 3,220 3,375 Dilutive impact of stock options 82 74 104 ----------------------------------------------------------------------------- Diluted shares 3,206 3,294 3,479 -----------------------------------------------------------------------------
35 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 years ended December 31, 2001 and 2000 is as follows:
-------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 -------------------------------------------------------------------------------------------------------------------------------- TAX NET- Tax Net- BEFORE-TAX (EXPENSE) OF-TAX Before-Tax (Expense) of-Tax AMOUNT OR BENEFIT AMOUNT Amount or Benefit Amount -------------------------------------------------------------------------------------------------------------------------------- Unrealized gains on securities: Unrealized holding gains arising during period $ 4,785 $(1,833) $ 2,952 $ 9,377 $(3,613) $ 5,764 Less: reclassification adjustment for gains realized in net income 4,262 (1,781) 2,481 3,049 (1,291) 1,758 -------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains 523 (52) 471 6,328 (2,322) 4,006 -------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 523 $ (52) $ 471 $ 6,328 $(2,322) $ 4,006 --------------------------------------------------------------------------------------------------------------------------------
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 $5.7 million and $8.7 million at December 31, 2001 and 2000, 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, 2001 2000 ----------------------------------------------------------------------------- Federal funds sold (overnight) $204,294 $112,711 Money market funds 32,088 131 ----------------------------------------------------------------------------- Total short-term investments $236,382 $112,842 =============================================================================
The investments above are stated at cost which approximates market value. 36 3. INVESTMENT SECURITIES The amortized cost and market value of investment securities follows:
------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (IN THOUSANDS) AT DECEMBER 31, 2001 Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations $ 79,932 $ 1,165 $ (214) $ 80,883 U.S. Government agency obligations 10,142 115 (4) 10,253 ------------------------------------------------------------------------------------------------------------------------- Total 90,074 1,280 (218) 91,136 ------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 22,499 1,025 -- 23,524 Federal Home Loan Mortgage Corporation 231,603 7,062 (31) 238,634 Federal National Mortgage Association 1,346 38 (1) 1,383 Collateralized mortgage obligations 1,452 38 -- 1,490 ------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 256,900 8,163 (32) 265,031 ------------------------------------------------------------------------------------------------------------------------- Total debt securities 346,974 9,443 (250) 356,167 ------------------------------------------------------------------------------------------------------------------------- Equity securities 15,102 3,931 (2,616) 16,417 ------------------------------------------------------------------------------------------------------------------------- Total securities available for sale 362,076 $ 13,374 $ (2,866) $372,584 ------------------------------------------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 10,508 ------------------------------------------------------------------------------------------------------------------------- Total securities available for sale, net 372,584 ------------------------------------------------------------------------------------------------------------------------- Total investment securities, net $372,584 =========================================================================================================================
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 =========================================================================================================================
37 3. INVESTMENT SECURITIES (continued) During the years ended December 31, 2001, 2000 and 1999, the Company realized gains and losses on sales of securities available for sale as follows:
--------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Realized Realized Realized Gains Losses Gains Losses Gains Losses --------------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 135 $ -- $ 66 $ (328) $ 2 $ (576) Marketable equity securities 5,160 (1,033) 4,130 (819) 5,099 (571) --------------------------------------------------------------------------------------------------------------------------- Total realized gains (losses) $ 5,295 $(1,033) $ 4,196 $(1,147) $ 5,101 $(1,147) ===========================================================================================================================
Proceeds from sales of debt securities available for sale during 2001, 2000 and 1999 were $20.6 million, $38.7 million and $48.4 million, respectively. Proceeds from sales of equity securities available for sale during 2001, 2000 and 1999, were $14.2 million, $21.7 million and $24.1 million, respectively. There were no sales of investment securities held-to-maturity during 2001, 2000 and 1999. 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, 2001 2000 ------------------------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value ------------------------------------------------------------------------------------------------------------------------- Investment securities held to maturity: Other bonds and obligations: Maturing within 1 year $ -- $ -- $ 230 $ 230 ------------------------------------------------------------------------------------------------------------------------- Total debt securities held to maturity -- -- 230 230 ========================================================================================================================= Investment securities available for sale: U.S. Treasury obligations: Maturing within 1 year 28,993 29,531 81,841 82,036 Maturing after 1 year but within 5 years 50,939 51,352 43,789 44,420 ------------------------------------------------------------------------------------------------------------------------- Total 79,932 80,883 125,630 126,456 ------------------------------------------------------------------------------------------------------------------------- U.S. Government agency obligations: Maturing within 1 year -- -- 9,000 8,989 Maturing after 1 year but within 5 years 10,000 10,115 -- -- Maturing after 15 years 142 138 147 144 ------------------------------------------------------------------------------------------------------------------------- Total 10,142 10,253 9,147 9,133 ------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Maturing within 1 year 159 160 287 283 Maturing after 1 year but within 5 years 1,162 1,216 2,166 2,209 Maturing after 5 years but within 10 years 88,871 92,482 66,188 67,292 Maturing after 10 years but within 15 years 164,731 169,157 211,830 214,467 Maturing after 15 years 1,977 2,016 2,996 2,962 ------------------------------------------------------------------------------------------------------------------------- Total 256,900 265,031 283,467 287,213 ------------------------------------------------------------------------------------------------------------------------- Total debt securities available for sale 346,974 356,167 418,244 422,802 ========================================================================================================================= Net unrealized gains on debt securities available for sale 9,193 -- 4,558 -- ------------------------------------------------------------------------------------------------------------------------- Total debt securities available for sale, net carrying value $356,167 $356,167 $422,802 $422,802 =========================================================================================================================
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. 38 4. TRADING SECURITIES The amortized cost and market values of trading securities are as follows:
-------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2001 2000 -------------------------------------------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value -------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 3,087 $ 3,086 $19,784 $19,791 Investments in mutual funds 2 3 2 3 -------------------------------------------------------------------------------------------- Total trading securities $ 3,089 $ 3,089 $19,786 $19,794 ============================================================================================
During the years ended December 31, 2001, 2000 and 1999, the Company realized gains and losses on sales of trading securities as follows:
---------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------- Realized Realized Realized Gains Losses Gains Losses Gains Losses ---------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 32 $ -- $ -- $ (1) $ 4 $(11) Investments in mutual funds -- -- -- (33) -- -- Marketable equity securities 104 (28) 500 (29) 132 (25) ---------------------------------------------------------------------------------------------------------------- Total realized gains (losses) $136 $(28) $500 $(63) $136 $(36) ================================================================================================================
Proceeds from sales of trading securities during 2001, 2000 and 1999 were $27.3 million, $10.8 million and $13.8 million, respectively. Unrealized gains or (losses) included in income in 2001, 2000 and 1999 were $(7) thousand, $39 thousand and $(21) 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. 39 5. LOANS (continued) The composition of the Bank's loan portfolio is summarized as follows:
---------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2001 2000 ---------------------------------------------------------------------------- Mortgage loans: Residential: Conventional: Fixed rate $ 257,381 $ 230,323 Variable rate 36,383 39,536 FHA and VA 259 471 Commercial 2,641 3,117 Construction 993 683 ---------------------------------------------------------------------------- Total mortgage loans 297,657 274,130 Premium on loans 51 105 Deferred mortgage loan origination fees (1,239) (1,284) ---------------------------------------------------------------------------- Mortgage loans, net 296,469 272,951 ---------------------------------------------------------------------------- Other loans: Consumer: Installment 1,178 1,829 Guaranteed education 4,937 6,266 Other secured 873 1,169 Home equity lines of credit 12,271 12,624 Unsecured 201 224 ---------------------------------------------------------------------------- Total consumer loans 19,460 22,112 Commercial 15,088 15,084 ---------------------------------------------------------------------------- Total other loans 34,548 37,196 ---------------------------------------------------------------------------- Total loans $ 331,017 $ 310,147 ============================================================================
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, 2001 follows:
---------------------------------------------------------------------------- (IN THOUSANDS) ---------------------------------------------------------------------------- Balance at December 31, 2000 $ 688 Additions 699 Repayments (435) ---------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 $ 952 ============================================================================
40 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, 2001 2000 1999 ----------------------------------------------------------------------------------- Balance at beginning of year $ 2,594 $ 2,555 $ 2,450 Provision for loan losses 40 60 140 Recoveries of loans previously charged-off 31 3 41 ----------------------------------------------------------------------------------- Total 2,665 2,618 2,631 ----------------------------------------------------------------------------------- Charge-offs: Mortgage loans -- -- (62) Other loans (22) (24) (14) ----------------------------------------------------------------------------------- Balance at end of year $ 2,643 $ 2,594 $ 2,555 ===================================================================================
The following table shows the allocation of the allowance for loan losses by category of loans at December 31, 2001, 2000 and 1999.
------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------- Percentage Percentage Percentage of Loans of Loans of Loans Amount to Total Amount to Total Amount to Total ------------------------------------------------------------------------------------------------------- Mortgage loans: Residential $ 960 89% $1,317 87% $1,535 88% Commercial 8 1 9 1 7 1 Consumer loans 256 6 162 7 215 7 Commercial loans 347 4 324 5 301 4 Unallocated 1,072 -- 782 -- 497 -- ------------------------------------------------------------------------------------------------------- Total $2,643 100% $2,594 100% $2,555 100% =======================================================================================================
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, 2001 2000 1999 -------------------------------------------------------------------------------------- Total nonaccrual loans $ 644 $ 565 $795 Total real estate acquired through foreclosure -- -- 62 -------------------------------------------------------------------------------------- Total non-performing assets $ 644 $ 565 $857 ====================================================================================== Percent of non-performing loans to total loans 0.19% 0.18% 0.24% Percent of non-performing assets to total assets 0.07% 0.06% 0.09%
The reduction in interest income associated with nonaccrual loans is as follows:
------------------------------------------------------------------------------------------------ (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------ Interest income that would have been recorded under original terms $ 60 $ 48 $ 64 Interest income actually recorded 37 36 51 ------------------------------------------------------------------------------------------------ Reduction in interest income $ 23 $ 12 $ 13 ================================================================================================
During 2001, 2000 and 1999 the Company had no impaired loans. 41 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, 2001 2000 ---------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to originate residential mortgage loans $17,710 $ 1,920 Unadvanced portions of construction loans 457 421 Unused credit lines, including unused portions of equity lines of credit 37,804 30,918 ==========================================================================================================
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. At December 31, 2001 the Bank also had commitments to purchase when-issued investment securities in the amount of $12.0 million. 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, 2001 2000 (IN YEARS) -------------------------------------------------------------------------------------------------- Premises: Land $ 2,215 $ 1,227 -- Buildings 5,714 3,686 25-45 Building and leasehold improvements 2,200 2,078 2-30 Equipment 4,417 4,080 2-10 -------------------------------------------------------------------------------------------------- 14,546 11,071 Less: accumulated depreciation and amortization 7,619 7,139 -------------------------------------------------------------------------------------------------- Total premises and equipment, net $ 6,927 $ 3,932 ==================================================================================================
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, 2001, 2000 and 1999 amounted to $391 thousand, $533 thousand and $521 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, 2001, are as follows:
----------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS ----------------------------------------------------------------------------- 2002 $229 2003 109 2004 39 2005 33 2006 27 ----------------------------------------------------------------------------- Total $437 =============================================================================
42 10. DEPOSITS Deposits are summarized as follows:
----------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2001 2000 ----------------------------------------------------------------------------------------------------- Amount Rate Amount Rate ----------------------------------------------------------------------------------------------------- Demand and NOW: NOW accounts $ 53,476 0.66% $ 51,390 0.96% Demand accounts 28,667 -- 28,562 -- ----------------------------------------------------------------------------------------------------- Total demand and NOW 82,143 0.43 79,952 0.62 ----------------------------------------------------------------------------------------------------- Savings: Regular savings and special notice accounts 368,631 2.77 317,926 3.44 Money market accounts 15,329 1.99 17,022 2.99 ----------------------------------------------------------------------------------------------------- Total savings 383,960 2.74 334,948 3.42 ----------------------------------------------------------------------------------------------------- Time certificates: Fixed rate certificates 287,773 4.17 309,245 5.79 Variable rate certificates 95,837 3.05 99,736 7.40 ----------------------------------------------------------------------------------------------------- Total time certificates 383,610 3.89 408,981 6.18 ----------------------------------------------------------------------------------------------------- Deposit acquisition premium, net of amortization (29) -- (256) -- ----------------------------------------------------------------------------------------------------- Total deposits $ 849,684 3.03% $ 823,625 4.52% =====================================================================================================
The maturity distribution and related rate structure of the Bank's time certificates at December 31, 2001 follows:
-------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2001 -------------------------------------------------------------------------- Average Amount Interest Rate -------------------------------------------------------------------------- Due within 3 months $ 93,472 4.25% Due within 3 - 6 months 86,318 3.74 Due within 6 - 12 months 104,916 4.05 Due within 1 - 2 years 69,508 3.67 Due within 2 - 3 years 13,368 3.38 Due within 3 - 5 years 15,571 2.86 Thereafter 457 5.18 -------------------------------------------------------------------------- Total $383,610 3.89% ==========================================================================
At December 31, 2001 and 2000, the Bank had individual time certificates of deposit of $100 thousand or more maturing as follows:
-------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 2001 2000 -------------------------------------------------------------------------- Due within 3 months $20,262 $19,421 Due within 3 - 6 months 19,736 15,616 Due within 6 - 12 months 28,339 24,705 Due within 1 - 2 years 16,525 17,026 Due within 2 - 3 years 3,487 8,038 Due within 3 - 5 years 5,948 3,202 Thereafter -- 284 -------------------------------------------------------------------------- Total $94,297 $88,292 ==========================================================================
43 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, 2001 and 2000 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, 2001 2000 ------------------------------------------------------------------------------------------------- Carrying Calculated Carrying Calculated Amount Fair Value Amount Fair Value ------------------------------------------------------------------------------------------------- Securities held to maturity $ -- $ -- $ 230 $ 230 Securities available for sale 372,584 372,584 442,552 442,552 Trading securities 3,089 3,089 19,794 19,794 ------------------------------------------------------------------------------------------------- Total securities $375,673 $375,673 $462,576 $462,576 =================================================================================================
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, 2001 2000 --------------------------------------------------------------------------------------------------- Carrying Calculated Carrying Calculated Amount Fair Value Amount Fair Value --------------------------------------------------------------------------------------------------- Real estate: Residential: Variable $ 36,341 $ 36,551 $ 39,668 $ 40,055 Fixed 257,499 260,031 230,178 229,365 Commercial: Variable 2,415 2,446 2,889 2,922 Fixed 214 209 216 208 Consumer 19,460 19,618 22,112 22,208 Commercial 15,088 15,077 15,084 15,073 --------------------------------------------------------------------------------------------------- Total loans 331,017 333,932 310,147 309,831 Allowance for loan losses (2,643) -- (2,594) -- --------------------------------------------------------------------------------------------------- Net loans $ 328,374 $ 333,932 $ 307,553 $ 309,831 ===================================================================================================
44 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, 2001 and 2000. 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, 2001 2000 -------------------------------------------------------------------------------------------------------------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value -------------------------------------------------------------------------------------------------------------------------- Demand accounts $ 28,667 $ 28,667 $ 28,562 $ 28,562 NOW accounts 53,476 53,476 51,390 51,390 Regular savings and special notice accounts 368,631 368,631 317,926 317,926 Money market accounts 15,329 15,329 17,022 17,022 Time certificates 383,610 385,344 408,981 409,671 Deposit acquisition premium, net of amortization (29) -- (256) -- -------------------------------------------------------------------------------------------------------------------------- Total deposits 849,684 851,447 823,625 824,571 Escrow deposits of borrowers 1,403 1,403 1,387 1,387 -------------------------------------------------------------------------------------------------------------------------- Total $ 851,087 $ 852,850 $ 825,012 $ 825,958 ==========================================================================================================================
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, 2001 and 2000 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. 45 12.INCOME TAXES
Income tax expense (benefit) was allocated as follows: - -------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 - -------------------------------------------------------------------------------- Current income tax expense: Federal $ 5,891 $ 5,934 $ 6,134 State 367 356 574 - -------------------------------------------------------------------------------- Total current tax expense 6,258 6,290 6,708 ================================================================================ Deferred income tax benefit: Federal (181) (79) (121) State (58) (24) (40) - -------------------------------------------------------------------------------- Total deferred tax benefit (239) (103) (161) - -------------------------------------------------------------------------------- Total income tax expense $ 6,019 $ 6,187 $ 6,547 ================================================================================
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, 2001 2000 1999 - --------------------------------------------------------------------------------------------------- Computed "expected" income tax expense at statutory rate $ 5,872 $ 6,054 $ 6,250 Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal benefit 201 216 347 Dividends received deduction (59) (75) (79) Other 5 (8) 29 - --------------------------------------------------------------------------------------------------- Income tax expense $ 6,019 $ 6,187 $ 6,547 - --------------------------------------------------------------------------------------------------- Effective income tax rate 35.87% 35.77% 36.66% ===================================================================================================
46 12. INCOME TAXES (continued) At December 31, 2001 and 2000, the Bank had gross deferred tax assets and gross deferred tax liabilities as follows:
- ------------------------------------------------------------------------ (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 - ------------------------------------------------------------------------ Deferred tax assets: Loan losses $ 879 $ 740 Deferred loan fees, net 58 9 Deferred compensation and pension cost 508 512 Depreciation 27 2 Purchase accounting 431 411 Other 38 31 - ------------------------------------------------------------------------ Gross deferred tax asset 1,941 1,705 - ------------------------------------------------------------------------ Deferred tax liabilities: Valuation of securities 4,065 4,013 Other unrealized securities gains 106 109 Other 45 1 - ------------------------------------------------------------------------ Gross deferred tax liability 4,216 4,123 - ------------------------------------------------------------------------ Net deferred tax liability $2,275 $2,418 ========================================================================
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, 2001. The primary sources of recovery of the gross federal deferred tax asset are federal income taxes paid in 2001, 2000 and 1999 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, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) Basic Diluted Basic Diluted Basic Diluted - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 10,759 $ 10,759 $ 11,111 $ 11,111 $ 11,311 $ 11,311 Average shares outstanding 3,140,020 3,140,020 3,245,299 3,245,299 3,408,280 3,408,280 Dilutive stock options -- 82,528 -- 73,578 -- 104,321 Unallocated Employee Stock Ownership Plan ("ESOP") shares not committed to be released (16,105) (16,105) (24,909) (24,909) (33,657) (33,657) - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 3,123,915 3,206,443 3,220,390 3,293,968 3,374,623 3,478,944 Earnings per share (in dollars) $ 3.44 $ 3.36 $ 3.45 $ 3.37 $ 3.35 $ 3.25 ==================================================================================================================================
47 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, 2001. 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, 2001 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1) - ---------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------- TIER I CAPITAL (TO AVERAGE ASSETS): MASSBANK Corp. (consolidated) $107,342 11.40% $28,251 3.00% N/A -- MASSBANK (the "Bank") 103,158 10.93 28,328 3.00 $ 47,213 5.00% TIER I CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 107,342 30.62 14,025 4.00 N/A -- MASSBANK (the "Bank") 103,158 29.47 14,001 4.00 21,001 6.00 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 110,757 31.54 28,049 8.00 N/A -- MASSBANK (the "Bank") 106,393 30.40 28,002 8.00 35,002 10.00 =========================================================================================================
(1) This column presents the minimum amounts and ratios that a financial institution must have to be categorized as well capitalized.
- ---------------------------------------------------------------------------------------------------------- (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 well capitalized. 48 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, 2001, 2000, and 1999, the plan's latest valuation dates:
- ------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------ Actuarial present value of vested benefits $ 5,700 $ 4,787 $ 4,690 Total accumulated benefit obligation 5,730 4,811 4,724 Change in benefit obligation: Projected benefit obligation at beginning of year $ 6,432 $ 5,906 $ 5,788 Service cost 375 386 440 Interest cost 499 458 375 Actuarial loss (gain) (130) 95 (463) Benefits paid (167) (413) (234) - ------------------------------------------------------------------------------------------------------------ Projected benefit obligation at end of year $ 7,009 $ 6,432 $ 5,906 ============================================================================================================ Change in plan assets: Fair value of plan assets at beginning of year $ 7,785 $ 7,175 $ 6,243 Actual return on plan assets (843) 1,023 1,166 Employer contribution 29 -- -- Benefits paid (167) (413) (234) - ------------------------------------------------------------------------------------------------------------ Fair value of plan assets at end of year $ 6,804 $ 7,785 $ 7,175 ============================================================================================================ (Deficiency) excess of plan assets over projected benefit obligation $ (205) $ 1,353 $ 1,269 ============================================================================================================
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 $ 85 $ 1,654 $ 1,535 Transition asset 126 148 169 Accrued benefit cost (416) (449) (435) - -------------------------------------------------------------------------------------------------------- (Deficiency) excess of plan assets over projected benefit obligation $(205) $ 1,353 $ 1,269 - --------------------------------------------------------------------------------------------------------
Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: Discount rate 7.00% 7.75% 7.75% Rate of compensation increase 4.50% 5.00% 4.50% Assumptions used to develop the net periodic benefit cost data were: Discount rate 7.75% 7.75% 6.75% Expected return on plan assets 7.75% 8.00% 8.00% Rate of compensation increase 5.00% 4.50% 4.00% Components of net periodic pension (benefit) expense: Service cost $ 375 $ 386 $ 440 Interest cost 498 458 375 Expected return on plan assets (603) (574) (499) Transition obligation (21) (21) (21) Recognized net actuarial gain (253) (236) (82) - ------------------------------------------------------------------------------------------------------ Net periodic pension (benefit) expense $ (4) $ 13 $ 213 ======================================================================================================
49 15. EMPLOYEE BENEFITS (continued) PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLANS The Bank's Profit Sharing and Incentive Compensation Bonus Plans provide for payments to employees under certain circumstances based upon a year-end measurement of the Company's net income and attainment of individual goals and objectives by certain key officers. Payments of $158 thousand, $302 thousand and $426 thousand were awarded under the plans in 2001, 2000 and 1999, 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, 2001 and 2000, such outstanding liabilities totaled $156 thousand and $312 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, 2001, the ESOP held 8,800 unallocated shares and 139,378 shares which have been allocated to participants. The fair value of the unallocated shares at December 31, 2001 was approximately $315 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 $328 thousand, $289 thousand and $366 thousand for the years ended December 31, 2001, 2000 and 1999, 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 $82 thousand, $173 thousand and $139 thousand in 2001, 2000 and 1999, respectively. 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, 2001 the trust held 14,800 shares of MASSBANK Corp. stock that the Company has classified as treasury stock. The treasury shares are considered outstanding in the computation of earnings per share and book value per share. STOCK OPTION PLAN Effective May 28, 1986, the Board of Directors of the Bank adopted a stock option plan for the benefit of its officers and other employees. In January, 1991, the plan was amended to authorize the grant of options to non-employee Directors of the Company. All but 5 of the 690,000 shares reserved for issuance under the plan were issued. On April 19, 1994, shareholders approved and the Bank adopted the Company's 1994 Stock Incentive Plan. The total number of shares of common stock that can be issued under this plan is 360,000 shares. Both incentive stock options and non-qualified stock options may be granted under the plans. As of December 31, 2001, there were 126,510.7 non-qualified stock options and 190,590.0 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. 50 15. EMPLOYEE BENEFITS (continued) A summary of the status of the Company's fixed stock option plan as of December 31, 2001, 2000 and 1999, and changes during the years ended on those dates is presented below:
- ----------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- 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 346,350.7 $ 24.31 363,317.3 $ 22.74 347,917.3 $ 20.62 Granted 21,750 31.00 36,000 28.50 40,000 37.50 Exercised (46,998) 17.09 (40,550) 10.24 (23,100) 15.17 Forfeited (4,002) 40.87 (12,416.6) 36.54 (1,500) 40.88 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 317,100.7 $ 25.63 346,350.7 $ 24.31 363,317.3 $ 22.74 ============================================================================================================================= Options exercisable at year-end 317,100.7 346,350.7 363,317.3 =============================================================================================================================
The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 2001:
- ------------------------------------------------------------------------------------------------------------------ AT DECEMBER 31, 2001 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 70,016.7 1.1 YEARS $15.83 70,016.7 $15.83 17.25 to 23.25 93,084 3.0 YEARS 19.19 93,084 19.19 24.56 to 31.00 92,250 6.8 YEARS 29.50 92,250 29.50 37.50 to 44.25 61,750 6.5 YEARS 40.67 61,750 40.67 - ------------------------------------------------------------------------------------------------------------------ $10.75 to 44.25 317,100.7 4.4 YEARS $25.63 317,100.7 $25.63 ==================================================================================================================
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 2001. 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 2001, 2000 and 1999:
- --------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------------------- Net income As reported $ 10,759 $ 11,111 $ 11,311 Pro forma 10,669 10,967 11,095 - --------------------------------------------------------------------------------------------------------- Basic earnings per share As reported $ 3.44 $ 3.45 $ 3.35 Pro forma 3.42 3.41 3.29 - --------------------------------------------------------------------------------------------------------- Diluted earnings per share As reported $ 3.36 $ 3.37 $ 3.25 Pro forma 3.33 3.33 3.19 ========================================================================================================= Weighted average fair value $ 6.98 $ 6.69 $ 9.01 Expected life 7.4 years 7.4 years 7.3 years Risk-free interest rate 4.66% 6.70% 4.80% Expected volatility 22.5% 22.7% 23.0% Expected dividend yield 3.1% 4.1% 2.9% =========================================================================================================
51 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 automatically become part of and trade with the Company's shares of common stock. Although the Rights are not exercisable initially, they 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 shall be $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, 2001 2000 - --------------------------------------------------------------------------------------------------- Assets: Cash $ 10 $ -- Interest-bearing deposits in banks 4,264 553 Investment in subsidiaries 110,876 108,024 Due from subsidiaries -- 84 Other assets 212 190 - --------------------------------------------------------------------------------------------------- Total assets $ 115,362 $ 108,851 =================================================================================================== Liabilities: Employee stock ownership plan liability (Note 15) $ 156 $ 312 Due to subsidiaries 288 -- Other liabilities 14 296 - --------------------------------------------------------------------------------------------------- Total liabilities 458 608 =================================================================================================== 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, 7,494,980 and 7,447,982 shares issued, respectively 7,495 7,448 Additional paid-in capital 62,875 61,674 Retained earnings 99,996 93,165 - --------------------------------------------------------------------------------------------------- 170,366 162,287 Treasury stock at cost, 4,362,289 and 4,300,489 shares, respectively (61,749) (59,704) Accumulated other comprehensive income (Note 1) 6,443 5,972 Common stock acquired by ESOP (Note 15) (156) (312) - --------------------------------------------------------------------------------------------------- Total stockholders' equity 114,904 108,243 - --------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 115,362 $ 108,851 ===================================================================================================
52 17. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------ (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------ INCOME: Dividends received from subsidiaries $ 8,800 $ 8,800 $ 9,200 Interest and dividend income 41 23 23 - ------------------------------------------------------------------------------------------ Total interest and dividend income 8,841 8,823 9,223 NON-INTEREST EXPENSE 123 115 92 - ------------------------------------------------------------------------------------------ Income before income taxes 8,718 8,708 9,131 INCOME TAX BENEFIT 16 23 53 - ------------------------------------------------------------------------------------------ Income before equity in undistributed earnings of subsidiaries 8,734 8,731 9,184 EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 2,025 2,380 2,127 - ------------------------------------------------------------------------------------------ Net income $10,759 $11,111 $11,311 ==========================================================================================
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, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,759 $ 11,111 $ 11,311 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (2,025) (2,380) (2,127) Increase in current income tax asset, net (17) (116) (17) Increase in deferred income tax asset, net (5) (4) -- (Decrease) increase in other liabilities (282) (25) 288 Decrease (increase) in amount due from subsidiaries 84 20 (59) Increase in amount due to subsidiaries 288 -- -- - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 8,802 8,606 9,396 - ------------------------------------------------------------------------------------------------------ CASH FLOW FROM FINANCING ACTIVITIES: Payments to acquire treasury stock (2,045) (5,814) (7,618) Purchase of company stock for deferred compensation plan 56 366 -- Issuance of common stock under stock option plan 803 415 351 Tax benefit resulting from stock options exercised 33 91 -- Dividends paid on common stock (3,935) (3,829) (3,759) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 7 10 13 - ------------------------------------------------------------------------------------------------------ Net cash used in financing activities (5,081) (8,761) (11,013) - ------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 3,721 (155) (1,617) Cash and cash equivalents at beginning of year 553 708 2,325 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 4,274 $ 553 $ 708 ======================================================================================================
During the years ended December 31, 2001, 2000 and 1999, the Company made cash payments for income taxes of $24 thousand, $44 thousand and $16 thousand, respectively, and no payments for interest. In addition, the Company made cash payments to the state of Delaware for franchise taxes in the amount of $37 thousand, $31 thousand and $38 thousand during the years ended December 31, 2001, 2000 and 1999, respectively. 53 18. FIFTEEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 10,759 $11,111 $11,311 $10,914 $ 10,167 $ 9,427 $ 8,759 $ 8,185 Diluted earnings per share 3.36 3.37 3.25 2.97 2.77 2.58 2.34 2.13 Cash dividends paid per share 1.26 1.18 1/2 1.11 1.02 0.88 1/2 0.69 0.54 3/4 0.45 Book value per share, at year end 36.51 34.25 30.65 31.58 29.06 25.75 24.84 20.09 Return on average assets 1.13% 1.20% 1.20% 1.17% 1.12% 1.08% 1.04% 0.96% Return on average realized equity(1) 10.25% 10.95% 11.35% 11.08% 11.11% 11.01% 10.81% 10.62% ==============================================================================================================================
(1) Excludes average net unrealized gains or losses on securities available for sale.
- ------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 6,695 $ 4,677 $ 2,250 $ 725 $ 2,668 $ 4,917 $ 5,521 Diluted earnings per share 1.67 1.19 0.59 0.17 0.50 0.86 0.86 Cash dividends paid per share 0.34 0.26 1/2 0.22 3/4 0.22 0.21 0.19 0.16 1/2 Book value per share, at year end 20.46 18.37 17.54 16.20 15.16 14.21 13.24 Return on average assets 0.79% 0.61% 0.60% 0.23% 0.86% 1.56% 1.69% Return on average realized equity(1) 8.98% 6.79% 3.39% 1.03% 3.38% 6.20% 6.79% ===============================================================================================================================
(1) Excludes average net unrealized gains or losses on securities available for sale. 19.QUARTERLY DATA (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- (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 $12,602 $13,517 $14,105 $14,893 $15,429 $15,226 $14,915 $14,710 Interest expense 6,939 8,064 8,476 8,912 9,276 9,079 8,621 8,421 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 5,663 5,453 5,629 5,981 6,153 6,147 6,294 6,289 Provision for loan losses 4 12 12 12 15 15 15 15 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,659 5,441 5,617 5,969 6,138 6,132 6,279 6,274 Non-interest income 1,601 1,489 1,552 1,171 1,438 945 1,293 1,312 Non-interest expense 3,031 2,832 2,991 2,867 3,114 2,894 3,325 3,180 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 4,229 4,098 4,178 4,273 4,462 4,183 4,247 4,406 Income tax expense 1,535 1,466 1,490 1,528 1,593 1,486 1,530 1,578 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 2,694 $ 2,632 $ 2,688 $ 2,745 $ 2,869 $ 2,697 $ 2,717 $ 2,828 =================================================================================================================================== Earnings per share (in dollars):(1) Basic $ 0.86 $ 0.84 $ 0.86 $ 0.88 $ 0.90 $ 0.84 $ 0.84 $ 0.87 Diluted 0.84 0.82 0.84 0.86 0.88 0.82 0.82 0.85 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding:(1) Basic 3,128 3,119 3,116 3,133 3,173 3,217 3,229 3,263 Diluted 3,208 3,215 3,197 3,206 3,242 3,292 3,305 3,337 ===================================================================================================================================
(1) Computation of earnings per share is further described in Note 1. 54 MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA YEARS ENDED DECEMBER 31, 2001 AND 2000 MASSBANK Corp.'s common stock is currently traded on the Nasdaq Stock Market under the symbol "MASB." At December 31, 2001 there were 3,147,491 shares outstanding and 837 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, 2001 - -------------------------------------------------------------------- FOURTH QUARTER $ 36.75 $ 33.85 $ 0.315 THIRD QUARTER 41.00 36.25 0.315 SECOND QUARTER 39.05 32.40 0.315 FIRST QUARTER 33.50 28.875 0.315
- -------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2000 - -------------------------------------------------------------------- Fourth Quarter $ 29.50 $ 27.875 $ 0.30 Third Quarter 29.75 28.0625 0.30 Second Quarter 29.875 27.50 0.30 First Quarter 29.50 27.00 0.285 - --------------------------------------------------------------------
55 MASSBANK BRANCH OFFICES d/b/a MASSBANK OF READING* 123 Haven Street Reading, MA 01867 (781) 942-8188 (978) 446-9200 MASSBANK OF CHELMSFORD 291 Chelmsford Street Chelmsford, MA 01824 (978) 256-3751 17 North Road Chelmsford, MA 01824 (978) 256-3733 MASSBANK OF DRACUT 45 Broadway Road Dracut, MA 01826 (978) 441-0040 MASSBANK OF EVERETT 738 Broadway Everett, MA 02149 (617) 387-5115 MASSBANK OF LOWELL 50 Central Street Lowell, MA 01852 (978) 446-9200 755 Lakeview Avenue Lowell, MA 01850 (978) 446-9216 MASSBANK OF MEDFORD 4110 Mystic Valley Parkway Wellington Circle Plaza Medford, MA 02155 (781) 395-4899 MASSBANK OF MELROSE 476 Main Street Melrose, MA 02176 (781) 662-0100 27 Melrose Street Towers Plaza Melrose, MA 02176 (781) 662-0165 MASSBANK OF STONEHAM 240 Main Street Stoneham, MA 02180 (781) 662-0177 MASSBANK OF TEWKSBURY 1800 Main Street Tewksbury, MA 01876 (978) 851-0300 MASSBANK OF WESTFORD 203 Littleton Road Westford, MA 01886 (978) 692-3467 MASSBANK OF WILMINGTON 370 Main Street Wilmington, MA 01887 (978) 658-4000 219 Lowell Street Lucci's Plaza Wilmington, MA 01887 (978) 658-5775 *Main Office 56 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 16, 2002 at the Sheraton Ferncroft Resort 50 Ferncroft Road Danvers, MA 01923 Trademark MASSBANK and its logo are registered trademarks of the Company Form 10-K Shareholders may obtain without charge a copy of the Company's 2001 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, Inc. Boston EquiServe Division Shareholder Services 150 Royall Street P.O. Box 644 Canton, MA 02021 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' 2001 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 57 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 * 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 Former 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 Retired, 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 Lisa A. DiCicco Trust Operations Officer Karen L. Flammia Assistant Vice President Melissa J. Flanagan Information Technology 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 Laura M. O'Connor Assistant Treasurer Erik C. Olson Auditor and Compliance Officer Joseph P. Orefice Information Technology Officer Karen L. O'Rourke Assistant Treasurer Mindy S. Peloquin Assistant Vice President Joseph D. Regan Comptroller Alice B. Sweeney Assistant Comptroller Margaret E. White Assistant Treasurer Patricia A. Witts Assistant Treasurer Michael J. Woods Assistant Vice President Stephen A. Yurish Loan Officer 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 58 EX-22 5 b42256mbex22.txt SUBSIDIARIES 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 6 b42256mbex23.txt CONSENT OF KPMG LLP 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 8, 2002, relating to the consolidated balance sheets of MASSBANK Corp. and subsidiaries as of December 31, 2001 and 2000 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, 2001, which report is incorporated by reference into the December 31, 2001 annual report on Form 10-K of MASSBANK Corp. /s/ KPMG LLP Boston, Massachusetts March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----