Exhibit 13
F i n a n c i a l H i g h l i g h t s
Massbank Corp. and Subsidiaries
Selected Consolidated Financial Data
Selected Consolidated Financial Data
(In thousands) At December 31, | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Total assets | $ | 843,522 | $ | 898,679 | $ | 976,168 | $ | 1,010,733 | $ | 1,009,367 | ||||||||||
Mortgage loans | 199,253 | 215,904 | 226,197 | 241,886 | 302,788 | |||||||||||||||
Other loans | 9,674 | 9,826 | 10,001 | 11,120 | 16,011 | |||||||||||||||
Allowance for loan losses | 1,382 | 1,253 | 1,307 | 1,554 | 2,271 | |||||||||||||||
Allowance for loan losses on off-balance sheet credit exposures | 345 | 517 | 588 | 626 | 384 | |||||||||||||||
Investments(1) | 590,646 | 637,576 | 704,611 | 722,079 | 669,875 | |||||||||||||||
Deposits | 723,332 | 784,728 | 849,465 | 882,508 | 883,928 | |||||||||||||||
Stockholders’ equity | 106,885 | 105,264 | 110,015 | 110,927 | 117,285 |
(In thousands) Years ended December 31, | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||
Operating Data: | ||||||||||||||||||||
Interest and dividend income | $ | 39,939 | $ | 36,801 | $ | 33,581 | $ | 38,137 | $ | 47,103 | ||||||||||
Interest expense | 18,951 | 15,141 | 12,729 | 15,854 | 22,701 | |||||||||||||||
Net interest income | 20,988 | 21,660 | 20,852 | 22,283 | 24,402 | |||||||||||||||
Provision (credit) for loan losses | 123 | (53 | ) | (242 | ) | (502 | ) | — | ||||||||||||
Gains on securities, net | 797 | 679 | 1,229 | 639 | 1,718 | |||||||||||||||
Other non-interest income | 1,408 | 1,238 | 1,307 | 1,335 | 1,255 | |||||||||||||||
Non-interest expense | 12,360 | 12,514 | 12,352 | 12,667 | 12,087 | |||||||||||||||
Income before income taxes | 10,710 | 11,116 | 11,278 | 12,092 | 15,288 | |||||||||||||||
Income tax expense | 3,683 | 3,793 | 3,898 | 4,229 | 5,474 | |||||||||||||||
Net income | $ | 7,027 | $ | 7,323 | $ | 7,380 | $ | 7,863 | $ | 9,814 | ||||||||||
Years ended December 31, | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||
Other Data: | ||||||||||||||||||||
Yield on average interest-earning assets | 4.80 | % | 4.07 | % | 3.52 | % | 3.87 | % | 4.85 | % | ||||||||||
Cost of average interest-bearing liabilities | 2.53 | 1.85 | 1.48 | 1.78 | 2.61 | |||||||||||||||
Interest rate spread | ||||||||||||||||||||
Interest rate spread | 2.27 | 2.22 | 2.04 | 2.09 | 2.24 | |||||||||||||||
Net interest margin | 2.53 | 2.40 | 2.19 | 2.26 | 2.52 | |||||||||||||||
Non-interest expense to average assets | 1.44 | 1.35 | 1.26 | 1.26 | 1.22 | |||||||||||||||
Efficiency ratio(2) | 53.7 | 52.7 | 51.6 | 50.0 | 44.0 | |||||||||||||||
Return on assets (net income/average assets) | 0.82 | 0.79 | 0.75 | 0.78 | 0.99 | |||||||||||||||
Return on equity (net income/average stockholders’ equity) | 6.74 | 6.84 | 6.71 | 7.08 | 8.39 | |||||||||||||||
Percent non-performing loans to total loans | 0.07 | 0.11 | 0.03 | 0.09 | 0.13 | |||||||||||||||
Percent non-performing assets to total assets | 0.02 | 0.03 | 0.01 | 0.02 | 0.04 | |||||||||||||||
Stockholders’ equity to assets, at year-end | 12.67 | 11.71 | 11.27 | 10.97 | 11.62 | |||||||||||||||
Book value per share,at year-end(3) | $ | 24.76 | $ | 24.32 | $ | 25.11 | $ | 25.17 | $ | 25.45 | ||||||||||
Market price – close, at year-end(3) | 32.89 | 33.00 | 37.45 | 43.01 | 28.30 | |||||||||||||||
Earnings per share:(3) | ||||||||||||||||||||
Basic | 1.62 | 1.68 | 1.67 | 1.77 | 2.09 | |||||||||||||||
Diluted | 1.61 | 1.66 | 1.64 | 1.73 | 2.04 | |||||||||||||||
Cash dividends paid per share(3) | 1.09 | 1.05 | 1.00 | 0.92 | 0.88 | |||||||||||||||
Dividend payout ratio | 67 | % | 63 | % | 60 | % | 52 | % | 42 | % | ||||||||||
(1) | Consist 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 (including the provision (credit) for loan losses) by fully taxable equivalent net interest income plus non-interest income. | |
(3) | All share information presented has been adjusted to reflect the 3-for-2 split of the Company’s common stock effective April 19, 2002. |
3
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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 2006 presentation.
The preparation of consolidated financial statements requires management to make estimates and assumptions, in the application of certain of its accounting policies, about the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues and expenses. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policies considered significant in this respect are the determination of the allowance for loan losses and allowance for loan losses on off-balance sheet credit exposures, and the determination of investment securities considered other than temporarily impaired. These significant accounting policies are discussed in the Provisions (Credit) for Loan Losses and Investment Securities Other Than Temporarily Impaired sections of this discussion and analysis and in Note 1 of the “Notes to Consolidated Financial Statements.”
The financial condition and results of operations ofMassbank Corp. (the “Company”) essentially reflect the operations of its subsidiary,Massbank (the “Bank”).
The Bank’s principal business has historically consisted of offering savings and other deposits to the general public and using the funds from these deposits to primarily make loans secured by residential real estate and consumer loans, and to make investments in debt and equity securities. Most residential mortgage loans granted by the Bank are for terms of 10, 12, 15 or 20 years and are generally low credit risk loans. The Bank’s debt securities portfolio consists primarily of U.S. Treasury and Government agency securities and Government agency mortgage-backed securities.
The Company’s consolidated net income depends largely upon net interest income, which is the difference between interest and dividend income from loans and investments (“interest-earning assets”), and interest expense on deposits (“interest-bearing liabilities”). Net interest income is significantly affected by loan and investment activity and volumes, including prepayment activity on loans and mortgage-backed securities and calls of callable government agency securities. Net interest income is also affected by general economic conditions, particularly changes in interest rates, competition, government legislation and policies affecting fiscal affairs, monetary policies of the Federal Reserve System, and the actions of the bank regulatory authorities. Earnings results are also affected by the Company’s provision (credit) for loan losses and changes in non-interest income, such as fee-based revenues and securities gains or losses; non-interest expense and income taxes.
Forward-Looking Statement Disclosure
Massbank Corp. may from time to time make written or oral forward-looking statements, including statements contained in this annual report, in the Company’s filings with the Securities and Exchange Commission, in its reports to stockholders and in otherMassbank Corp. communications. These statements relate to future, not past events.
These forward-looking statements include, among others, statements with respect toMassbank Corp.’s beliefs, plans, objectives, goals, guidelines, expectations, financial condition, results of operations, future performance and business of the Company. You can identify forward-looking statements by the use of the words “may”, “could”, “should”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “assume”, “will”, “would”, “plan”, “projects”, “outlook” or similar expressions. These statements are based upon the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. These forward-looking statements involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyondMassbank Corp.’s control).
The following factors, among others, could cause the Company’s performance to differ materially from that expressed in any forward-looking statements: (1) the strength of the United States economy in general and the strength of the local economy in which the Company conducts operations may be different than expected; (2) unexpected fluctuations in market interest rates; (3) adverse conditions in the stock market, the public debt market and other capital markets; (4) an increase in the level of non-performing assets; (5) an increase in the competitive pricing pressures within the Company’s market which may result in an increase in the Company’s cost of funds, a decrease in loan originations, a decrease in deposits and assets; (6) adverse legislative and regulatory developments; (7) a significant decline in residential real estate values in the Company’s market area; (8) adverse impacts resulting from the continuing war on terrorism; (9) a significant increase in employee benefit costs; (10) the impact of changes in accounting principles; (11) the impact of inflation or deflation; and (12)Massbank Corp.’s success at managing the risks involved in the foregoing.
9
Critical Accounting Policies
The Company’s consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. As such, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet dates and the reported amounts of income and expense during the reporting periods. Actual amounts could differ from such estimates.
The Company believes that the following accounting policies are among the most critical because they involve significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.
Provisions (Credit) for Loan losses
The provision (credit) for loan losses represents a charge or credit against current earnings and an addition to or deduction from the allowance for loan losses. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses (“loan allowance”). Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient loan allowance. The methodology includes three elements: an analysis of individual loans deemed to be impaired, general loss allocations for various types of loans based on loss experience factors and an unallocated allowance. The unallocated allowance 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 affect the borrowers’ ability to pay, and trends in loan delinquencies and charge-offs.
The provision (credit) for loan losses on off-balance sheet credit exposures represents a charge or credit against current earnings (reported in other non-interest expense) and an addition to or deduct ion from the allowance for loan losses on off-balance sheet credit exposures (“off-balance sheet exposures”). In determining the amount to provide for off-balance sheet exposures, the key factor is the adequacy of the balance. The balance of the off-balance sheet exposures is maintained based on expected drawdowns of committed loans, their loss experience factors, management’s assesment of various other factors including current and anticipated economic conditions that may affect the borrowers’ ability to pay and trends in loan delinquencies and charge-offs.
Any significant changes in assumptions and/or conditions could result in higher than estimated losses that could adversely affect the Company’s earnings results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowances. Such agencies may require the Bank to recognize additional allowances based on judgements different from those of management, which could also adversely affect the Company’s earnings results.
Investment Securities other than Temporarily Impaired
Management judgment is involved in the evaluation of declines in value (“impairment”) of individual investment securities held by the Company. Declines in value that are deemed other than temporary are recognized in the income statement through write-downs in the recorded value of the affected securities. Management considers many factors in its analysis of other than temporarily impaired securities, including industry analyst reports, sector credit ratings, volatility in market price and other relevant information, such as the financial condition, earnings capacity and near term prospects of the company and the length of time and extent to which the market value has been less than cost.
Whenever a debt or equity security is deemed to be “other than temporarily impaired” due to a fundamental deterioration in its financial condition as determined by management’s analysis, it is written down to its current fair market value. U.S. Treasury Securities and other securities backed by the U.S. Government are never considered impaired due to a fundamental deterioration in financial condition.
If “due to general market conditions” an investment security declines in price from its cost basis by 25% or more for more than a year, between 30% and 40% for more than nine months, between 40% and 50% for more than six months or over 50% for more than ninety days, and in each case the value of the investment security has been below its cost basis for the entire period in question, then the security is considered “other than temporarily impaired” and it is written down to its current fair market value and the loss is recognized in earnings. U.S. Treasury and Government Agency securities fluctuate in value based on changes in market interest rates and other factors; however, they can be redeemed at par value if held to maturity and therefore, if their maturity date is less than one year into the future regardless of their market value they are considered only temporarily impaired. Any unfavorable change in general market conditions could cause an increase in the Company’s impairment write downs of investment securities. This would have an adverse effect on the Company’s earnings results. There were no other than temporary impairment write downs of investment securities in 2006, 2005 or 2004.
Available for sale securities deemed temporarily impaired are carried at market value in the asset section of the Company’s balance sheet. Any change in value, net of income taxes, is reflected in accumulated other comprehensive income in the stockholders’ equity section of the Company’s balance sheet.
10
Financial Overview
Comparison of the years 2006 and 2005
Comparison of the years 2006 and 2005
Massbank Corp. provides a broad range of banking services through its subsidiary,Massbank (“the Bank”). The Bank offers a full range of retail and commercial deposit products through its fifteen banking offices located in Eastern Massachusetts. The Bank’s lending business includes residential and commercial real estate mortgages, construction loans, commercial loans and a variety of consumer loans. The Bank’s loan portfolio is concentrated among borrowers from the municipalities in which it operates banking offices and all of the contiguous cities and towns. The Bank also 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’s earnings depend largely upon net interest income. Securities gains are also an important source of revenue for the Bank.
The Bank faces strong competition from banks and other financial services providers in its market area. The principal methods of competition are through interest rates, financing terms and other customer conveniences. Among the external factors affectingMassbank’s operating results are market interest rates, the shape of the U.S. Treasury securities yield curve, the condition of the financial markets and both regional and national economic conditions.
Fiscal 2006 was a challenging year for the Company. The flat-to-inverted yield curve environment in 2006 made it difficult for the Company to profitably grow deposits. Additionally, rising short-term interest rates influenced by the rate setting actions of the Federal Reserve Bank resulted in increased competition for shorter-term deposits. In this environment, the Company decided to more aggressively price its medium term certificates of deposit (CDs) contributing to a shifting of deposits from savings to these CD maturities.
In 2006, the Company generated net income of $7.0 million, or $1.61 per diluted share, compared with $7.3 million or $1.66 per diluted share in 2005. Return on average assets in 2006 improved to 0.82% from 0.79% in the prior year. Return on average equity was 6.74% in 2006 compared to 6.84% in 2005.
The major factors affecting the comparison of earnings and diluted earnings per share between 2006 and 2005 were:
• | The decrease in net interest income of $672 thousand due primarily to a decrease in average earning assets. | |
• | The provision for loan losses of $123 thousand versus a credit for loan losses of $53 thousand the prior year. | |
• | The increase in net securities gains of $118 thousand. | |
• | The increase in other non-interest income of $170 thousand. | |
• | The decrease in non-interest expense of $154 thousand. | |
• | The decrease in income tax expense of $110 thousand due to lower income before taxes partially offset by an increase in the Company’s effective income tax rate. |
Years ended December 31, 2006 compared to 2005:
(In thousands) Years ended December 31, | 2006 | 2005 | change | |||||||||
Income Statement Data | ||||||||||||
Interest and dividend income: | ||||||||||||
Mortgage and other loans | $ | 12,070 | $ | 12,792 | $ | (722 | ) | |||||
Mortgage-backed securities | 7,592 | 7,217 | 375 | |||||||||
Federal funds sold | 7,731 | 6,116 | 1,615 | |||||||||
Other securities and investments | 12,546 | 10,676 | 1,870 | |||||||||
Total interest and dividend income | 39,939 | 36,801 | 3,138 | |||||||||
Total interest expense | 18,951 | 15,141 | (3,810 | ) | ||||||||
Net interest income | 20,988 | 21,660 | (672 | ) | ||||||||
Provision (credit) for loan losses | 123 | (53 | ) | (176 | ) | |||||||
Gains on securities, net | 797 | 679 | 118 | |||||||||
Other non-interest income | 1,408 | 1,238 | 170 | |||||||||
Non-interest expense | 12,360 | 12,514 | 154 | |||||||||
Income tax expense | 3,683 | 3,793 | 110 | |||||||||
Net income | $ | 7,027 | $ | 7,323 | $ | ( 296 | ) | |||||
Diluted earnings per share (in dollars): | $ | 1.61 | $ | 1.66 | $ | (0.05 | ) | |||||
(In thousands) Years ended December 31, | 2006 | 2005 | change | |||||||||
Average Balance Sheet Data | ||||||||||||
Total average earning assets | $ | 833,842 | $ | 904,646 | $ | (70,804 | ) | |||||
Total average deposits | $ | 750,437 | $ | 816,577 | $ | (66,140 | ) | |||||
11
Financial Condition
The Company’s total assets decreased $55.2 million, or 6.1% to $843.5 million at December 31, 2006 from $898.7 million at December 31, 2005. The reduction in total assets reflects a decrease in investments of $46.9 million and a decrease in total loans of $16.8 million.
Deposits decreased $61.4 million, or 7.8% to $723.3 million at year-end 2006 from $784.7 million at year-end 2005. This was due to increased competition for deposits, more attractive returns on other investment opportunities and various other market factors.
Condensed Consolidated Balance Sheets
(In thousands) at December 31, | 2006 | 2005 | change | |||||||||
Short-term investments | $ | 139,240 | $ | 167,787 | $ | (28,547 | ) | |||||
Interest-bearing deposits in banks | — | 898 | (898 | ) | ||||||||
Term Federal funds sold | 41,000 | — | 41,000 | |||||||||
Securities available for sale, at market value | 403,079 | 453,472 | (50,393 | ) | ||||||||
Securities held to maturity, at amortized cost | 5,396 | 6,137 | (741 | ) | ||||||||
Trading securities, at market value | 1,931 | 9,282 | (7,351 | ) | ||||||||
Total investments | 590,646 | 637,576 | (46,930 | ) | ||||||||
Total loans | 208,927 | 225,730 | (16,803 | ) | ||||||||
Allowance for loan losses | (1,382 | ) | (1,253 | ) | (129 | ) | ||||||
Net loans | 207,545 | 224,477 | (16,932 | ) | ||||||||
Other assets | 45,331 | 36,626 | 8,705 | |||||||||
Total assets | $ | 843,522 | $ | 898,679 | $ | (55,157 | ) | |||||
Total deposits | $ | 723,332 | $ | 784,728 | $ | (61,396 | ) | |||||
Escrow deposits of borrowers | 1,006 | 1,059 | (53 | ) | ||||||||
Other liabilities | 12,299 | 7,628 | 4,671 | |||||||||
Total liabilities | 736,637 | 793,415 | (56,778 | ) | ||||||||
Total stockholders’ equity | 106,885 | 105,264 | 1,621 | |||||||||
Total liabilities and stockholders’ equity | $ | 843,522 | $ | 898,679 | $ | (55,157 | ) | |||||
Investments
At December 31, 2006 the Company’s investment portfolio consisted of short-term investments, term Federal funds sold, and securities available for sale, held to maturity and trading totaling $590.6 million representing 70.0% of total assets. This reflects a decrease of $46.9 million compared to $637.6 million or 70.9% of total assets at December 31, 2005. Massbank’s investment portfolio is concentrated in U.S. Treasury and Government agency securities and 15-year contractual life mortgage-backed securities issued by Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and other agency issuers. U.S. Treasury and Government agency securities totaled $261.3 million at year-end 2006. This included $161.3 million in callable agency securities. The mortgage-backed securities portfolio totaled $139.9 million at December 31, 2006, essentially unchanged from the prior year. The Company also holds $7.4 million in equity securities at year-end 2006.Massbank’s strategy is to purchase liquid investments with short to intermediate maturities in the current interest rate environment. If the currently inverted Treasury yield curve becomes more normalized in 2007, the Company will likely add to its mortgage-backed securities portfolio and reduce its short-term investments and term Federal funds sold which totaled $180.2 million at December 31, 2006. In such event, we believe that this would likely improve the Company’s net interest margin.
12
Loans
Massbank’s loan portfolio at December 31, 2006 totaled $208.9 million representing 24.8% of total assets compared to $225.7 million representing 25.1% of total assets at December 31, 2005. The loan portfolio consists predominantly of residential mortgages. Residential mortgage loans amounted to $194.3 million at year-end 2006, representing approximately 93.0% of the total loan portfolio as compared to $213.6 million representing 94.6% of the total loan portfolio as of December 31, 2005. Commercial real estate loans increased from $2.3 million at December 31, 2005 to $5.0 million at year-end 2006, as the bank has focused more on this type of lending this past year.
Non-Performing Assets
Non-accrual loans, generally those loans that are 90 days or more delinquent, were near historical lows totaling $137 thousand at December 31, 2006, representing 0.07% of total loans. This compares to $257 thousand representing 0.11% of total loans at December 31, 2005. The Bank generally places all loans on non-accrual status when 90 days delinquent. The Bank had no real estate acquired through foreclosure at year-end 2006.
Deposits
Deposits have traditionally been the Bank’s primary source of funds for lending and investment activities.Massbank attracts deposits within its primary market area by offering a variety of deposit instruments including demand and NOW accounts, money market accounts, different types of savings accounts, certificates of deposit and retirement savings plans. 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.
Total deposits at December 31, 2006 were $723.3 million, compared to $784.7 million at December 31 ,2005. Increased competition for deposits and more attractive returns on other investment opportunities were the principal reasons for the deposit outflows.
In 2006, savings deposits decreased $96.7 million or 21.9% year-over-year, to $344.8 million from $441.5 million at year-end 2005. Conversely, certificates of deposit increased by $38.7 million or 14.8% to $299.7 million at year-end 2006 as customers continued to shift deposits from savings accounts to certificates of deposit seeking a higher rate of return on their deposits. Demand and NOW deposits totaled $78.9 million at December 31, 2006 compared to $82.3 million at December 31, 2005. For information concerning deposit balances at year-end 2006 and 2005, the average cost and the maturity distribution of the deposits 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 $1.6 million or 1.5% to $106.9 million at December 31, 2006, from $105.3 million at year-end 2005. Book value per share increased $0.44 or 1.8% to $24.76 per share at December 31, 2006, from $24.32 per share at December 31, 2005.
The increase in total stockholders’ equity was due principally to the 2006 net income of $7.0 million and the payments and related tax benefits received from the exercise of stock options by the Company’s officers and directors of $0.9 million. This was partially offset by the payment of dividends to stockholders of $4.7 million and the Company’s repurchase of 49,500 shares of treasury stock at a cost of $1.6 million.
As of December 31, 2006, the Company has recognized as a component of other comprehensive income, the under-funded status of its defined benefit pension plan, net of tax, in accordance with the provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” See Consolidated Statements of Changes in Stockholders’ Equity.
13
Results of Operations
Comparison of the years 2006 and 2005
Comparison of the years 2006 and 2005
Net Interest Income
Net interest income is the primary source ofMassbank’s operating income. Net interest income is affected by the volume and mix of average interest earning-assets and interest-bearing liabilities, market interest rates, the shape of the U.S. Treasury securities (interest rate) yield curve and other factors. In 2006, short-term interest rates rose at a greater rate than intermediate and long rates. This caused the yield curve to “invert.” An inverted curve significantly limits the ability to benefit from investing assets at long term rates. Because of this situation, we maintain a significant position of short term investments. Due to our current asset mix and other factors, we would expect to benefit from an increase in interest rates along with a steeper interest rate yield curve.
Net interest income on a fully taxable equivalent (FTE) basis totaled $21.1 million in 2006 compared to $21.7 million in 2005, reflecting a decrease of 3.1%. The decrease in net interest income in 2006 is primarily attributable to lower levels of interest earning assets partially offset by lower levels of interest bearing liabilities and an improvement in net interest margin. The Company’s average earning assets in 2006 declined $70.8 million or 7.8% to $833.8 million, from $904.6 million in 2005. Average deposits declined $66.1 million or 8.1% to $750.4 million in 2006, from $816.6 million in 2005. The market for deposits was very competitive in 2006. Financial institutions were aggressive in pricing their deposit products in order to retain deposits.Massbank chose not to match these competitors’ rates in order to protect its net interest margin.
The Company’s net interest margin (net interest income on a FTE basis divided by average interest earning assets) for the year ended December 31, 2006 increased 13 basis points to 2.53% from 2.40% in the prior year. The increase in margin was driven by the increases to short term interest rates in 2006. This was partially offset by the unfavorable changes in the mix of our deposits and competitive market conditions which contributed to our increased funding costs.
The tables on pages 26 and 27 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 affected interest income and expense during the years indicated. Information is provided for each category of interest-earning assets and interest-bearing liabilities, on changes due to (1) changes in volume and (2) changes in interest rates.
Interest on investment securities available for sale (AFS) on a fully taxable equivalent basis was $12.1 million in 2006 compared to $9.9 million in 2005. The average balance of investment securities AFS was $308.7 million with an average yield of 3.93% for the year ended December 31, 2006 compared to an average balance of $313.7 million with an average yield of 3.16% for the year ended December 31, 2005. The increase in yield is primarily due to the replacement yields on new securities purchased being higher because of a rise in market interest rates and to a lesser extent a change in mix of securities in the portfolio.
Interest on mortgage-backed securities AFS and held to maturity was $7.6 million in 2006 compared to $7.2 million in 2005. The average balance of mortgage-backed securities was $141.0 million with an average yield of 5.39% in 2006 compared to an average balance of $134.8 million with an average yield of 5.35% in 2005. The increase in yield is due primarily to the higher replacement yields on the securities purchased in 2006. However, with the flat-to-inverted yield curve environment in 2006, the Company only purchased $25.9 million in mortgage-backed securities during the year as compared to $49.3 million in 2005. Principal repayments (including prepayments) on our mortgage-backed securities portfolio in 2006 declined to $26.7 million, from $31.5 million in the prior year.
Interest on trading securities was $0.2 million in 2006, down from $0.8 million in the prior year. The average balance of trading securities was $5.7 million in 2006 compared to $32.2 million in 2005. The average yield on these securities improved to 3.55% in the recent year, from 2.40% in 2005 due primarily to rising market interest rates.
Interest income on Federal funds sold and short-term investments was $8.0 million in 2006, up 30.0% from $6.2 million in the prior year. The average balance of these investments was $161.2 million with an average yield of 4.97% in 2006 compared to an average balance of $193.8 million with an average yield of 3.18% in 2005. The significant improvement in yield was driven by the Federal Reserve’s increases to the short-term interest rates. The Federal Reserve Bank Board’s Federal Open Market Committee raised the target interest rate for Federal Funds four times in 2006, increasing the rate from 4.25% to 5.25% by mid-year 2006.
Interest on loans fell to $12.1 million in 2006, from $12.8 million in 2005. The average balance for mortgage and other loans in 2006 was $217.3 million with an average yield of 5.56%. This compares to an average balance for mortgage and other loans of $230.1 million in 2005 with an average yield of 5.56%. The decline in average balances is due to principal payments, pay downs and prepayments on mortgages and lower loan origination volume in 2006 compared to 2005. Loan originations totaled $21.7 million in 2006 compared to $48.9 million in 2005. This is primarily attributable to a decline in mortgage refinancing activity due to the rise in market interest rates and a decline in new and existing home sales in the Bank’s market area.
Interest on total deposits was $19.0 million in 2006 compared to $15.1 million in 2005. The average balance of total deposits was $750.4 million with an average cost of 2.53% in 2006 compared to an average balance of $816.6 million with an average cost of 1.85% in 2005. The decrease in average balance was due primarily to increased competition for deposits and more attractive returns on other investment opportunities. The year-over-year increase in the average cost of funds is due primarily to the increases to short-term interest rates over the past year (which were partially passed on to our customers) as well as changes in the mix of deposits.
14
Provisions (Credit) for Loan Losses
In 2006, the Bank recorded a provision for loan losses of $123 thousand compared to a negative or credit provision for loan losses of $53 thousand in 2005. The provision was to increase the Bank’s allowance for possible losses on its outstanding loan balances due to certain recently funded loan commitments. At the same time, because of the funding of the loan commitments, the Bank reduced its allowance for possible losses on outstanding loan commitments by $172 thousand. This compares to a negative provision or reduction of $71 thousand in this allowance over the prior year. These credits are included in other non-interest expense. On a combined basis, the Bank reduced its overall allowance on loan balances and outstanding loan commitments by $49 thousand in 2006, as compared to a reduction of $124 thousand in 2005.
The Bank’s loan portfolio decreased $16.8 million or 7.4% from $225.7 million at December 31, 2005 to $208.9 million at December 31, 2006. 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 the purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired, 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 borrowers’ ability to pay, and trends in loan delinquencies and charge-offs. At December 31, 2006, the allowance for loan losses was $1.4 million representing 0.66% of total loans and over ten times the balance of non-accrual loans. This compares to $1.3 million representing 0.56% of total loans and almost five times the balance of non-accrual loans at December 31, 2005. Non-accrual loans were near historical lows totaling $137 thousand at December 31, 2006, down from $257 thousand a year earlier. The Bank had net recoveries of loans previously charged-off of $6 thousand in 2006 compared to $1 thousand in net charge-offs in 2005.
The Bank’s allowance for loan losses on off-balance sheet credit exposures (shown separately on the balance sheet) totaled $345 thousand and $517 thousand, respectively, at December 31, 2006 and 2005.
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 for the year ended December 31, 2006 increased $288 thousand or 15.0% to $2.2 million, from $1.9 million for the year ended December 31, 2005. The increase is due primarily to an increase in net gains on securities available for sale and trading of $118 thousand, from $679 thousand in 2005 to $797 thousand in 2006 and option fess of $150 thousand generated in 2006. The Company has granted a local developer an option to purchase a parcel of land that the Company owns and is not being used for operations purposes. As consideration for this option, the developer will make quarterly option payments of $75,000 to the Company until the option is either exercised and the closing transaction for the purchase occurs or the option is allowed to lapse. The Closing is expected to take place in the third quarter of 2007. Option payments received are not applied towards the purchase price and are not refundable.
Deposit account service fees, deferred compensation plan income and other non-interest income combined increased $20 thousand in 2006 compared to the prior year.
Non-Interest Expense
Non-interest expense totaled $12.4 million for the twelve months ended December 31, 2006 compared to $12.5 million for the prior year, a decrease of $154 thousand or 1.2%. Salaries and employee benefits, the largest component of non-interest expense decreased $125 thousand or 1.7% to $7.3 million in 2006 from $7.5 million in 2005.
The decrease in salaries and employee benefits is due principally to a reduction in the number of bank employees and a decrease in pension expense. These were partially offset by the share based compensation expense recorded by the Company with respect to stock option grants in 2006 and the increased costs of other employee benefits.
Deferred compensation plan expense increased $91 thousand to $263 thousand in 2006 from $172 thousand in 2005. This increase was offset by the increased earnings on plan assets reflected in non-interest income of $94 thousand.
The Company’s other expenses consisting of occupancy and equipment, data processing, professional services, advertising and marketing, deposit insurance and other expenses totaled $4.8 million in 2006 reflecting a decrease of $120 thousand or 2.5% from the prior year. The decrease essentially results from a higher negative provision for off-balance sheet credit exposures in 2006 than the prior year. In 2006, the Bank reduced its allowance for possible losses on outstanding commitments by $172 thousand versus a reduction of $71 thousand in 2005.
Income Tax Expense
For the years ended December 31, 2006 and 2005, income tax expense amounted to $3.7 million and $3.8 million, respectively. The decrease in income tax expense is primarily due to lower income before taxes partially offset by an increase in the Company’s effective income tax rate. The Company’s effective income tax rate for the year ended December 31, 2006 was 34.39%, up from 34.12% for the year ended December 31, 2005. For additional information with respect toMassbank’s income taxes, see Note 12 of Notes to Consolidated Financial Statements.
15
Financial Overview
Comparison of the years 2005 and 2004
Comparison of the years 2005 and 2004
Massbank Corp. provides a broad range of banking services through its subsidiary,Massbank (“the Bank”). The Bank offers a full range of retail and commercial deposit products through its fifteen banking offices located in Eastern Massachusetts. The Bank’s lending business includes residential and commercial real estate mortgages, construction loans, commercial loans and a variety of consumer loans. The Bank’s loan portfolio is concentrated among borrowers from the municipalities in which it operates banking offices and all of the contiguous cities and towns. The Bank also 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’s earnings depend largely upon net interest income. Securities gains are also an important source of revenue for the Bank.
The Bank faces strong competition from banks and other financial services providers in our market area. The principal methods of competition are through interest rates, financing terms and other customer conveniences. Among the external factors affectingMassbank’s operating results are market interest rates, the shape of the U.S. Treasury securities yield curve, the condition of the financial markets and both regional and national economic conditions.
We experienced a successful year in 2005 as the Company improved its net interest margin throughout the year as a result of the interest sensitive position of our balance sheet and the rise in short-term interest rates. The Federal Reserve Bank Board’s Federal Open Market Committee (FOMC) raised the target rate for Federal funds by 25 basis points eight times during 2005, increasing the rate from 2.25% to 4.25%.
In 2005, the Company generated net income of $7.3 million, or $1.66 per diluted share, compared with $7.4 million or $1.64 per diluted share in 2004. Return on average assets and return on average equity improved to 0.79% and 6 .84%, respectively, in 2005, compared to 0.75% and 6.71%, respectively, in 2004.
The improvement in earnings per share and operating ratios was driven by an increase in net interest income partially offset by a decline in net gains on securities in 2005. The Company’s earnings performance was also negatively affected by a reduction in the credit for loan losses recorded in 2005 compared to 2004 due primarily to a smaller decrease in the size of the bank’s loan portfolio in 2005 compared to 2004.
The major factors affecting the comparison of earnings and diluted earnings per share between 2005 and 2004 were:
• | The increase in net interest income of $808 thousand due primarily to the higher yield on Federal funds sold and the resulting increase in interest income on Federal funds. | |
• | The credit to the provision for loan losses that was $189 thousand less than the prior year. | |
• | The decrease in net securities gains of $550 thousand. | |
• | The decrease in other non-interest income of $69 thousand. | |
• | The increase in non-interest expense of $162 thousand. | |
• | The decrease in income tax expense of $105 thousand due to lower income before taxes and a reduction in the Company’s effective income tax rate. |
16
Years ended December 31, 2005 compared to 2004:
(In thousands)Years ended December 31, | 2005 | 2004 | change | |||||||||
Income Statement Data | ||||||||||||
Interest and dividend income: | ||||||||||||
Mortgage and other loans | $ | 12,792 | $ | 14,247 | $ | (1,455 | ) | |||||
Mortgage-backed securities | 7,217 | 6,571 | 646 | |||||||||
Federal funds sold | 6,116 | 2,438 | 3,678 | |||||||||
Other securities and investments | 10,676 | 10,325 | 351 | |||||||||
Total interest and dividend income | 36,801 | 33,581 | 3,220 | |||||||||
Total interest expense | 15,141 | 12,729 | (2,412 | ) | ||||||||
Net interest income | 21,660 | 20,852 | 808 | |||||||||
Provision (credit) for loan losses | (53 | ) | (242 | ) | (189 | ) | ||||||
Gains on securities, net | 679 | 1,229 | (550 | ) | ||||||||
Other non-interest income | 1,238 | 1,307 | (69 | ) | ||||||||
Non-interest expense | 12,514 | 12,352 | (162 | ) | ||||||||
Income tax expense | 3,793 | 3,898 | 105 | |||||||||
Net income | $ | 7,323 | $ | 7,380 | $ | (57 | ) | |||||
Diluted earnings per share (in dollars): | $ | 1.66 | $ | 1.64 | $ | 0.02 | ||||||
(In thousands)Years ended December 31, | 2005 | 2004 | change | |||||||||
Average Balance Sheet Data | ||||||||||||
Total average earning assets | $ | 904,646 | $ | 955,267 | $ | (50,621 | ) | |||||
Total average deposits | $ | 816,577 | $ | 862,691 | $ | (46,114 | ) | |||||
Financial Condition
The Company’s total assets decreased $77.5 million, or 7.9% to $898.7 million at December 31, 2005 from $976.2 million at December 31, 2004. The reduction in total assets reflects a decrease in investments of $67.0 million and a decrease in total loans of $10.5 million.
Deposits decreased $64.7 million, or 7.6% to $784.7 million at year-end 2005 from $849.5 million at year-end 2004. This was due to increased competition for deposits, more attractive returns on other investment opportunities and various other market factors.
Condensed Consolidated Balance Sheets
(In thousands)at December 31, | 2005 | 2004 | change | |||||||||
Short-term investments | $ | 167,787 | $ | 194,250 | $ | (26,463 | ) | |||||
Interest-bearing deposits in banks | 898 | 2,718 | (1,820 | ) | ||||||||
Securities available for sale, at market value | 453,472 | 443,753 | 9,719 | |||||||||
Securities held to maturity, at amortized cost | 6,137 | 4,877 | 1,260 | |||||||||
Trading securities, at market value | 9,282 | 59,013 | (49,731 | ) | ||||||||
Total investments | 637,576 | 704,611 | (67,035 | ) | ||||||||
Total loans | 225,730 | 236,198 | (10,468 | ) | ||||||||
Allowance for loan losses | (1,253 | ) | (1,307 | ) | 54 | |||||||
Net loans | 224,477 | 234,891 | (10,414 | ) | ||||||||
Other assets | 36,626 | 36,666 | (40 | ) | ||||||||
Total assets | $ | 898,679 | $ | 976,168 | $ | (77,489 | ) | |||||
Total deposits | $ | 784,728 | $ | 849,465 | $ | (64,737 | ) | |||||
Escrow deposits of borrowers | 1,059 | 1,074 | (15 | ) | ||||||||
Other liabilities | 7,628 | 15,614 | (7,986 | ) | ||||||||
Total liabilities | 793,415 | 866,153 | (72,738 | ) | ||||||||
Total stockholders’ equity | 105,264 | 110,015 | (4,751 | ) | ||||||||
Total liabilities and stockholders’ equity | $ | 898,679 | $ | 976,168 | $ | (77,489 | ) | |||||
17
Investments
At December 31, 2005 the Company’s investment portfolio consisted of short-term investments, interest-bearing deposits in banks, and securities available for sale, held to maturity and trading totaling $637.6 million representing 70.9% of total assets. This reflects a decrease of $67.0 million compared to $704.6 million or 72.2% of total assets at December 31, 2004. MASSBANK’s investment portfolio is concentrated in U.S. Treasury and Government agency securities and 15-year contractual life mortgage-backed securities issued by Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and other agency issuers. U.S. Treasury and Government agency securities totaled $318.5 million at year-end. This included $189.3 million in callable agency securities. The mortgage-backed securities portfolio totaled $141.5 million at December 31, 2005. MASSBANK’s strategy is to purchase liquid investments with short to intermediate maturities that generally match the Company’s deposit structure. This strategy seeks to maintain the Company’s overall interest rate risk position within policy requirements. The Company also holds $7.4 million in equity securities at December 31, 2005. In 2005, the Company increased its mortgage-backed securities portfolio from $127.6 million at December 31, 2004 to $141.5 million at December 31, 2005 to help improve its net interest margin. If the difference between longer term and short term interest rates widens to a sufficient extent in 2006, the Company will likely add to its mortgage-backed securities portfolio and reduce its short-term investments (primarily Federal funds sold) that totaled $167.8 million at December 31, 2005. We believe that this would likely improve the Company’s net interest margin.
Loans
MASSBANK’s loan portfolio at December 31, 2005 was $225.7 million, compared to $236.2 million at December 31, 2004, and was comprised of $213.6 million of residential mortgage loans, $2.3 million of commercial real estate loans, $9.7 million of consumer loans and $0.1 million of commercial loans. The bank’s loan portfolio composition shifted slightly in 2005 as the portfolio was 94.6% residential mortgages, 1.0% commercial mortgages, 4.3% consumer and 0.1% commercial compared to 95.1% residential mortgages, 0.7% commercial mortgages and 4.2% consumer at December 31, 2004.
Non-Performing Assets
Non-accrual loans, generally those loans that are 90 days or more delinquent, were $257 thousand at December 31, 2005, compared to $74 thousand at December 31, 2004. This represents 0.11% of total loans and 0.03% of total assets at December 31, 2005 . The Bank generally places all loans on non-accrual status at 90 days delinquent. The Bank had no real estate acquired through foreclosure at year-end 2005.
Deposits
Deposits have traditionally been the Bank’s primary source of funds for lending and investment activities. MASSBANK attracts deposits within its primary market area by offering a variety of deposit instruments including demand and NOW accounts, money market accounts, different types of savings accounts, certificates of deposit and retirement savings plans. 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.
Total deposits at December 31, 2005 were $784.7 million, compared to $849.5 million at December 31,2004. Increased competition for deposits and more attractive returns on other investment opportunities were the principal reasons for the deposit outflows.
In 2005, savings deposits decreased $119.8 million or 21.3% year-over-year, to $441.5 million from $561.3 million at year-end 2004. Conversely, certificates of deposit increased by $60.4 million or 30.1% to $260.9 million at year-end 2005 as customers shifted deposits from savings accounts to certificates of deposit seeking a higher rate of return on their deposits as rates increased throughout the year. Demand and NOW deposits totaled $82.3 million at December 31, 2005 compared to $87.7 million at December 31, 2004. For information concerning deposit balances at year-end 2005 and 2004, the average cost and the maturity distribution of the deposits 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 decreased $4.8 million to $105.3 million at December 31, 2005, representing a book value of $24.32 per share, from $110.0 million representing a book value of $25.11 per share at December 31, 2004.
The decrease in total stockholders’ equity was due principally to the Company’s repurchase of 128,460 shares of treasury stock at a cost of $4.5 million, the payment of dividends to stockholders of $4.6 million and the decrease in other comprehensive income of $4.8 million due primarily to the decline in market value of the Bank’s debt securities portfolio. This was partially offset by the net income for the year of $7.3 million and the payments and related tax benefits received from the exercise of stock options by the Company’s officers and directors of $1.8 million.
18
Results of Operations
Comparison of the years 2005 and 2004
Comparison of the years 2005 and 2004
Net Interest Income
Net interest income is the primary source of MASSBANK’s operating income. Net interest income is affected by the volume and mix of average interest-earning assets and interest-bearing liabilities, market interest rates, the shape of the U.S. Treasury securities (interest rate) yield curve and other factors. In 2005, short-term interest rates rose at a greater rate than intermediate and long rates. This caused the yield curve to “flatten.” A flat curve limits the ability to benefit from investing assets at long term rates. Because of this situation we maintain a significant position of short term investments. Due to our current asset mix and other factors we would expect to benefit from any substantial sustained increase in interest rates and a steeper interest rate yield curve.
Net interest income on a fully taxable equivalent (FTE) basis totaled $21.7 million in 2005 compared to $20.9 million in 2004, or an increase of 3.9%. The increase in net interest income in 2005 was due primarily to an improvement in net interest margin. The Company’s net interest margin (net interest income on a FTE basis divided by average interest-earning assets) for the year ended December 31, 2005 increased 21 basis points to 2.40% from 2.19% in the prior year. The increase in margin was driven by the Federal Reserve’s increases to short term interest rates over the past year. This was partially offset by the unfavorable mix changes in our deposit costs. The net interest margin was also impacted by the decline in the Company’s average earning assets in 2005. Average total earning assets decreased $50.6 million or 5.3% to $904.6 million in 2005, from $955.3 million in 2004.
The tables on pages 26 and 27 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 affected interest income and expense during the years indicated. Information is provided for each category of interest-earning assets and interest-bearing liabilities, on changes due to (1) changes in volume and (2) changes in interest rates.
Interest on investment securities available for sale (AFS) on a fully taxable equivalent basis was $9.9 million for 2005 compared to $9.0 million for 2004. The average balance of investment securities AFS was $313.7 million with an average tax equivalent yield of 3.16% for the year ended December 31, 2005 compared to an average balance of $324.2 million with an average yield of 2.78% for the year ended December 31, 2004. The increase in yield is primarily due to a rise in market interest rates and to a lesser extent a change in mix of securities in the portfolio.
Interest on mortgage-backed securities AFS and held to maturity was $7.2 million for 2005 compared to $6.6 million for 2004. The average balance of mortgage-backed securities was $134.8 million with an average yield of 5.35% for 2005 compared to an average balance of $115.8 million with an average yield of 5.67% for 2004. The decrease in yield is due primarily to normal amortization and prepayments and the replacement yields on new securities purchased being lower. Longer-term rates have stayed flat which has negatively impacted our mortgage-backed securities yields. Prepayment activity on our mortgage-backed securities portfolio declined in 2005 compared to the prior two years.
Interest on trading securities was $0.8 million for 2005, down from $1.1 million in the prior year. The average balance of trading securities was $32.2 million for 2005 compared to $69.3 million for 2004. The yield on these securities improved to 2.40% for the recent year, from 1.65% for 2004 due primarily to rising short term interest rates.
Interest income on Federal funds sold and short-term investments was $6.2 million for 2005, up 130.4% from $2.7 million in the prior year. The average balance of these investments was $193.8 million with an average yield of 3.18% for 2005 compared to an average balance of $202.5 million with an average yield of 1.32% for 2004. The significant improvement in yield was driven by the Federal Reserve’s increases to the short-term interest rates. The Federal Reserve Bank Board’s Federal Open Market Committee raised the target interest rate for Federal funds eight times in 2005, increasing the rate from 2.25% to 4.25% by year-end 2005.
Interest on loans fell to $12.8 million for 2005, from $14.2 million for 2004. The average balance of mortgage and other loans for 2005 was $230.1 million with an average yield of 5.56%. This compares to an average balance of mortgage and other loans of $243.4 million for 2004 with an average yield of 5.85%. The decline in average balances is due to principal payments, pay downs and prepayments on mortgages and lower loan origination volume for 2005 compared to 2004. Loan originations totaled $48.9 million in 2005 compared to $60.3 million in 2004. The decline in average yields is due to normal amortization and prepayment of higher yielding mortgages and the lower rate on newly originated replacement mortgages.
Interest on total deposits was $15.1 million for 2005 compared to $12.7 million for 2004. The average balance of total deposits was $816.6 million with an average cost of 1.85% for 2005 compared to an average balance of $862.7 million with an average cost of 1.48% for 2004. The decrease in average balance was due primarily to increased competition for deposits and more attractive returns on other investment opportunities. The increase in the average cost year to year is due primarily to the e Federal Reserve’s increases to short-term interest rates over the past year (which were partially passed on to our customers) as well as changes in the mix of deposits.
19
Provisions (Credit) for Loan Losses
In 2005, the Bank recorded a negative provision for loan losses of $53 thousand due to the quality of the loans in the portfolio and a decrease in the size of the Bank’s loan portfolio. This compares to a negative provision for loan losses of $242 thousand in 2004. The Bank’s loan portfolio decreased $10.5 million or 4.4% from $236.2 million at December 31, 2004 to $225.7 million at December 31,2005. 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 the purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired, 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 borrowers’ ability to pay, and trends in loan delinquencies and charge-offs. At December 31, 2005, the allowance for loan losses was $1.3 million representing 0.56% of total loans and 488% of non-accrual loans. This compares to $1.3 million representing 0.55% of total loans and 1766% of non-accrual loans at December 31, 2004. Non-accrual loans totaled $257 thousand at December 31, 2005, up from $74 thousand a year earlier. The Bank’s net charge-offs totaled $1 thousand in 2005 compared to $5 thousand in 2004. The Bank also maintains an allowance for loan losses on off-balance sheet credit exposures (shown separately on the balance sheet) that totaled $517 thousand and $588 thousand, respectively, at December 31, 2005 and 2004. In 2005, the Company recorded a negative provision for off-balance sheet credit exposures of $70 thousand compared to a negative provision of $39 thousand in 2004. The credit or provision is included in other non-interest expense.
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 for the year ended December 31, 2005 decreased $619 thousand or 24.4% to $1.9 million, from $2.5 million for the year ended December 31, 2004. The decrease is due primarily to a decrease in net gains on securities available for sale and trading of $550 thousand, from $1.2 million in 2004 to $679 thousand in 2005. Net securities gains in 2005 were comprised of $725 thousand in net gains on equity securities and $46 thousand in net losses on debt securities. This compares to $1.5 million in net gains on equity securities and $299 thousand in net losses on debt securities in 2004. Deposit account service fees and other non-interest income combined were $1.2 million and $1.3 million, respectively, in 2005 and 2004.
Non-Interest Expense
Non-interest expense totaled $12.5 million for the twelve months ended December 31, 2005 compared to $12.4 million for the prior year, an increase of $162 thousand or 1.3%. Salaries and employee benefits, the largest component of non-interest expense increased $202 thousand or 2.8% to $7.5 million in 2005 from $7.3 million in 2004. The increase in salaries and employee benefits is due principally to broad based salary increases of $149 thousand and the increased costs of employee benefits. The Company’s other expenses consisting of deferred compensation plan expense, occupancy and equipment, data processing, advertising and marketing, deposit insurance and other expenses totaled $4.6 million in 2005 reflecting an increase of $106 thousand or 2.4% from the prior year. This was offset by a decrease in professional services expenses of $146 thousand, from $631 thousand in 2004 to $485 thousand in 2005. The decrease essentially results from a reduction in audit fees paid to our independent registered public accountants in 2005 compared to the prior year.
Income Tax Expense
For the years ended December 31, 2005 and 2004, income tax expense amounted to $3.8 million and $3.9 million, respectively. The decrease in income tax expense is primarily due to lower income before taxes and a decrease in the Company’s effective income tax rate. The Company’s effective income tax rate for the year ended December 31, 2005 was 34.12%, down from 34.56% for the year ended December 31, 2004. For additional information with respect toMassbank’s income taxes, see Note 12 of Notes to Consolidated Financial Statements.
20
Contractual Obligations
The Company’s contractual cash obligations and commitments to extend credit as of December 31, 2006 are as follows:
Payments Due or Commitments Expiring - by Period | ||||||||||||||||||||
Less than | One to | Four to | More than | |||||||||||||||||
(In thousands) | Total | one year | three years | five years | five years | |||||||||||||||
Contractual cash obligations: | ||||||||||||||||||||
Operating lease obligations | $ | 1,390 | $ | 295 | $ | 458 | $ | 330 | $ | 307 | ||||||||||
Data processing service obligations(1) | 1,511 | 590 | 921 | — | — | |||||||||||||||
Pension benefit obligations | 347 | 347 | — | — | — | |||||||||||||||
Supplemental retirement benefit obligations | 79 | 79 | — | — | — | |||||||||||||||
Total contractual cash obligations | $ | 3,327 | $ | 1,311 | $ | 1,379 | $ | 330 | $ | 307 | ||||||||||
Other commitments: | ||||||||||||||||||||
Commitments to originate residential mortgage loans | $ | 1,206 | $ | 1,206 | $ | — | $ | — | $ | — | ||||||||||
Unused lines of credit | 28,779 | 842 | 7,764 | 5,167 | 15,006 | |||||||||||||||
Other loan commitments | 2,554 | 217 | 1,882 | 26 | 429 | |||||||||||||||
Total other commitments(2) | $ | 32,539 | $ | 2,265 | $ | 9,646 | $ | 5,193 | $ | 15,435 | ||||||||||
(1) | The fees charged by our data processing service provider fluctuate based on the number of deposit and loan accounts serviced and therefore have been estimated. | |
(2) | 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. These commitments generally have fixed expiration dates. The total commitment amounts do not necessarily represent future cash requirements since many of the commitments may expire without being drawn upon. |
21
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, calls 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 Federal funds sold (overnight) and money market funds, which can readily be converted into cash, and United States Treasury and Government agency securities, which can be sold or pledged to raise funds. At December 31, 2006, the Bank had $139.2 million or 16.5% of total assets and $261.3 million or 31.0% of total assets invested, respectively, in Federal funds sold and money market funds, 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 the se 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, 2006, the Bank had a leverage Tier I capital to average assets ratio of 12.39%, a Tier I capital to risk-weighted assets ratio of 34.77% and a total capital to risk-weighted assets ratio of 35.35%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to average assets of 12.78%, Tier I capital to risk-weighted assets of 36.58% and total capital to risk-weighted assets of 37.17% at December 31, 2006.
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 assumptions 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 controller, generally meets four times a year to review the economic environment and the volume, mix and maturity of the Company’s assets and liabilities.
22
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, including income simulation models. These models, produced quarterly, estimate the effect that instantaneous and permanent “market interest rate shocks” of +/-100, 200 and 300 basis points would have on the Company’s net interest income, with no effect given to any steps that management might take to counter the effect of these interest rate movements. These results are compared to an existing interest rate scenario and a consensus forecast that represents the most likely future course of interest rates.
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 analytics and securities data from 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, mortgage-backed securities and callable U.S. Government agency 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 may have the right to prepay loans, particularly residential mortgage loans, at times without penalty. Additionally, the Company’s mortgage based assets (i.e., mortgage loans and mortgage-backed securities) are subject to prepayment risk and can prepay without penalty. 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. Additionally, some of the Company’s callable U.S. Government agency securities may be called prior to maturity. As a result, the interest rate sensitivity of these investment securities cannot be determined precisely.
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. If rates fall and the GAP is positive, the institution’s net interest spread will decrease as more assets than liabilities react to the rate change. If the GAP is negative and rates fall, the institution’s net interest spread will improve as more liabilities react to market rates than assets.
23
Interest rate risk(continued)
The Company, despite having a one-year negative GAP position as of year-end 2006, estimates that it would benefit from any significant rise in interest rates in 2007 rather than have its net interest income move in the opposite direction as the change in market interest rates as GAP theory postulates. (Net interest income, however, may be adversely affected by the shape of the yield curve). 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. Since the Company has elected to raise rates by less than the market movement on some savings and transaction-oriented accounts in response to a change in market rates, these deposits are included in the three months or less category. As a result, the Company’s one-year cumulative GAP position was converted from asset sensitive to liability sensitive as of year-end 2006.
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. In the current inverted yield curve environment, the Company’s strategy is to purchase liquid investments with short to intermediate maturities and currently not to pay market rates on short-term deposits.
The following table presents the amounts of interest-earning assets and interest-bearing liabilities at December 31, 2006 that are assumed to mature or reprice during the periods indicated. The table also summarizes the Company’s GAP position at December 31, 2006. As of this date, the Company’s one-year cumulative GAP position was negative $296.0 million, representing approximately 35.1% of total assets compared to a negative GAP of $282.4 million or 31.4% of total assets at December 31, 2005. 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(3) | $ | 16,053 | $ | 7,696 | $ | 16,465 | $ | 95,536 | $ | 73,177 | $ | 208,927 | ||||||||||||
Short-term investments: | ||||||||||||||||||||||||
Federal funds sold | 117,104 | — | — | — | — | 117,104 | ||||||||||||||||||
Money market investment fund | 22,133 | — | — | — | — | 22,133 | ||||||||||||||||||
Term Federal funds sold | 41,000 | — | — | — | — | 41,000 | ||||||||||||||||||
Interest-bearing deposits in banks | 3 | — | — | — | — | 3 | ||||||||||||||||||
Securities available for sale(3) (5) | 53,881 | 26,987 | 42,750 | 227,568 | 56,418 | 407,604 | ||||||||||||||||||
Securities held to maturity | 189 | 182 | 346 | 2,033 | 2,646 | 5,396 | ||||||||||||||||||
Trading securities | 1,931 | — | — | — | — | 1,931 | ||||||||||||||||||
Total interest-earning assets | $ | 252,294 | $ | 34,865 | $ | 59,561 | $ | 325,137 | $ | 132,241 | $ | 804,098 | ||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Deposits(1) (2) (4) | $ | 527,659 | $ | 52,091 | $ | 63,016 | $ | 54,264 | $ | 304 | $ | 697,334 | ||||||||||||
Total interest-bearing liabilities | $ | 527,659 | $ | 52,091 | $ | 63,016 | $ | 54,264 | $ | 304 | $ | 697,334 | ||||||||||||
GAP for period | $ | (275,365 | ) | $ | (17,226 | ) | $ | (3,455 | ) | $ | 270,873 | $ | 131,937 | $ | 106,764 | |||||||||
Cumulative GAP — December 31, 2006 | $ | (275,365 | ) | $ | (292,591 | ) | $ | (296,046 | ) | $ | (25,173 | ) | $ | 106,764 | ||||||||||
Cumulative GAP as a percent of total assets | (32.6 | )% | (34.7 | )% | (35.1 | )% | (3.0 | )% | 12.7 | % | ||||||||||||||
Cumulative GAP — December 31, 2005 | $ | (297,094 | ) | $ | (309,173 | ) | $ | (282,412 | ) | $ | (41,165 | ) | $ | 104,845 | ||||||||||
(1) | Excludes non-interest bearing demand accounts of $27,004 thousand. | |
(2) | Includes escrow deposits of borrowers of $1,006 thousand. | |
(3) | Loans and mortgage-backed securities reflect regular amortization of principal and prepayment estimates. Callable U.S. Government agency securities of $163,743 thousand are shown in the period they are expected to be called or reprice, otherwise they are shown based on their maturity date. It is assumed that a security will be called if the coupon rate on the security exceeded market interest rates at year-end 2006 . | |
(4) | It is assumed that the Bank’s Savings and NOW account rates will be increased within 3 months or less. | |
(5) | Excludes net unrealized losses on securities available for sale of $(4,525) thousand. |
24
Interest rate risk(continued)
The following table shows the Company’s financial instruments that are sensitive to changes in interest rates, categorized by expected call date or maturity, and the instruments’ fair values as of December 31, 2006.
Expected Maturity Date
At December 31, 2006
At December 31, 2006
Fair Value | ||||||||||||||||||||||||||||||||
(In thousands) | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | at 12/31/06 | ||||||||||||||||||||||||
Interest sensitive assets: | ||||||||||||||||||||||||||||||||
Fixed rate securities(5) | $ | 112,968 | $ | 101,686 | $ | 50,940 | $ | 36,008 | $ | 23,966 | $ | 56,071 | $ | 381,639 | $ | 377,197 | ||||||||||||||||
Average interest rate(1) | 4.04 | % | 3.91 | % | 4.60 | % | 4.63 | % | 5.11 | % | 6.39 | % | 4.55 | % | ||||||||||||||||||
Variable rate securities(2)(5) | 11,366 | — | 9,000 | 4,000 | 4,000 | 2,995 | 31,361 | 31,158 | ||||||||||||||||||||||||
Average interest rate(1) | 3.98 | % | — | 3.67 | % | 5.00 | % | 5.19 | % | 4.58 | % | 4.23 | % | |||||||||||||||||||
Trading securities(6) | 1,931 | — | — | — | — | — | 1,931 | 1,931 | ||||||||||||||||||||||||
Average interest rate | 0.57 | % | — | — | — | — | — | 0.57 | % | |||||||||||||||||||||||
Fixed rate loans | 25,632 | 21,120 | 18,504 | 17,158 | 17,391 | 71,649 | 171,454 | 165,643 | ||||||||||||||||||||||||
Average interest rate | 5.42 | % | 5.47 | % | 5.49 | % | 5.47 | % | 5.51 | % | 5.28 | % | 5.39 | % | ||||||||||||||||||
Variable rate loans | 14,583 | 5,433 | 7,586 | 3,573 | 4,852 | 1,446 | 37,473 | 36,335 | ||||||||||||||||||||||||
Average interest rate | 7.40 | % | 5.98 | % | 5.98 | % | 6.23 | % | 6.59 | % | 5.63 | % | 6.41 | % | ||||||||||||||||||
Other fixed rate assets(4) | 41,000 | — | — | — | — | — | 41,000 | 41,000 | ||||||||||||||||||||||||
Average interest rate | 5.29 | % | — | — | — | — | — | 5.29 | % | |||||||||||||||||||||||
Other variable rate assets(3) | 139,240 | — | — | — | — | — | 139,240 | 139,240 | ||||||||||||||||||||||||
Average interest rate | 5.14 | % | — | — | — | — | — | 5.14 | % | |||||||||||||||||||||||
Total interest sensitive assets | $ | 346,720 | $ | 128,239 | $ | 86,030 | $ | 60,739 | $ | 50,209 | $ | $132,161 | $ | 804,098 | $ | 792,504 | ||||||||||||||||
Interest sensitive liabilities: | ||||||||||||||||||||||||||||||||
Savings and money market deposit accounts | $ | 344,808 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 344,808 | $ | 344,808 | ||||||||||||||||
Average interest rate | 3.1.96 | % | — | — | — | — | — | 1.96 | % | |||||||||||||||||||||||
Fixed rate certificates of deposit | 176,142 | 44,332 | 7,831 | 1,242 | 859 | 304 | 230,710 | 230,348 | ||||||||||||||||||||||||
Average interest rate | 4.30 | % | 4.62 | % | 4.52 | % | 4.36 | % | 4.48 | % | 4.93 | % | 4.38 | % | ||||||||||||||||||
Variable rate certificates of deposit | 27,106 | 15,874 | 13,300 | 12,674 | — | — | 68,954 | 68,954 | ||||||||||||||||||||||||
Average interest rate | 5.50 | % | 5.51 | % | 5.69 | % | 5.69 | % | — | — | 5.57 | % | ||||||||||||||||||||
NOW accounts | 51,856 | — | — | — | — | — | 51,856 | 51,856 | ||||||||||||||||||||||||
Average interest rate | 0.53 | % | — | — | — | — | — | 0.53 | % | |||||||||||||||||||||||
Escrow deposits of borrowers | 1,006 | — | — | — | — | — | 1,006 | 1,006 | ||||||||||||||||||||||||
Average interest rate | 0.75 | % | — | — | — | — | — | 0.75 | % | |||||||||||||||||||||||
Total interest sensitive liabilities | $ | 600,918 | $ | 60,206 | $ | 21,131 | $ | 13,916 | $ | 859 | $ | 304 | $ | 697,334 | $ | 696,972 | ||||||||||||||||
(1) | Securities rates presented are on a tax equivalent basis. | |
(2) | Includes equity securities. | |
(3) | Consist of Federal funds sold (overnight), money market investment funds and interest-bearing bank money market accounts. | |
(4) | Consist of term Federal funds sold. | |
(5) | Securities presented are at amortized cost. | |
(6) | Securities presented are at market value. |
The Company uses certain assumptions to estimate fair values and expected maturities. For interest-sensitive assets, except callable government agency securities, expected maturities are based upon contractual maturity, and projected repayments and prepayments of principal. For callable government agency securities expected maturities are based upon the next call date for those securities expected to be called, otherwise, the securities are shown at their expected maturity date. For interest-sensitive deposit liabilities, maturities are based on contractual maturity. 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 $7.4 million at December 31, 2006. The net unrealized losses on these securities totaled $14 thousand at year-end 2006. 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.
25
Average Balance Sheets
(In thousands) Years ended December 31, | 2006 | 2005 | 2004 | |||||||||||||||||||||||||||||||||
Interest | Average | Interest | Average | Interest | Average | |||||||||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||||||||||||||||||
Balance | Expense(1) | Rate | Balance | Expense(1) | Rate | Balance | Expense(1) | Rate | ||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||||||||||||||
Federal funds sold | $ | 155,556 | $ | 7,731 | 4.97 | % | $ | 192,154 | $ | 6,116 | 3.18 | % | $ | 186,615 | $ | 2,438 | 1.31 | % | ||||||||||||||||||
Short-term investments(4) | 5,691 | 289 | 5.08 | 1,653 | 53 | 3.21 | 15,870 | 239 | 1.51 | |||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||
Investment securities(2) | 308,716 | 12,124 | 3.93 | 313,708 | 9,923 | 3.16 | 324,239 | 9,002 | 2.78 | |||||||||||||||||||||||||||
Mortgage-backed securities(2) | 135,267 | 7,293 | 5.39 | 129,850 | 6,961 | 5.36 | 112,445 | 6,398 | 5.69 | |||||||||||||||||||||||||||
Mortgage-backed securities held to maturity | 5,695 | 299 | 5.25 | 4,989 | 256 | 5.13 | 3,402 | 173 | 5.09 | |||||||||||||||||||||||||||
Trading securities | 5,657 | 201 | 3.55 | 32,222 | 772 | 2.40 | 69,345 | 1,145 | 1.65 | |||||||||||||||||||||||||||
Mortgage loans(3) | 207,650 | 11,305 | 5.44 | 220,020 | 12,111 | 5.50 | 232,709 | 13,578 | 5.83 | |||||||||||||||||||||||||||
Other loans(3) | 9,610 | 765 | 7.96 | 10,050 | 681 | 6.78 | 10,642 | 669 | 6.29 | |||||||||||||||||||||||||||
Total earning assets | 833,842 | 40,007 | 4.80 | % | 904,646 | 36,873 | 4.07 | % | 955,267 | 33,642 | 3.52 | % | ||||||||||||||||||||||||
Allowance for loan losses | (1,299 | ) | (1,266 | ) | (1,460 | ) | ||||||||||||||||||||||||||||||
Total earning assets less allowance for loan losses | 832,543 | 903,380 | 953,807 | |||||||||||||||||||||||||||||||||
Other assets | 26,655 | 25,174 | 25,541 | |||||||||||||||||||||||||||||||||
Total assets | $ | 859,198 | $ | 928,554 | $ | 979,348 | ||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||
Demand and NOW | $ | 80,188 | 228 | 0.28 | % | $ | 85,326 | 187 | 0.22 | % | $ | 85,066 | 171 | 0.20 | % | |||||||||||||||||||||
Savings | 389,260 | 7,043 | 1.81 | 499,772 | 7,949 | 1.59 | 585,239 | 8,563 | 1.46 | |||||||||||||||||||||||||||
Time certificates of deposit | 280,989 | 11,680 | 4.16 | 231,479 | 7,005 | 3.03 | 192,386 | 3,995 | 2.08 | |||||||||||||||||||||||||||
Total deposits | 750,437 | 18,951 | 2.53 | % | 816,577 | 15,141 | 1.85 | % | 862,691 | 12,729 | 1.48 | % | ||||||||||||||||||||||||
Other liabilities | 4,434 | 4,984 | 6,660 | |||||||||||||||||||||||||||||||||
Total liabilities | 754,871 | 821,561 | 869,351 | |||||||||||||||||||||||||||||||||
Stockholders’ Equity | 104,327 | 106,993 | 109,997 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 859,198 | $ | 928,554 | $ | 979,348 | ||||||||||||||||||||||||||||||
Net interest income (tax- equivalent basis) | 21,056 | 21,732 | 20,913 | |||||||||||||||||||||||||||||||||
Less adjustment of tax- exempt interest income | 68 | 72 | 61 | |||||||||||||||||||||||||||||||||
Net interest income | $ | 20,988 | $ | 21,660 | $ | $20,852 | ||||||||||||||||||||||||||||||
Interest rate spread(5) | 2.27 | % | 2.22 | % | 2.04 | % | ||||||||||||||||||||||||||||||
Net interest margin(6) | 2.53 | % | 2.40 | % | 2.19 | % | ||||||||||||||||||||||||||||||
(1) | Income on equity securities is included on a tax equivalent basis. | |
(2) | Averages balances include net unrealized gains (losses) on securities available for sale. | |
(3) | Loans on non-accrual status are included in average balances. | |
(4) | Short-term investments consist of interest-bearing deposits in banks and investments in money market funds. | |
(5) | Interest rate spread represents the difference between the yield on earning assets and the cost of the Company’s deposits. | |
(6) | Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets. |
26
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.
2006 Compared to 2005 | 2005 Compared To 2004 | |||||||||||||||||||||||
(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 | $ | (1,331 | ) | $ | 2,946 | $ | 1,615 | $ | 75 | $ | 3,603 | $ | 3,678 | |||||||||||
Short-term investments | 191 | 45 | 236 | (321 | ) | 135 | (186 | ) | ||||||||||||||||
Investment securities | (159 | ) | 2,358 | 2,199 | (298 | ) | 1,220 | 922 | ||||||||||||||||
Mortgage-backed securities | 330 | 45 | 375 | 1,032 | (386 | ) | 646 | |||||||||||||||||
Trading securities | (812 | ) | 247 | (565 | ) | (759 | ) | 374 | (385 | ) | ||||||||||||||
Mortgage loans | (675 | ) | (131 | ) | (806 | ) | (720 | ) | (747 | ) | (1,467 | ) | ||||||||||||
Other loans | (31 | ) | 115 | 84 | (38 | ) | 50 | 12 | ||||||||||||||||
Total interest and dividend income | (2,487 | ) | 5,625 | 3,138 | (1,029 | ) | 4,249 | 3,220 | ||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Demand and NOW | (12 | ) | 53 | 41 | 1 | 15 | 16 | |||||||||||||||||
Savings | (1,907 | ) | 1,001 | (906 | ) | (1,319 | ) | 705 | (614 | ) | ||||||||||||||
Time certificates of deposit | 1,702 | 2,973 | 4,675 | 926 | 2,084 | 3,010 | ||||||||||||||||||
Total interest expense | (217 | ) | 4,027 | 3,810 | (392 | ) | 2,804 | 2,412 | ||||||||||||||||
Net interest income | $ | (2,270 | ) | $ | 1,598 | $ | (672 | ) | $ | (637 | ) | $ | 1,445 | $ | 808 | |||||||||
Impact of Inflation and Changing Prices
Massbank Corp.’s financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America 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.
27
Recent Accounting Pronouncements
Interpretation No. 48, Accounting for Uncertainty In Income Taxes, An Interpretation of Sfas No. 109
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”, an interpretation of FASB Statement No. 109.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax position s that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The Company is currently evaluating the potential financial impact of adopting FIN 48.
SABNo. 108, Considering the Effects of Prior Year Misstatements When Qualifying Misstatements
In Current Year Financial Statements
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108 to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that the Company quantify misstatements based on their impact on each of the Company’s financial statements and related disclosures. SAB 108 is effective as of the first fiscal year ending after November 15, 2006, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006, for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. The adoption of SAB No. 108 did not have a material effect onMassbank Corp.’s financial condition or results of operations.
SFAS No. 157, Fair Value Measurements
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, that SFAS No. 157 will have on its financial position and results of operations. The Company will adopt the provisions of this statement January 1, 2008.
SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,
an amendment of Sfas Nos. 87, 88, 106 and 132(r)
In September 2006, FASB issued SFAS No. 158, which requires employers to recognize the under-funded or over-funded status of a defined benefit plan as an asset or liability in its statement of financial position. The new reporting requirements and related new footnote disclosure rules of SFAS No. 158 are effective for the years ending after December 15, 2006, with changes in the funded status recognized through comprehensive income in the year in which they occur.
SFAS No. 158 will not change the amount of net periodic benefit expense recognized in an entity’s results of operations. As such, the adoption did not have an impact to the Company’s results of operations in 2006.
SFAS No. 158 also requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The new measurement date requirement applies for fiscal years ending after December 15, 2008.
On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158. The effect of adopting SFAS No. 158 on the Company’s financial condition at December 31, 2006 has been included in the accompanying consolidated financial statements. SFAS No. 158 did not have an affect on the Company’s consolidated financial condition at December 31, 2005 or 2004. See Note 15 of Notes to Consolidated Financial Statements for further discussion.
28
Massbank Corp.
Management’s Annual Report On Internal Control Over Financial Reporting
Management’s Annual Report On Internal Control Over Financial Reporting
Massbank Corp.’s management is responsible for the preparation, content and integrity of the financial statements and other statistical data and analyses compiled for this annual report. The financial statements and related notes have been prepared in conformity with U.S. generally accepted accounting principles and reflect management’s best estimates and judgments. Management believes that the financial statements and notes present fairlyMassbank Corp.’s financial position, results of operations and cash flows in all material respects.
Management is responsible for establishing and maintaining a system of internal control that is intended to protectMassbank Corp.’s assets and the integrity of its financial reporting. This corporate-wide system of controls includes self-monitoring mechanisms, written policies and procedures, proper delegation of authority and organizational division of responsibility, and the selection and training of qualified personnel.
An annual code of ethics certification process is conducted, and compliance with the code of ethics is required of all Company employees. Although any system of internal control can be compromised by human error or intentional circumvention of required procedures, management believes the Company’s system provides reasonable assurances that financial transactions are recorded and reported properly, providing an adequate basis for reliable financial statements.
The Board of Directors discharges its responsibility forMassbank Corp.’s financial statements through its Audit Committee. This committee, which draws its members exclusively from the independent directors, also hires the independent registered public accounting firm.
Management’s Assessment of Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting forMassbank Corp. Management has assessed the effectiveness ofMassbank Corp.’s internal control and procedures over financial reporting using criteria described in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management believes that the Company maintained an effective system of internal control over financial reporting as of December 31, 2006.Massbank Corp.’s independent registered public accounting firm has issued an attestation report, dated March 6, 2007, on management’s assessment ofMassbank Corp.s internal control over financial reporting, which is included in this annual report.
Gerard H. Brandi
Chairman, President and CEO
Chairman, President and CEO
Reginald E. Cormier
Sr. Vice President, Treasurer and CFO
Sr. Vice President, Treasurer and CFO
29
report of independent registered public accounting firm
The Board of Directors and Stockholder
MassbankCorp.:
MassbankCorp.:
We have audited the accompanying consolidated balance sheets ofMassbank Corp. and Subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended. We also have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, thatMassbank Corp. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Massbank Corp.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits. The consolidated financial statements ofMassbank Corp. and Subsidiaries as of December 31, 2004, were audited by other auditors whose report dated March 14, 2005, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
30
report of independent registered public accounting firm(continued)
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofMassbank Corp. and Subsidiaries as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, management’s assessment thatMassbank Corp. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion,Massbank Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Certified Public Accountants, Inc.
Boston, Massachusetts
March 6, 2007
March 6, 2007
31
Massbank Corp. and Subsidiaries
Consolidated Balance Sheets
Consolidated Balance Sheets
(In thousands except share data)At December 31, | 2006 | 2005 | ||||||
Assets: | ||||||||
Cash and due from banks | $ | 8,650 | $ | 9,590 | ||||
Short-term investments (Note 2) | 139,240 | 167,787 | ||||||
Total cash and cash equivalents | 147,890 | 177,377 | ||||||
Interest-bearing deposits in banks | — | 898 | ||||||
Term Federal funds sold | 41,000 | — | ||||||
Securities available for sale, at market value (amortized cost of $407,604 in 2006 and $458,297 in 2005) (Note 3) | 403,079 | 453,472 | ||||||
Securities held to maturity, at amortized cost (market value of $5,276 in 2006 and $6,022 in 2005) (Note 3) | 5,396 | 6,137 | ||||||
Trading securities, at market value (Note 4) | 1,931 | 9,282 | ||||||
Loans (Notes 5 and 7): | ||||||||
Mortgage loans | 199,253 | 215,904 | ||||||
Other loans | 9,674 | 9,826 | ||||||
Total loans | 208,927 | 225,730 | ||||||
Allowance for loan losses (Note 6) | (1,382 | ) | (1,253 | ) | ||||
Net loans | 207,545 | 224,477 | ||||||
Premises and equipment (Note 9) | 7,085 | 6,525 | ||||||
Real estate held for resale | 425 | — | ||||||
Accrued interest and income receivable | 5,083 | 3,898 | ||||||
Goodwill | 1,090 | 1,090 | ||||||
Income tax receivable, net | 88 | — | ||||||
Deferred income tax asset, net (Note 12) | 3,347 | 3,240 | ||||||
Other assets | 19,563 | 12,283 | ||||||
Total assets | $ | 843,522 | $ | 898,679 | ||||
Liabilities and Stockholders’ Equity: | ||||||||
Deposits (Note 10): | ||||||||
Demand and NOW | $ | 78,860 | $ | 82,250 | ||||
Savings | 344,808 | 441,541 | ||||||
Time certificates of deposit | 299,664 | 260,937 | ||||||
Total deposits | 723,332 | 784,728 | ||||||
Escrow deposits of borrowers | 1,006 | 1,059 | ||||||
Accrued income taxes, net | — | 35 | ||||||
Allowance for loan losses on off-balance sheet credit exposures | 345 | 517 | ||||||
Other liabilities | 11,954 | 7,076 | ||||||
Total liabilities | 736,637 | 793,415 | ||||||
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, 7,850,317 and 7,811,680 shares issued in 2006 and 2005, respectively | 7,850 | 7,812 | ||||||
Additional paid-in capital | 57,953 | 57,067 | ||||||
Retained earnings | 107,055 | 104,743 | ||||||
172,858 | 169,622 | |||||||
Treasury stock at cost, 3,532,663 and 3,483,163 shares in 2006 and 2005, respectively | (62,902 | ) | (61,281 | ) | ||||
Accumulated other comprehensive income (loss) | (3,071 | ) | (3,077 | ) | ||||
Shares held in rabbi trust at cost, 17,944 and 15,644 shares in 2006 and 2005, respectively | (426 | ) | (351 | ) | ||||
Deferred compensation obligation | 426 | 351 | ||||||
Total stockholders’ equity | 106,885 | 105,264 | ||||||
Total liabilities and stockholders’ equity | $ | 843,522 | $ | 898,679 | ||||
See accompanying notes to consolidated financial statements.
32
Massbank Corp. and Subsidiaries
Consolidated Statements of Income
Consolidated Statements of Income
(In thousands except share data)Years ended December 31, | 2006 | 2005 | 2004 | |||||||||
Interest and dividend income: | ||||||||||||
Mortgage loans | $ | 11,305 | $ | 12,111 | $ | 13,578 | ||||||
Other loans | 765 | 681 | 669 | |||||||||
Securities available for sale: | ||||||||||||
Mortgage-backed securities | 7,293 | 6,961 | 6,398 | |||||||||
Other securities | 12,062 | 9,863 | 8,941 | |||||||||
Mortgage-backed securities held to maturity | 299 | 256 | 173 | |||||||||
Trading securities | 195 | 760 | 1,145 | |||||||||
Federal funds sold | 7,731 | 6,116 | 2,438 | |||||||||
Other investments | 289 | 53 | 239 | |||||||||
Total interest and dividend income | 39,939 | 36,801 | 33,581 | |||||||||
Interest expense: | ||||||||||||
Deposits: | ||||||||||||
NOW | 228 | 187 | 171 | |||||||||
Savings | 7,043 | 7,949 | 8,563 | |||||||||
Time certificates of deposit | 11,680 | 7,005 | 3,995 | |||||||||
Total interest expense | 18,951 | 15,141 | 12,729 | |||||||||
Net interest income | 20,988 | 21,660 | 20,852 | |||||||||
Provision (credit) for loan losses(Note 6) | 123 | (53 | ) | (242 | ) | |||||||
Net interest income after provision (credit) for loan losses | 20,865 | 21,713 | 21,094 | |||||||||
Non-interest income: | ||||||||||||
Deposit account service fees | 343 | 393 | 448 | |||||||||
Gains on securities available for sale, net | 736 | 515 | 1,361 | |||||||||
Gains (losses) on trading securities, net | 61 | 164 | (132 | ) | ||||||||
Option fees | 150 | — | — | |||||||||
Deferred compensation plan income | 178 | 84 | 108 | |||||||||
Other | 737 | 761 | 751 | |||||||||
Total non-interest income | 2,205 | 1,917 | 2,536 | |||||||||
Non-interest expense: | ||||||||||||
Salaries and employee benefits | 7,338 | 7,463 | 7,261 | |||||||||
Deferred compensation plan expense | 263 | 172 | 167 | |||||||||
Occupancy and equipment | 2,176 | 2,212 | 2,169 | |||||||||
Data processing | 583 | 540 | 521 | |||||||||
Professional services | 553 | 485 | 631 | |||||||||
Advertising and marketing | 139 | 155 | 110 | |||||||||
Deposit insurance | 126 | 145 | 160 | |||||||||
Other | 1,182 | 1,342 | 1,333 | |||||||||
Total non-interest expense | 12,360 | 12,514 | 12,352 | |||||||||
Income before income taxes | 10,710 | 11,116 | 11,278 | |||||||||
Income tax expense(Note 12) | 3,683 | 3,793 | 3,898 | |||||||||
Net income | $ | 7,027 | $ | 7,323 | $ | 7,380 | ||||||
Weighted average common shares outstanding: | ||||||||||||
Basic | 4,325,879 | 4,365,932 | 4,408,293 | |||||||||
Diluted | 4,360,688 | 4,422,529 | 4,501,537 | |||||||||
Earnings per share(in dollars): | ||||||||||||
Basic | $ | 1.62 | $ | 1.68 | $ | 1.67 | ||||||
Diluted | 1.61 | 1.66 | 1.64 | |||||||||
See accompanying notes to consolidated financial statements.
33
Massbank Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
(In thousands)Years ended December 31, | 2006 | 2005 | 2004 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 7,027 | $ | 7,323 | $ | 7,380 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 669 | 642 | 676 | |||||||||
Share-based payment compensation | 60 | — | — | |||||||||
Loan interest capitalized | (11 | ) | (9 | ) | (8 | ) | ||||||
(Increase) decrease in accrued interest and income receivable | (1,185 | ) | (482 | ) | 438 | |||||||
Increase (decrease) in other liabilities | 554 | (22 | ) | 276 | ||||||||
(Increase) decrease in income tax receivable, net | (88 | ) | 164 | 161 | ||||||||
Amortization of premiums (accretion of discounts) on securities, net | (79 | ) | (48 | ) | 566 | |||||||
Net trading securities activity | 7,412 | 49,895 | 13,488 | |||||||||
Gains on securities available for sale, net | (736 | ) | (515 | ) | (1,361 | ) | ||||||
Appreciation on donated equity securities | 5 | — | — | |||||||||
(Gains) losses on trading securities, net | (61 | ) | (164 | ) | 132 | |||||||
Decrease in deferred mortgage loan origination fees, net of amortization | (27 | ) | (113 | ) | (231 | ) | ||||||
(Decrease) increase in accrued income taxes, net | (35 | ) | 35 | — | ||||||||
Deferred income tax expense (benefit) | (56 | ) | 250 | 28 | ||||||||
(Increase) decrease in other assets | (3,301 | ) | (5,088 | ) | 847 | |||||||
Provision (credit) for loan losses | 123 | (53 | ) | (242 | ) | |||||||
Provision (credit) for loan losses on off-balance sheet credit exposures | (172 | ) | (71 | ) | (38 | ) | ||||||
Gains on sales of premises and equipment | (3 | ) | — | (4 | ) | |||||||
Net cash provided by operating activities | 10,096 | 51,744 | 22,108 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of term Federal funds | (41,000 | ) | (15,000 | ) | — | |||||||
Proceeds from maturities of term Federal funds | — | 15,000 | — | |||||||||
Net decrease in interest-bearing bank deposits | 898 | 1,820 | 2,967 | |||||||||
Proceeds from sales of investment securities available for sale | 20,405 | 28,252 | 28,942 | |||||||||
Proceeds from maturities and redemption of investment securities held to maturity and available for sale | 122,250 | 103,961 | 207,509 | |||||||||
Purchases of investment securities available for sale | (91,205 | ) | (132,546 | ) | (225,318 | ) | ||||||
Purchases of mortgage-backed securities available for sale | (25,943 | ) | (47,696 | ) | (63,922 | ) | ||||||
Purchases of mortgage-backed securities held to maturity | — | (1,581 | ) | (4,925 | ) | |||||||
Principal repayments of mortgage-backed securities | 26,730 | 31,450 | 35,671 | |||||||||
Principal repayments of securities available for sale | 2 | — | 1 | |||||||||
Donated equity securities | 5 | — | — | |||||||||
Loans originated | (21,736 | ) | (48,874 | ) | (60,332 | ) | ||||||
Loan principal payments received | 38,583 | 59,460 | 77,369 | |||||||||
Purchases of premises and equipment | (1,654 | ) | (700 | ) | (193 | ) | ||||||
Proceeds from sales of premises and equipment | 3 | — | 4 | |||||||||
Net cash provided by (used in) investing activities | 27,338 | (6,454 | ) | (2,227 | ) | |||||||
(Continued)
34
Massbank Corp. and Subsidiaries
Consolidated Statements of Cash Flows(Continued)
Consolidated Statements of Cash Flows(Continued)
(In thousands)Years ended December 31, | 2006 | 2005 | 2004 | |||||||||
Cash flows from financing activities: | ||||||||||||
Net decrease in deposits | (61,396 | ) | (64,737 | ) | (33,043 | ) | ||||||
Decrease in escrow deposits of borrowers | (53 | ) | (15 | ) | (65 | ) | ||||||
Payments to acquire treasury stock | (1,621 | ) | (4,487 | ) | (2,617 | ) | ||||||
Purchase of company stock for deferred compensation plan, net of distributions | (75 | ) | (30 | ) | (38 | ) | ||||||
Increase in deferred compensation obligation | 75 | 30 | 38 | |||||||||
Options exercised, including tax benefit | 864 | 1,830 | 944 | |||||||||
Cash dividends paid on common stock | (4,715 | ) | (4,583 | ) | (4,415 | ) | ||||||
Net cash used in financing activities | (66,921 | ) | (71,992 | ) | (39,196 | ) | ||||||
Net decrease in cash and cash equivalents | (29,487 | ) | (26,702 | ) | (19,315 | ) | ||||||
Cash and cash equivalents at beginning of year | 177,377 | 204,079 | 223,394 | |||||||||
Cash and cash equivalents at end of year | $ | 147,890 | $ | 177,377 | $ | 204,079 | ||||||
Supplemental cash flow disclosures: | ||||||||||||
Cash transactions: | ||||||||||||
Cash paid during the year for interest | $ | 18,950 | $ | 15,203 | $ | 12,769 | ||||||
Cash paid during the year for taxes, net of refunds | 3,745 | 3,002 | 3,401 | |||||||||
Non-cash transactions: | ||||||||||||
Transfer of property from premises and equipment to real estate held for resale | $ | 425 | $ | — | $ | — | ||||||
See accompanying notes to consolidated financial statements.
35
Massbank Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands except share data)Years ended December 31, 2006, 2005 and 2004 | ||||||||||||||||||||||||||||||||
Accumulated | Shares | |||||||||||||||||||||||||||||||
Additional | other | held in | Deferred | |||||||||||||||||||||||||||||
Common | paid-in | Retained | Treasury | comprehensive | Rabbi | compensation | ||||||||||||||||||||||||||
stock | capital | earnings | stock | income | Trust | obligation | Total | |||||||||||||||||||||||||
Balance at December 31, 2003 | $ | 7,688 | $ | 54,417 | $ | 99,038 | $ | (54,177 | ) | $ | 3,961 | $ | (515 | ) | $ | 515 | $ | 110,927 | ||||||||||||||
Net Income | — | — | 7,380 | — | — | — | — | 7,380 | ||||||||||||||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||||||||||||||
Unrealized losses on securities, net of reclassification adjustment (Note 1) | — | — | — | — | (2,204 | ) | — | — | (2,204 | ) | ||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | — | 5,176 | ||||||||||||||||||||||||
Cash dividends paid ($1.00 per share) | — | — | (4,415 | ) | — | — | — | — | (4,415 | ) | ||||||||||||||||||||||
Purchase of treasury stock | — | — | — | (2,617 | ) | — | — | — | (2,617 | ) | ||||||||||||||||||||||
Purchase of company stock for deferred compensation plan, net of distributions | — | — | — | — | — | (38 | ) | 38 | — | |||||||||||||||||||||||
Exercise of stock options | 48 | 588 | — | — | — | — | — | 636 | ||||||||||||||||||||||||
Tax benefit on stock options exercised | — | 308 | — | — | — | — | — | 308 | ||||||||||||||||||||||||
Balance at December 31, 2004 | 7,736 | 55,313 | 102,003 | (56,794 | ) | 1,757 | (553 | ) | 553 | 110,015 | ||||||||||||||||||||||
Net Income | — | — | 7,323 | — | — | — | — | 7,323 | ||||||||||||||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||||||||||||||
Unrealized losses on securities, net of reclassification adjustment (Note 1) | — | — | — | — | (4,834 | ) | — | — | (4,834 | ) | ||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | — | 2,489 | ||||||||||||||||||||||||
Cash dividends paid ($1.05 per share) | — | — | (4,583 | ) | — | — | — | — | (4,583 | ) | ||||||||||||||||||||||
Purchase of treasury stock | — | — | — | (4,487 | ) | — | — | — | (4,487 | ) | ||||||||||||||||||||||
Purchase of company stock for deferred compensation plan | — | — | — | — | — | (30 | ) | 30 | — | |||||||||||||||||||||||
Distribution of company stock from deferred compensation plan | — | — | — | — | — | 232 | (232 | ) | — | |||||||||||||||||||||||
Exercise of stock options | 76 | 1,412 | — | — | — | — | — | 1,488 | ||||||||||||||||||||||||
Tax benefit on stock options exercised | — | 342 | — | — | — | — | — | 342 | ||||||||||||||||||||||||
Balance at December 31, 2005 | 7,812 | 57,067 | 104,743 | (61,281 | ) | (3,077 | ) | (351 | ) | 351 | 105,264 | |||||||||||||||||||||
Net Income | — | — | 7,027 | — | — | — | — | 7,027 | ||||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||
Unrealized gains on securities, net of reclassification adjustment (Note 1) | — | — | — | — | 202 | — | — | 202 | ||||||||||||||||||||||||
Pension liability adjustment to initially apply SFAS No. 158, net of tax | — | — | — | — | (196 | ) | — | — | (196 | ) | ||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | — | 7,033 | ||||||||||||||||||||||||
Share-based payment compensation | — | 60 | — | — | — | — | — | 60 | ||||||||||||||||||||||||
Cash dividends paid ($1.09 per share) | — | — | (4,715 | ) | — | — | — | — | (4,715 | ) | ||||||||||||||||||||||
Purchase of treasury stock | — | — | — | (1,621 | ) | — | — | — | (1,621 | ) | ||||||||||||||||||||||
Purchase of company stock for deferred compensation plan | — | — | — | — | — | (75 | ) | 75 | — | |||||||||||||||||||||||
Exercise of stock options | 38 | 712 | — | — | — | — | — | 750 | ||||||||||||||||||||||||
Tax benefit on stock options exercised | — | 114 | — | — | — | — | — | 114 | ||||||||||||||||||||||||
Balance at December 31, 2006 | $ | 7,850 | $ | 57,953 | $ | 107,055 | $ | (62,902 | ) | $ | (3,071 | ) | $ | (426 | ) | $ | 426 | $ | 106,885 | |||||||||||||
See accompanying notes to consolidated financial statements.
36
Massbank Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
1. | Summary of Significant Accounting Policies | |
Massbank Corp. (the “Company”) is a Delaware chartered holding company whose principal subsidiary isMassbank (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 subsidiaries Knabssam LLC andMassbank 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 U.S. 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, the allowance for loan losses on off-balance sheet credit exposures and other than temporary declines in value of investment securities requiring impairment write downs due to general market conditions or other factors. | ||
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, 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, 2006, stockholders’ equity included approximately $2.9 million of accumulated other comprehensive loss, representing the net unrealized losses on securities available for sale, less applicable income tax benefits. | ||
Securities that are bought and held principally for the purpose of sale in the near term are classified astrading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price caused by market volatility. 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 available for sale, net.” When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings. |
37
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 Bank 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 and Allowance for Loan Losses on Off-Balance Sheet Credit Exposures | ||
The Company maintains an allowance for possible 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, general loss allocations for various loan types based on historical 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 affect borrowers’ ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the information available in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. | ||
The Company also maintains an allowance for possible losses on its outstanding loan commitments. The allowance for loan losses on off-balance sheet credit exposures (shown separately on the balance sheet) is maintained based on expected drawdowns of committed loans and their loss experience factors and management’s assessment of various other factors including current and anticipated economic conditions that may effect the borrowers’ ability to pay, and trends in loan delinquencies and charge-offs. |
38
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 Held for Resale | ||
Real estate held for resale consists of a parcel of land owned by the Company’s subsidiary, Knabssam LLC that is not being used for operations purposes. The land is carried at cost. The Company, through its subsidiary, has granted a local developer an option purchase the land. As consideration for this option, the developer will make quarterly option payments to Knabssam LLC until the option is either exercised and the closing transaction for the purchase occurs or the option is allowed to lapse. The closing is expected to take place in the third quarter of 2007. Option payments received prior to the expiration of the option period in August 2007 are not applied towards the purchase price and are not refundable. Under the option agreement, the option period may be extended in accordance with the terms of the agreement. | ||
Impairment of the Long-lived Assets — Except Goodwill | ||
The Company reviews long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. The Company performs undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on the fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less any cost of disposal. | ||
Share-based Payment | ||
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R) which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including stock option grants, based on estimated fair values. SFAS 123(R) supersedes previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) for periods beginning in fiscal year 2006. | ||
SFAS 123(R) requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Consolidated Statements of Income. The Company adopted SFAS 123(R) using the modified prospective transition method that requires the application of the accounting standard starting the first day of the fiscal year, January 1, 2006 for the Company. Under this method, compensation expense is also recognized for stock based awards that are modified after December 31, 2005. The Company’s Consolidated Financial Statements, as of and for the year ended December 31, 2006, reflect the impact of SFAS 123(R). Stock-based compensation expense for the year ended December 31, 2006 totaled $60,000. This stock-based compensation expense is related to the 34,250 stock options granted to employees and directors in 2006, net of any forfeitures, accounted for under SFAS 123(R) and to the modification of 11,250 stock options in 2006, due to the retirement of a Company director. Typically, when a director ceases to be a director by reason of the director’s retirement after reaching the mandatory retirement age of 72, the Board has voted to extend the date that the director’s outstanding options shall become fully exercisable from a period of three months from the date of termination to a period of five years from the date of retirement or until the expiration date, if earlier. As required by SFAS 123(R), the change in fair value resulting from this modification has been included in expense. The stock options that were granted in 2006 were granted at an exercise price equal to the Company’s closing stock price at the date of grant. The stock options issued vest at 20% per year over 5 years and have a contractual term of ten years. | ||
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Under the intrinsic value based method, no stock-based compensation expense for employee stock options was recognized in the Company’s Consolidated Financial Statements, because the exercise price of the stock options granted to the Company’s employees and directors equaled the fair market value of the underlying stock at the date of grant. In accordance with the modified prospective transition method the Company used in adopting SFAS 123(R), the Company’s earnings results prior to fiscal year 2006 have not been restated to reflect, and do not include, the possible impact of SFAS 123(R). Prior to 2006, the stock options issued by the Company had a contractual term of ten years and vested immediately at the time of issuance. | ||
Upon adoption of SFAS 123(R), the Company selected the Black-Scholes option-pricing model as the most appropriate method for determining the estimated fair value for stock-based awards. |
39
1. | Summary of Significant Accounting Policies(continued) | |
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 in 2005 and 2004. |
(In thousands except per share data)Years Ended December 31, | 2005 | 2004 | ||||||
Net income, as reported | $ | 7,323 | $ | 7,380 | ||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects(1) | (161 | ) | (170 | ) | ||||
Pro forma net income | $ | 7,162 | $ | 7,210 | ||||
Earnings per share: | ||||||||
Basic – as reported | $ | 1.68 | $ | 1.67 | ||||
Basic – pro forma | 1.64 | 1.64 | ||||||
Diluted – as reported | $ | 1.66 | $ | 1.64 | ||||
Diluted – pro forma | 1.62 | 1.60 | ||||||
Weighted average fair value per share | $ | 8.11 | $ | 9.55 | ||||
Expected term (years) | 7.3 years | 7.3 years | ||||||
Risk-free interest rate | 3.97 | % | 3.49 | % | ||||
Volatility | 21.2 | % | 21.9 | % | ||||
Dividend yield | 2.8 | % | 2.3 | % | ||||
(1) | A Black-Scholes option pricing model was used to determine the fair values of the options granted. |
Goodwill Impairment | ||
The Company adopted SFAS No. 142, Goodwill and Other Intangibles, effective January 1, 2002. The statement addresses the method of identifying and measuring goodwill and other intangible assets acquired in a business combination, eliminates further amortization of goodwill, and requires periodic impairment evaluations of goodwill. Impairment evaluations are required to be performed annually and may be required more frequently if certain conditions indicating potential impairment exists. In the event that the Company were to determine that its goodwill were impaired, the recognition of an impairment charge could have an adverse impact on its results of operations in the period that the impairment occurred or on its financial position. | ||
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. | ||
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. 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, 2006, 2005 and 2004 follows: |
(In thousands)Years ended December 31, | 2006 | 2005 | 2004 | |||||||||
Basic shares | 4,326 | 4,366 | 4,408 | |||||||||
Dilutive impact of stock options | 35 | 57 | 94 | |||||||||
Diluted shares | 4,361 | 4,423 | 4,502 | |||||||||
40
1. | Summary of Significant Accounting Policies(continued) | |
Comprehensive Income | ||
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. | ||
The components of other comprehensive income and related tax effects at December 31 are as follows: |
(In thousands)Years ended December 31, | 2006 | 2005 | 2004 | |||||||||
Unrealized holding gains (losses) on available for sale securities and when issued securities contracts arising during period | $ | 1,027 | $ | (7,221 | ) | $ | (2,242 | ) | ||||
Less: reclassification adjustment for gains realized in income | 735 | 515 | 1,361 | |||||||||
Net unrealized gains (losses) | 292 | (7,736 | ) | (3,603 | ) | |||||||
Tax (expense) or benefit | (90 | ) | 2,902 | 1,399 | ||||||||
Net unrealized gains (losses), net of tax | 202 | (4,834 | ) | (2,204 | ) | |||||||
Pension liability adjustment to initially apply SFAS No. 158 | (337 | ) | — | — | ||||||||
Tax benefit | 141 | — | — | |||||||||
Pension liability adjustment, net of tax | (196 | ) | — | — | ||||||||
Other comprehensive income (loss) | $ | 6 | $ | (4,834 | ) | $ | (2,204 | ) | ||||
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 $4.6 million and $7.6 million at December 31, 2006 and 2005, 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 pre-tax 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, | 2006 | 2005 | ||||||
Federal funds sold (overnight) | $ | 117,104 | $ | 152,785 | ||||
Term Federal funds sold | — | 15,000 | ||||||
Money market investment funds | 22,133 | — | ||||||
Interest-bearing bank money market accounts | 3 | 2 | ||||||
Total short-term investments | $ | 139,240 | $ | 167,787 | ||||
The investments above are stated at cost which approximates market value. |
41
3. | Investment Securities | |
The amortized cost and market value of investment securities follows: |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
(In thousands)At December 31,2006 | Cost | Gains | Losses | Value | ||||||||||||
Securities held to maturity: | ||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Federal National Mortgage Association | $ | 5,396 | $ | — | $ | (120 | ) | $ | 5,276 | |||||||
Total | $ | 5,396 | $ | — | $ | (120 | ) | $ | 5,276 | |||||||
Securities available for sale: | ||||||||||||||||
Debt securities: | ||||||||||||||||
U.S. Treasury obligations | $ | 22,018 | $ | — | $ | (309 | ) | $ | 21,709 | |||||||
U.S. Government agency obligations | 242,775 | 10 | (3,238 | ) | 239,547 | |||||||||||
Total | 264,793 | 10 | (3,547 | ) | 261,256 | |||||||||||
Mortgage-backed securities: | ||||||||||||||||
Government National Mortgage Association | 1,554 | 19 | — | 1,573 | ||||||||||||
Federal Home Loan Mortgage Corporation | 131,399 | 602 | (1,555 | ) | 130,446 | |||||||||||
Federal National Mortgage Association | 2,418 | — | (40 | ) | 2,378 | |||||||||||
Collateralized mortgage obligations | 74 | — | — | 74 | ||||||||||||
Total mortgage-backed securities | 135,445 | 621 | (1,595 | ) | 134,471 | |||||||||||
Total debt securities | 400,238 | 631 | (5,142 | ) | 395,727 | |||||||||||
Equity securities | 7,366 | 589 | (603 | ) | 7,352 | |||||||||||
Total securities available for sale | 407,604 | $ | 1,220 | $ | (5,745 | ) | $ | 403,079 | ||||||||
Net unrealized losses on securities available for sale | (4,525 | ) | ||||||||||||||
Total securities available for sale, net | 403,079 | |||||||||||||||
Total investment securities, net | $ | 408,475 | ||||||||||||||
The amortized cost and market value of investment securities follows: |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
(In thousands)At December 31,2005 | Cost | Gains | Losses | Value | ||||||||||||
Securities held to maturity: | ||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Federal National Mortgage Association | $ | 6,137 | $ | — | $ | (115 | ) | $ | 6,022 | |||||||
Total | $ | 6,137 | $ | — | $ | (115 | ) | $ | 6,022 | |||||||
Securities available for sale: | ||||||||||||||||
Debt securities: | ||||||||||||||||
U.S. Treasury obligations | $ | 77,051 | $ | — | $ | (935 | ) | $ | 76,116 | |||||||
U.S. Government agency obligations | 239,024 | 10 | (4,497 | ) | 234,537 | |||||||||||
Total | 316,075 | 10 | (5,432 | ) | 310,653 | |||||||||||
Mortgage-backed securities: | ||||||||||||||||
Government National Mortgage Association | 3,262 | 89 | — | 3,351 | ||||||||||||
Federal Home Loan Mortgage Corporation | 128,942 | 1,003 | (1,058 | ) | 128,887 | |||||||||||
Federal National Mortgage Association | 3,138 | 2 | (37 | ) | 3,103 | |||||||||||
Collateralized mortgage obligations | 92 | — | (1 | ) | 91 | |||||||||||
Total mortgage-backed securities | 135,434 | 1,094 | (1,096 | ) | 135,432 | |||||||||||
Total debt securities | 451,509 | 1,104 | (6,528 | ) | 446,085 | |||||||||||
Equity securities | 6,788 | 722 | (123 | ) | 7,387 | |||||||||||
Total securities available for sale | 458,297 | $ | 1,826 | $ | (6,651 | ) | $ | 453,472 | ||||||||
Net unrealized losses on securities available for sale | (4,825 | ) | ||||||||||||||
Total securities available for sale, net | 453,472 | |||||||||||||||
Total investment securities, net | $ | 459,609 | ||||||||||||||
42
3. | Investment Securities(continued) | |
During the years ended December 31, 2006, 2005 and 2004, the Company realized gains and losses on sales of securities available for sale as follows: |
(In thousands)At December 31, | 2006 | 2005 | 2004 | |||||||||||||||||||||
Realized | Realized | Realized | ||||||||||||||||||||||
Gains | Losses | Gains | Losses | Gains | Losses | |||||||||||||||||||
Sales: | �� | |||||||||||||||||||||||
U.S. Treasury obligations | $ | — | $ | (105 | ) | $ | 29 | $ | (55 | ) | $ | 35 | $ | (68 | ) | |||||||||
Marketable equity securities | 1,083 | (248 | ) | 761 | (220 | ) | 1,720 | (326 | ) | |||||||||||||||
Securities donated toMassbank Charitable Foundation: | ||||||||||||||||||||||||
Marketable equity securities | 5 | — | — | — | — | — | ||||||||||||||||||
Total realized gains (losses) | $ | 1,088 | $ | (353 | ) | $ | 790 | $ | (275 | ) | $ | 1,755 | $ | (394 | ) | |||||||||
Proceeds from sales of debt securities available for sale during 2006, 2005 and 2004 were $9.9 million, $22.0 million and $18.3 million, respectively. Proceeds from sales of equity securities available for sale during 2006, 2005 and 2004, were $10.5 million, $6.3 million and $10.6 million, respectively. | ||
There were no sales of investment securities held to maturity during 2006, 2005 and 2004. | ||
The amortized cost and market value of debt securities available for sale by contractual maturity are as follows: |
(In thousands)At December 31, | 2006 | 2005 | ||||||||||||||
Amortized | Market | Amortized | Market | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. Treasury obligations: | ||||||||||||||||
Maturing within 1 year | $ | 14,019 | $ | 13,911 | $ | 50,950 | $ | 50,595 | ||||||||
Maturing after 1 year but within 5 years | 7,999 | 7,798 | 26,101 | 25,521 | ||||||||||||
Total | 22,018 | 21,709 | 77,051 | 76,116 | ||||||||||||
U.S. Government agency obligations: | ||||||||||||||||
Maturing within 1 year | 75,000 | 74,594 | 45,999 | 45,612 | ||||||||||||
Maturing after 1 year but within 5 years | 150,745 | 148,246 | 171,992 | 168,254 | ||||||||||||
Maturing after 5 years but within 10 years | 15,995 | 15,706 | 19,996 | 19,665 | ||||||||||||
Maturing after 10 years but within 15 years | 1,035 | 1,001 | 1,037 | 1,006 | ||||||||||||
Total | 242,775 | 239,547 | 239,024 | 234,537 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Maturing within 1 year | 100 | 101 | 19 | 20 | ||||||||||||
Maturing after 1 year but within 5 years | 7,508 | 7,666 | 7,238 | 7,451 | ||||||||||||
Maturing after 5 years but within 10 years | 17,155 | 17,473 | 22,333 | 22,955 | ||||||||||||
Maturing after 10 years but within 15 years | 110,608 | 109,157 | 105,779 | 104,940 | ||||||||||||
Maturing after 15 years | 74 | 74 | 65 | 66 | ||||||||||||
Total | 135,445 | 134,471 | 135,434 | 135,432 | ||||||||||||
Total debt securities available for sale | 400,238 | 395,727 | 451,509 | 446,085 | ||||||||||||
Net unrealized losses on debt securities available for sale | (4,511 | ) | — | (5,424 | ) | — | ||||||||||
Total debt securities available for sale, net carrying value | $ | 395,727 | $ | 395,727 | $ | 446,085 | $ | 446,085 | ||||||||
Maturities of mortgage-backed securities are shown at final contractual maturity and do not reflect any principal amortization or prepayments. | ||
Included in U.S. Government agency obligations are investments that can be called prior to final maturity with an amortized cost of $163.7 million and a market value of $161.3 million at December 31, 2006 and an amortized cost of $193.0 million and a market value of $189.3 million at December 31, 2005. |
43
3. | Investment Securities(continued) | |
The fair value and unrealized losses of temporarily impaired investments aggregated by category of investments is as follows: |
(In thousands)At December 31, 2006 | Less Than 12 months | 12 Months or longer | Total | |||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Description of Securities | Fair value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Debt securities available for sale and held to maturity: | ||||||||||||||||||||||||
U.S. Treasury obligations | $ | — | $ | — | $ | 21,709 | $ | (309 | ) | $ | 21,709 | $ | (309 | ) | ||||||||||
U.S. Government agency obligations | 48,670 | (79 | ) | 178,832 | (3,159 | ) | 227,502 | (3,238 | ) | |||||||||||||||
Mortgage-backed securities | 38,135 | (203 | ) | 68,953 | (1,512 | ) | 107,088 | (1,715 | ) | |||||||||||||||
Total debt securities | 86,805 | (282 | ) | 269,494 | (4,980 | ) | 356,299 | (5,262 | ) | |||||||||||||||
Equity securities | 3,292 | (603 | ) | — | — | 3,292 | (603 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 90,097 | $ | (885 | ) | $ | 269,494 | $ | (4,980 | ) | $ | 359,591 | $ | (5,865 | ) | |||||||||
As of December 31, 2006, management concluded that the unrealized losses above are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost. The losses above (with the exception of the equity securities) are on securities that have contractual maturity dates and are primarily related to market interest rates. The fair value and unrealized losses of temporarily impaired investments aggregated by category of investments is as follows: |
(In thousands)At December 31, 2005 | Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Description of Securities | Fair value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Debt securities available for sale and held to maturity: | ||||||||||||||||||||||||
U.S. Treasury obligations | $ | 42,489 | $ | (279 | ) | $ | 32,625 | $ | (656 | ) | $ | 75,114 | $ | (935 | ) | |||||||||
U.S. Government agency obligations | 107,529 | (1,458 | ) | 120,960 | (3,039 | ) | 228,489 | (4,497 | ) | |||||||||||||||
Mortgage-backed securities | 96,160 | (1,084 | ) | 3,050 | (127 | ) | 99,210 | (1,211 | ) | |||||||||||||||
Total debt securities | 246,178 | (2,821 | ) | 156,635 | (3,822 | ) | 402,813 | (6,643 | ) | |||||||||||||||
Equity securities | 1,856 | (117 | ) | 59 | (6 | ) | 1,915 | (123 | ) | |||||||||||||||
Total temporarily impaired securities | $ | 248,034 | $ | (2,938 | ) | $ | 156,694 | $ | (3,828 | ) | $ | 404,728 | $ | (6,766 | ) | |||||||||
As of December 31, 2005, management concluded that the unrealized losses above are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost. The losses above (with the exception of the equity securities) are on securities that have contractual maturity dates and are primarily related to market interest rates. |
44
3. | Investment Securities(continued) | |
The amortized cost and market value of U.S. Government agency securities available for sale that can be called prior to maturity by scheduled maturity and next call date are as follows: |
(In thousands)At December 31, | 2006 | 2005 | ||||||||||||||
Amortized | Market | Amortized | Market | |||||||||||||
Based on Scheduled Maturity | Cost | Value | Cost | Value | ||||||||||||
Investment securities available for sale | ||||||||||||||||
U.S. Government agency obligations: | ||||||||||||||||
Maturing within 1 year | $ | 32,000 | $ | 31,735 | $ | 19,999 | $ | 19,775 | ||||||||
Maturing after 1 but within 2 years | 46,750 | 45,824 | 47,000 | 46,122 | ||||||||||||
Maturing after 2 but within 3 years | 36,000 | 35,418 | 51,000 | 49,758 | ||||||||||||
Maturing after 3 but within 4 years | 18,000 | 17,704 | 32,000 | 31,299 | ||||||||||||
Maturing after 4 but within 5 years | 16,000 | 15,974 | 22,000 | 21,688 | ||||||||||||
Maturing after 5 but within 10 years | 13,994 | 13,710 | 19,996 | 19,665 | ||||||||||||
Maturing after 10 but within 15 years | 1,000 | 966 | 1,000 | 969 | ||||||||||||
Total | $ | 163,744 | $ | 161,331 | $ | 192,995 | $ | 189,276 | ||||||||
Amortized | Market | Amortized | Market | |||||||||||||
Based on Next Call Date | Cost | Value | Cost | �� | Value | |||||||||||
Investment securities available for sale | ||||||||||||||||
U.S. Government agency obligations: | ||||||||||||||||
Callable within 1 year | $ | 157,744 | $ | 155,391 | $ | 182,995 | $ | 179,365 | ||||||||
Callable after 1 but within 2 years | 6,000 | 5,940 | 7,000 | 6,945 | ||||||||||||
Callable after 2 but within 3 years | — | — | 3,000 | 2,966 | ||||||||||||
Total | $ | 163,744 | $ | 161,331 | $ | 192,995 | $ | 189,276 | ||||||||
4. | Trading Securities | |
The carrying amount and market value of trading securities are as follows: |
(In Thousands)At December 31, | 2006 | 2005 | ||||||
Market | Market | |||||||
Value | Value | |||||||
U.S. Treasury obligations | $ | — | $ | 7,896 | ||||
Marketable equity securities | 1,926 | 1,382 | ||||||
Investments in mutual funds | 5 | 4 | ||||||
Total trading securities | $ | 1,931 | $ | 9,282 | ||||
During the years ended December 31, 2006, 2005 and 2004, the Company realized gains and losses on sales of trading securities as follows: |
(In Thousands)Years Ended December 31, | 2006 | 2005 | 2004 | |||||||||||||||||||||
Realized | Realized | Realized | ||||||||||||||||||||||
Gains | Losses | Gains | Losses | Gains | Losses | |||||||||||||||||||
U.S. Treasury obligations | $ | — | $ | (29 | ) | $ | 1 | $ | (119 | ) | $ | 101 | $ | (40 | ) | |||||||||
Marketable equity securities | 224 | — | 99 | (3 | ) | 72 | (19 | ) | ||||||||||||||||
Total realized gains (losses) | $ | 224 | $ | (29 | ) | $ | 100 | $ | (122 | ) | $ | 173 | $ | (59 | ) | |||||||||
Proceeds from sales of trading securities during 2006, 2005 and 2004 were $21.2 million, $24.4 million and $46.4 million, respectively. Mark-to-market adjustments included in income in 2006, 2005 and 2004 were $(134) thousand, $186 thousand and $(246) thousand, respectively. |
45
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.
The composition of the Bank’s loan portfolio is summarized as follows:
(In thousands)At December 31, | 2006 | 2005 | ||||||
Mortgage loans: | ||||||||
Residential: | ||||||||
Conventional: | ||||||||
Fixed rate | $ | 169,036 | $ | 189,736 | ||||
Variable rate | 23,941 | 22,948 | ||||||
FHA and VA | 13 | 27 | ||||||
Construction | 1,217 | 845 | ||||||
Commercial: | ||||||||
Fixed rate | 367 | 191 | ||||||
Variable rate | 4,076 | 2,144 | ||||||
Construction | 563 | — | ||||||
Total mortgage loans | 199,213 | 215,891 | ||||||
Premium on loans | 2 | 2 | ||||||
Deferred mortgage loan origination costs, net | 38 | 11 | ||||||
Mortgage loans, net | 199,253 | 215,904 | ||||||
Other loans: | ||||||||
Consumer: | ||||||||
Second mortgage loans | 751 | 34 | ||||||
Installment | 211 | 211 | ||||||
Guaranteed education | 635 | 1,094 | ||||||
Other secured | 408 | 499 | ||||||
Home equity lines of credit | 7,460 | 7,722 | ||||||
Unsecured | 128 | 148 | ||||||
Total consumer loans | 9,593 | 9,708 | ||||||
Commercial | 81 | 118 | ||||||
Total other loans | 9,674 | 9,826 | ||||||
Total loans | $ | 208,927 | $ | 225,730 | ||||
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, 2006 follows: |
(In thousands) | ||||
Balance at December 31, 2005 | $ | 1,489 | ||
Additions | 76 | |||
Repayments | (162 | ) | ||
Balance at December 31, 2006 | $ | 1,403 | ||
46
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, | 2006 | 2005 | 2004 | |||||||||
Balance at beginning of year | $ | 1,253 | $ | 1,307 | $ | 1,554 | ||||||
Provision (credit) for loan losses | 123 | (53 | ) | (242 | ) | |||||||
Recoveries of loans previously charged-off | 19 | — | — | |||||||||
Total | 1,395 | 1,254 | 1,312 | |||||||||
Charge-offs: | ||||||||||||
Mortgage loans | — | — | — | |||||||||
Other loans | (13 | ) | (1 | ) | (5 | ) | ||||||
Balance at end of year | $ | 1,382 | $ | 1,253 | $ | 1,307 | ||||||
The following table shows the allocation of the allowance for loan losses by category of loans at December 31, 2006, 2005 and 2004. |
(In thousands)At December 31, | 2006 | 2005 | 2004 | |||||||||||||||||||||
Percentage | Percentage | Percentage | ||||||||||||||||||||||
of Loans | of Loans | of Loans | ||||||||||||||||||||||
Amount | to Total | Amount | to Total | Amount | to Total | |||||||||||||||||||
Mortgage loans: | ||||||||||||||||||||||||
Residential | $ | 795 | 93 | % | $ | 770 | 95 | % | $ | 767 | 95 | % | ||||||||||||
Commercial | 324 | 2 | 111 | 1 | 79 | 1 | ||||||||||||||||||
Consumer loans | 98 | 5 | 139 | 4 | 154 | 4 | ||||||||||||||||||
Commercial loans | 40 | — | 46 | — | 46 | — | ||||||||||||||||||
Unallocated | 125 | — | 187 | — | 261 | — | ||||||||||||||||||
Total | $ | 1,382 | 100 | % | $ | 1,253 | 100 | % | $ | 1,307 | 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 there are possible 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 affect borrowers’ 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. 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. | ||
7. | Non-performing Assets | |
The following schedule summarizes non-performing assets at the dates shown: |
(In thousands)At December 31, | 2006 | 2005 | 2004 | |||||||||
Total nonaccrual loans | $ | 137 | $ | 257 | $ | 74 | ||||||
Total non-performing assets | $ | 137 | $ | 257 | $ | 74 | ||||||
Percent of non-performing loans to total loans | 0.07 | % | 0.11 | % | 0.03 | % | ||||||
Percent of non-performing assets to total assets | 0.02 | % | 0.03 | % | 0.01 | % |
47
7. | Non-performing Assets (continued) | |
The reduction in interest income associated with nonaccrual loans is as follows: |
(In thousands)Years ended December 31, | 2006 | 2005 | 2004 | |||||||||
Interest income that would have been recorded under original terms | $ | 8 | $ | 16 | $ | 4 | ||||||
Interest income actually recorded | 5 | 9 | 1 | |||||||||
Reduction in interest income | $ | 3 | $ | 7 | $ | 3 | ||||||
During 2006, 2005 and 2004 the Company had no impaired loans. | ||
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 instru ment 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, | 2006 | 2005 | ||||||
Financial instruments whose contract amounts represent credit risk: | ||||||||
Commitments to originate residential mortgage loans | $ | 1,206 | $ | 1,257 | ||||
Unadvanced portions of construction loans | 217 | 530 | ||||||
Unused credit lines, including unused portions of equity lines of credit | 28,779 | 31,413 | ||||||
Other loan commitments | 2,337 | 2,451 | ||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. | ||
9. | Premises and Equipment | |
A summary of premises and equipment and their estimated useful lives used for depreciation purposes is as follows: |
Estimated | ||||||||||||
Useful Life | ||||||||||||
(In thousands)At December 31, | 2006 | 2005 | (In Years) | |||||||||
Premises: | ||||||||||||
Land | $ | 1,967 | $ | 2,392 | — | |||||||
Buildings | 7,438 | 6,204 | 25-45 | |||||||||
Building and leasehold improvements | 2,862 | 2,723 | 2-30 | |||||||||
Equipment | 5,591 | 5,309 | 1-15 | |||||||||
17,858 | 16,628 | |||||||||||
Less: accumulated depreciation and amortization | 10,773 | 10,103 | ||||||||||
Total premises and equipment, net | $ | 7,085 | $ | 6,525 | ||||||||
The Bank is obligated under a number of noncancelable operating leases for various banking offices. These operating leases expire at various dates through 2016 with options for renewal. Rent expense for the years ended December 31, 2006, 2005 and 2004 amounted to $312 thousand, $298 thousand, and $294 thousand, respectively. |
48
9. | Premises and Equipment(continued) | |
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, 2006, are as follows: |
(In thousands) Years ending December 31, | PAYMENTS | |||
2007 | $ | 295 | ||
2008 | 267 | |||
2009 | 191 | |||
2010 | 165 | |||
2011 | 165 | |||
Later years | 307 | |||
Total | $ | 1,390 | ||
10. | Deposits | |
Deposits are summarized as follows: |
(In Thousands) AT December 31, | 2006 | 2005 | ||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Demand and NOW: | ||||||||||||||||
NOW accounts | $ | 51,856 | 0.53 | % | $ | 54,924 | 0.37 | % | ||||||||
Demand accounts | 27,004 | — | 27,326 | — | ||||||||||||
Total demand and NOW | 78,860 | 0.35 | 82,250 | 0.25 | ||||||||||||
Savings: | ||||||||||||||||
Savings accounts | 335,142 | 1.96 | 430,771 | 1.75 | ||||||||||||
Money market accounts | 9,666 | 1.99 | 10,770 | 1.73 | ||||||||||||
Total savings | 344,808 | 1.96 | 441,541 | 1.75 | ||||||||||||
Time certificates of deposit: | ||||||||||||||||
Fixed rate certificates | 230,710 | 4.38 | 197,743 | 3.19 | ||||||||||||
Variable rate certificates | 68,954 | 5.57 | 63,194 | 4.80 | ||||||||||||
Total time certificates of deposit | 299,664 | 4.65 | 260,937 | 3.58 | ||||||||||||
Total deposits | $ | 723,332 | 2.90 | % | $ | 784,728 | 2.20 | % | ||||||||
The maturity distribution and related rate structure of the Bank’s time certificates of deposit at December 31, 2006 follows: |
(In Thousands) AT December 31, | 2006 | |||||||
Average | ||||||||
Amount | Interest Rate | |||||||
Due within 3 months | $ | 74,084 | 4.44 | % | ||||
Due within 3–6 months | 57,942 | 4.44 | ||||||
Due within 6–12 months | 71,222 | 4.50 | ||||||
Due within 1–2 years | 60,206 | 4.86 | ||||||
Due within 2–3 years | 21,131 | 5.26 | ||||||
Due within 3–5 years | 14,775 | 5.50 | ||||||
Thereafter | 304 | 4.93 | ||||||
Total | $ | 299,664 | 4.65 | % | ||||
49
10. | Deposits (continued) | |
At December 31, 2006 and 2005, the Bank had individual time certificates of deposit of $100 thousand or more maturing as follows: |
(In Thousands)At December 31, | 2006 | 2005 | ||||||
Due within 3 months | $ | 33,060 | $ | 17,824 | ||||
Due within 3–6 months | 21,323 | 21,777 | ||||||
Due within 6–12 months | 26,980 | 22,174 | ||||||
Due within 1–2 years | 22,322 | 21,363 | ||||||
Due within 2–3 years | 10,050 | 3,381 | ||||||
Due within 3–5 years | 5,021 | 7,736 | ||||||
Thereafter | 155 | 200 | ||||||
Total | $ | 118,911 | $ | 94,455 | ||||
11. | Fair Value of Financial Instruments | |
The Bank is required to 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 and Income 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, 2006 and 2005 approximate fair value. | ||
Securities The fair value of investment securities is based principally on quoted market prices and dealer quotes. |
SFAS No. 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, | 2006 | 2005 | ||||||||||||||
Carrying | Calculated | Carrying | Calculated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Securities available for sale | $ | 403,079 | $ | 403,079 | $ | 453,472 | $ | 453,472 | ||||||||
Securities held to maturity | 5,396 | 5,276 | 6,137 | 6,022 | ||||||||||||
Trading securities | 1,931 | 1,931 | 9,282 | 9,282 | ||||||||||||
Total securities | $ | 410,406 | $ | 410,286 | $ | 468,891 | $ | 468,776 | ||||||||
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.
50
11. | Fair Value of Financial Instruments(continued) | |
The following table presents information for loans: |
(In thousands)At December 31, | 2006 | 2005 | ||||||||||||||
Carrying | Calculated | Carrying | Calculated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Real estate: | ||||||||||||||||
Residential: | ||||||||||||||||
Variable | $ | 25,168 | $ | 24,171 | $ | 23,113 | $ | 22,202 | ||||||||
Fixed | 169,112 | 163,378 | 190,471 | 186,377 | ||||||||||||
Commercial: | ||||||||||||||||
Fixed | 367 | 347 | 192 | 175 | ||||||||||||
Variable | 4,606 | 4,445 | 2,128 | 2,057 | ||||||||||||
Consumer | 9,593 | 9,569 | 9,708 | 9,709 | ||||||||||||
Commercial | 81 | 68 | 118 | 94 | ||||||||||||
Total loans | 208,927 | 201,978 | 225,730 | 220,614 | ||||||||||||
Allowance for loan losses | (1,382 | ) | — | (1,253 | ) | — | ||||||||||
Net loans | $ | 207,545 | $ | 201,978 | $ | 224,477 | $ | 220,614 | ||||||||
Deposits | ||
The fair value of deposits with no stated maturity, such as demand deposits, NOW accounts, savings accounts, and money market accounts for purposes of this disclosure, is equal to the amount payable on demand as of December 31, 2006 and 2005. 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, | 2006 | 2005 | ||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Demand accounts | $ | 27,004 | $ | 27,004 | $ | 27,326 | $ | 27,326 | ||||||||
NOW accounts | 51,856 | 51,856 | 54,924 | 54,924 | ||||||||||||
Savings accounts | 335,142 | 335,142 | 430,771 | 430,771 | ||||||||||||
Money market accounts | 9,666 | 9,666 | 10,770 | 10,770 | ||||||||||||
Time certificates of deposit | 299,664 | 299,302 | 260,937 | 259,755 | ||||||||||||
Total deposits | 723,332 | 722,970 | 784,728 | 783,546 | ||||||||||||
Escrow deposits of borrowers | 1,006 | 1,006 | 1,059 | 1,059 | ||||||||||||
Total | $ | 724,338 | $ | 723,976 | $ | 785,787 | $ | 784,605 | ||||||||
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, 2006 and 2005 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. The Bank’s other loan commitments approximate fair value.
51
11. | Fair Value Of Financial Instruments(continued) | |
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 determined 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 income tax asset, 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.
12. | Income Taxes | |
Income tax expense was allocated as follows: |
(In Thousands)Years ended december 31, | 2006 | 2005 | 2004 | |||||||||
Current income tax expense: | ||||||||||||
Federal | $ | 3,507 | $ | 3,430 | $ | 3,606 | ||||||
State | 232 | 113 | 264 | |||||||||
Total current tax expense | 3,739 | 3,543 | 3,870 | |||||||||
Deferred income tax (benefit) expense: | ||||||||||||
Federal | (44 | ) | 186 | 23 | ||||||||
State | (12 | ) | 64 | 5 | ||||||||
Total deferred tax (benefit) expense: | (56 | ) | 250 | 28 | ||||||||
Total income tax expense | $ | 3,683 | $ | 3,793 | $ | 3,898 | ||||||
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, | 2006 | 2005 | 2004 | |||||||||
Computed “expected” income tax expense at statutory rate | $ | 3,749 | $ | 3,891 | $ | 3,947 | ||||||
Increase (reduction) in income taxes resulting from: | ||||||||||||
Reduction in federal income tax rate | (100 | ) | (91 | ) | (98 | ) | ||||||
State and local income taxes, net of federal benefit | 143 | 115 | 175 | |||||||||
Dividends received deduction | (40 | ) | (42 | ) | (40 | ) | ||||||
Dividends paid to ESOP deduction | (70 | ) | (72 | ) | (73 | ) | ||||||
Other | 1 | (8 | ) | (13 | ) | |||||||
Income tax expense | $ | 3,683 | $ | 3,793 | $ | 3,898 | ||||||
Effective income tax rate | 34.39 | % | 34.12 | % | 34.56 | % | ||||||
52
12. | Income Taxes(continued) | |
At December 31, 2006 and 2005, the Bank had gross deferred tax assets and gross deferred tax liabilities as follows: |
(In Thousands)Years ended december 31, | 2006 | 2005 | ||||||
Deferred tax assets: | ||||||||
Unrealized losses on securities available for sale | $ | 1,656 | $ | 1,746 | ||||
Loan losses | 722 | 740 | ||||||
Deferred compensation and pension cost | 889 | 672 | ||||||
Depreciation | 166 | 147 | ||||||
Purchase accounting | 11 | 95 | ||||||
Deferred loan fees, net | 3 | 4 | ||||||
Other | 19 | 11 | ||||||
Gross deferred tax asset | 3,466 | 3,415 | ||||||
Deferred tax liabilities: | ||||||||
Other unrealized securities gains | 111 | 167 | ||||||
Other | 8 | 8 | ||||||
Gross deferred tax liability | 119 | 175 | ||||||
Net deferred tax asset | $ | 3,347 | $ | 3,240 | ||||
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, 2006. The primary sources of recovery of the gross federal deferred tax asset are federal income taxes paid in 2006, 2005 and 2004 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, | 2006 | 2005 | 2004 | |||||||||||||||||||||
(In thousands except share data) | Basic | Diluted | Basic | Diluted | Basic | Diluted | ||||||||||||||||||
Net income | $ | 7,027 | $ | 7,027 | $ | 7,323 | $ | 7,323 | $ | 7,380 | $ | 7,380 | ||||||||||||
Average shares outstanding | 4,325,879 | 4,325,879 | 4,365,932 | 4,365,932 | 4,408,293 | 4,408,293 | ||||||||||||||||||
Dilutive stock options | — | 34,809 | — | 56,597 | — | 93,244 | ||||||||||||||||||
Weighted average shares outstanding | 4,325,879 | 4,360,688 | 4,365,932 | 4,422,529 | 4,408,293 | 4,501,537 | ||||||||||||||||||
Earnings per share (in dollars) | $ | 1.62 | $ | 1.61 | $ | 1.68 | $ | 1.66 | $ | 1.67 | $ | 1.64 | ||||||||||||
53
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, 2006. |
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 Company and its principal subsidiary “MASSBANK” set forth below currently exceed the minimum ratios for “well capitalized” banks as defined by federal regulators.
As of December 31, 2006, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would cause a change in the Bank’s categorization.
(IN THOUSANDS) | For Capital | TO BE WELL | ||||||||||||||||||||||
At December 31, 2006 | Actual | Adequacy Purposes | Capitalized(1) | |||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Tier I Capital (to Average Assets): | ||||||||||||||||||||||||
MASSBANK Corp. (consolidated) | $ | 108,852 | 12.78 | % | $ | 25,547 | 3.00 | % | N/A | — | ||||||||||||||
MASSBANK (the “Bank”) | 103,245 | 12.39 | 24,992 | 3.00 | $ | 41,653 | 5.00 | % | ||||||||||||||||
Tier I Capital (to Risk-Weighted Assets): | ||||||||||||||||||||||||
MASSBANK Corp. (consolidated) | 108,852 | 36.58 | 11,901 | 4.00 | N/A | — | ||||||||||||||||||
MASSBANK (the “Bank”) | 103,245 | 34.77 | 11,876 | 4.00 | 17,815 | 6.00 | ||||||||||||||||||
Total Capital (to Risk-Weighted Assets): | ||||||||||||||||||||||||
MASSBANK Corp. (consolidated) | 110,579 | 37.17 | 23,803 | 8.00 | N/A | — | ||||||||||||||||||
MASSBANK (the “Bank”) | 104,972 | 35.35 | 23,753 | 8.00 | 29,691 | 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, 2005 | Actual | Adequacy Purposes | Capitalized(1) | |||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Tier I Capital (to Average Assets): | ||||||||||||||||||||||||
MASSBANK Corp. (consolidated) | $ | 107,251 | 11.94 | % | $ | 26,942 | 3.00 | % | N/A | — | ||||||||||||||
MASSBANK (the “Bank”) | 103,122 | 11.48 | 26,940 | 3.00 | $ | 44,900 | 5.00 | % | ||||||||||||||||
Tier I Capital (to Risk-Weighted Assets): | ||||||||||||||||||||||||
MASSBANK Corp. (consolidated) | 107,251 | 39.03 | 10,990 | 4.00 | N/A | — | ||||||||||||||||||
MASSBANK (the “Bank”) | 103,122 | 37.54 | 10,989 | 4.00 | 16,484 | 6.00 | ||||||||||||||||||
Total Capital (to Risk-Weighted Assets): | ||||||||||||||||||||||||
MASSBANK Corp. (consolidated) | 109,290 | 39.78 | 21,981 | 8.00 | N/A | — | ||||||||||||||||||
MASSBANK (the “Bank”) | 105,161 | 38.28 | 21,978 | 8.00 | 27,473 | 10.00 | ||||||||||||||||||
1) | This column presents the minimum amounts and ratios that a financial institution must have to be categorized as well capitalized. |
54
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 service expected to be earned in the future. Pension plan assets consist principally of equity securities; mutual funds – bonds, mutual funds – equities, and all assets mutual funds; and money market funds and cash. |
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 December 31, 2006 and 2005, the plan’s latest valuation dates:
(In thousands) Years ended december 31, | 2006 | 2005 | ||||||
Accumulated benefit obligation | $ | 8,837 | $ | 7,842 | ||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 9,994 | $ | 9,488 | ||||
Service cost | 413 | 459 | ||||||
Interest cost | 575 | 546 | ||||||
Actuarial loss (gain) | 326 | (52 | ) | |||||
Benefits paid | (646 | ) | (447 | ) | ||||
Benefit obligation at end of year | $ | 10,662 | $ | 9,994 | ||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 8,443 | $ | 7,834 | ||||
Actual return on plan assets | 1,242 | 691 | ||||||
Employer contribution | 141 | 364 | ||||||
Benefits paid | (646 | ) | (447 | ) | ||||
Other | 1 | 1 | ||||||
Fair value of plan assets at end of year | $ | 9,181 | $ | 8,443 | ||||
Funded status | $ | (1,481 | ) | $ | (1,551 | ) | ||
On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158 which requires an employer to recognize in its balance sheet as an asset or liability the over-funded or under-funded status of a defined benefit postretirement plan, measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. SFAS No. 158 requires that gains or losses and prior service costs or credits that arise during the period, but are not included as components of net periodic benefit expense pursuant to SFAS No. 87 or SFAS No. 106, be recognized as a component of other comprehensive income (loss). The impact of adopting the new standard on the Company’s consolidated balance sheet at December 31, 2006 was to increase certain accounts as follows:
Defined Benefit | ||||
(In Thousands) At December 31, 2006 | Pension Plan | |||
Other liabilities (accrued pension liability) | $ | 337 | ||
Deferred income tax asset, net | (141 | ) | ||
Other comprehensive loss | (196 | ) |
After the adoption of SFAS No. 158 at December 31, 2006 defined benefit pension cost recognized in the accompanying consolidated balance sheets at December 31 are as follows:
Defined Benefit | ||||||||
Pension Plan | ||||||||
(In thousands) At December 31, | 2006 | 2005 | ||||||
Accrued pension liability | $ | 1,481 | $ | 959 | ||||
Unrecognized net actuarial loss | — | 528 | ||||||
Unrecognized transition asset | — | (42 | ) | |||||
Unrecognized past service cost | — | 106 | ||||||
Funded status of pension plan — net under-funded amount | $ | 1,481 | $ | 1,551 | ||||
55
15. | Employee benefits(continued) | |
The amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit expense at December 31, 2006 are as follows: |
Defined benefit | ||||
(In thousands) | Pension plan | |||
Prior service cost, net of tax of $41 | $ | 57 | ||
Actuarial loss, net of tax of $109 | 151 | |||
Transition asset, net of tax of $9 | (12 | ) | ||
Total | $ | 196 | ||
The following table reflects the amortization of amounts in accumulated other comprehensive loss that is expected to be recognized as components of net periodic benefit expense during 2007: |
Defined benefit | ||||
(In thousands) | Pension plan | |||
Amortization of net prior service cost (credit) | $ | 8 | ||
Amortization of actuarial loss | — | |||
Amortization of transition asset | (21 | ) |
Assumptions used in determining the actuarial present value of the Company’s benefit obligation were as follows: |
(In thousands)years ende december 31, | 2006 | 2005 | 2004 | |||||||||
Discount rate | 5.75 | % | 5.75 | % | 5.75 | % | ||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | ||||||
Assumptions used to develop the net periodic benefit cost data were: | ||||||||||||
Discount rate | 5.75 | % | 5.75 | % | 6.25 | % | ||||||
Expected return on plan assets | 7.75 | % | 7.75 | % | 7.75 | % | ||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | ||||||
Components of net periodic pension expense: | ||||||||||||
Service cost | $ | 413 | $ | 459 | $ | 430 | ||||||
Interest cost | 575 | 546 | 524 | |||||||||
Expected return on plan assets | (654 | ) | (607 | ) | (545 | ) | ||||||
Amortization of transition obligation | (21 | ) | (21 | ) | (21 | ) | ||||||
Amortization of prior service cost | 7 | 7 | 7 | |||||||||
Amortization of unrecognized net actuarial (gain) loss | 6 | 48 | 8 | |||||||||
Net periodic pension expense | $ | 326 | $ | 432 | $ | 403 | ||||||
The approximate composition of pension plan assets as of the end of the plan years ended October 31, 2006 and 2005 is as follows: |
Years ended october 31, | 2006 | 2005 | ||||||
Asset Category: | ||||||||
Fixed Income Securities (including money market funds) | 36.5 | % | 35.1 | % | ||||
Domestic Equity Securities | 48.5 | 50.5 | ||||||
International Equity Securities | 15.0 | 14.4 | ||||||
100.0 | % | 100.0 | % | |||||
56
15.Employee benefits(continued)
The expected long-term rate of return on plan assets is based on prevailing yields on high quality fixed income investments increased by a premium of 3% — 5% for equity investments.
The Bank expects to contribute $347 thousand to its pension plan in 2007.
The investment policies and strategies for the Bank’s pension plan are as follows:Massbank (the “Bank”) is a member of the Savings Banks Employees Retirement Association (“SBERA”) within which the Bank maintains a Defined Benefit pension plan. SBERA offers a common and collective trust as the underlying investment structure for pension plans participating in the Association. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range from 55% to 75% of total portfolio assets. The remainder of the portfolio is allocated to fixed income. The approximate investment allocation of the portfolio is shown in the table above. The Trustees of SBERA, through the Association’s Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify equity investments across a spectrum of investment types (e.g., small cap, large cap, international, etc.) and styles (e.g., growth, value, etc.).
The Bank expects to make benefit payments for the plan years ending October 31, as follows:
(In thousands)Years ending October 31, | Payments | |||
2007 | $ | 907 | ||
2008 | 1,654 | |||
2009 | 501 | |||
2010 | 569 | |||
2011 | 1,584 | |||
2012 | 685 | |||
2013 | 1,347 | |||
2014 | 2,363 | |||
2015 | 848 | |||
2016 | 1,043 | |||
2017 | 1,065 | |||
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. There were no profit sharing or incentive compensation bonus distributions in 2006, 2005 and 2004 because the criteria for making such distributions were not met.
The Board of Directors approved a holiday distribution to all non-officer employees in 2006 in the amount of $38 thousand. In 2005 and 2004, approval was given for a holiday distribution to all officers, excluding the CEO, and non-officer employees in the amount of $76 thousand and $47 thousand, 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.
In 2006, 2005 and 2004, the Bank contributed $154,000, $160,000 and $145,000, respectively, to the ESOP to invest in the Company’s common stock. These shares were allocated to plan participants, on a pro rata basis, based on compensation.
At December 31, 2006, the ESOP held 185,582 shares of the Company’s common stock which have been allocated to plan participants and no unallocated shares. The shares are considered outstanding in the computation of earnings per share and book value per share.
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 accounts.
The Company’s total expense applicable to the ESOP amounted to $121 thousand, $133 thousand and $205 thousand for the years ended December 31, 2006, 2005 and 2004, 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. The Company made contributions of $67 thousand, $55 thousand and $52 thousand to a rabbi trust for the benefits payable under the agreements in 2006, 2005 and 2004.
57
15. Employee Benefits(continued)
Directors Deferred Compensation Plan
In 1988, the Company established a deferred compensation plan for its directors. The plan allows the Company’s directors to defer receipt of all or a portion of their compensation until: (1) their attaining the age of 72, or (2) their termination as a director of the Company. 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, 2006, the trust held 17,944 shares ofMassbank Corp. common stock. The shares are considered outstanding in the computation of earnings per share and book value per share.
Stock Option Plan
Effective April 20, 2004, the Board of Directors adopted and the shareholders approved the Corporation’s 2004 Stock Option and Incentive Plan (the “2004 Plan”). This new plan replaced the Corporation’s 1994 Stock Incentive Plan, which expired in January 2004. The 2004 Plan provides for awards of incentive stock options, non-qualified stock options, stock appreciation rights, a limited number of restricted stock awards and cash replacement awards. The total number of shares of common stock that can be issued under this plan is 400,000 shares, subject to adjustment for stock splits, stock dividends and similar events. Of this amount, no more than 100,000 shares of common stock may be issued as awards of restricted stock under the 2004 Plan. Under the 2004 Plan, the Corporation may not grant stock options with an exercise price less than 100% of the fair market value of the Corporation’s common stock on the date of grant. The maximum option term is ten years.
Effective January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition method to account for share-based payments to officers and directors of the Company. The only type of share-based payment utilized by the Company to-date is stock options. Stock options are awards which allow the officer or director to purchase shares of the Company’s stock at a fixed price. Stock options are granted at an exercise price equal to the Company closing stock price at the date of grant. Prior to 2006, the stock options issued by the Company had a contractual term of ten years and vested immediately at the time of issuance. The stock options issued in 2006 vest at 20% per year over five years and have a contractual term of ten years.
As of December 31, 2006, there were 93,332 non-qualified stock options and 151,518 incentive stock options outstanding to purchase shares under the 1994 and 2004 plans.
A summary of the status of the Company’s fixed stock option plan as of December 31, 2006, 2005 and 2004, and changes during the years ended on those dates is presented below. All share information presented has been adjusted for stock splits.
Years Ended December 31, | 2006 | 2005 | 2004 | |||||||||||||||||||||
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 | 251,637 | $ | 26.95 | 300,087 | $ | 24.35 | 318,334 | $ | 20.94 | |||||||||||||||
Granted | 35,500 | 32.79 | 32,850 | 37.15 | 30,250 | 42.76 | ||||||||||||||||||
Exercised | (38,637 | ) | 19.41 | (75,250 | ) | 19.76 | (48,097 | ) | 13.22 | |||||||||||||||
Forfeited | (3,650 | ) | 37.47 | (6,050 | ) | 42.42 | (400 | ) | 42.90 | |||||||||||||||
Outstanding at end of year | 244,850 | $ | 28.83 | 251,637 | $ | 26.95 | 300,087 | $ | 24.35 | |||||||||||||||
Options exercisable at year-end | 210,600 | 251,637 | 300,087 | |||||||||||||||||||||
The following table summarizes information about fixed stock options outstanding and exercisable at December 31,2006:
At December 31, 2006 | 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 | |||||||||||||||
$19.00 to $20.67 | 65,875 | 2.3 years | $ | 19.76 | �� | 65,875 | $ | 19.76 | ||||||||||||
25.00 to 27.63 | 47,250 | 3.1 years | 26.09 | 47,250 | 26.09 | |||||||||||||||
28.44 to 29.60 | 43,325 | 2.7 years | 29.14 | 43,325 | 29.14 | |||||||||||||||
32.50 to 32.80 | 34,250 | 8.9 years | 32.79 | — | — | |||||||||||||||
36.70 to 42.90 | 54,150 | 7.0 years | 39.52 | 54,150 | 39.52 | |||||||||||||||
$19.00 to $42.90 | 244,850 | 4.5 years | $ | 28.83 | 210,600 | $ | 28.19 | |||||||||||||
58
15. Employee Benefits(continued)
The Company estimates the fair value of stock option grants using the Black-Scholes valuation model. Expected volatilities are based on a combination of implied and historical volatilities of our common stock; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The following table presents the key input assumptions for the Black-Scholes valuation model:
Years ended December 31, | 2006 | 2005 | ||||||
Weighted average fair value per share | $ | 6.58 | $ | 8.11 | ||||
Expected term (years) | 7.3 years | 7.3 years | ||||||
Risk free interest rate | 4.31 | % | 3.97 | % | ||||
Dividend Yield | 3.29 | % | 2.80 | % | ||||
Volatility | 21.5 | % | 21.2 | % | ||||
The total intrinsic value (amount by which the fair value of the underlying stock exceeds the exercise price of an option on exercise date) of options exercised in 2006 and 2005 was $511 thousand and $1.158 million, respectively. The total cash received from officers and directors of the Company as a result of stock option exercises in 2006 and 2005 was $750 thousand and $1.488 million, respectively. The tax benefit realized as a result of the stock option exercises was $114 thousand in 2006 compared to $342 thousand in 2005.
In 2006, the Company recognized compensation cost amounting to $42 thousand, which has been charged against income, for options granted in January 2006 that will vest after the first year. As of December 31, 2006 there was $183 thousand of unrecognized compensation related to nonvested options granted in 2006. That cost is expected to be recognized pro-rata over the next four years as these options vest. Tax benefits recognized in the income statement related to compensation costs of these options was $14 thousand for 2006.
During 2006, the Company extended the contractural life of 11,250 fully vested options to a retiring Director of the Company. As a result of this modification, the Company recognized additional compensation expense of $18 thousand for the year ended December 31, 2006.
16. Shareholder Rights Plan
The Company has in effect a Shareholder Rights Plan, pursuant to which the Board of Directors authorized the issuance of one preferred stock purchase right for each share of common stock of the Company outstanding. 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 ofMassbank 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 toMassbank Corp. 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.
59
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, | 2006 | 2005 | ||||||
Assets: | ||||||||
Cash | $ | 5,087 | $ | 12 | ||||
Interest-bearing deposits in banks | — | 3,894 | ||||||
Total cash and cash equivalents | 5,087 | 3,906 | ||||||
Investment in subsidiaries | 101,789 | 101,135 | ||||||
Income tax receivable, net | 155 | 210 | ||||||
Deferred income tax asset, net | 32 | 25 | ||||||
Other assets | 1 | — | ||||||
Total assets | $ | 107,064 | $ | 105,276 | ||||
Liabilities: | ||||||||
Other liabilities | $ | 179 | $ | 12 | ||||
Total liabilities | 179 | 12 | ||||||
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, 7,850,317 and 7,811,680 shares issued in 2006 and 2005, respectively | 7,850 | 7,812 | ||||||
Additional paid-in capital | 57,953 | 57,067 | ||||||
Retained earnings | 107,055 | 104,743 | ||||||
172,858 | 169,622 | |||||||
Treasury stock at cost, 3,532,663 and 3,483,163 shares in 2006 and 2005, respectively | (62,902 | ) | (61,281 | ) | ||||
Accumulated other comprehensive income (loss) | (3,071 | ) | (3,077 | ) | ||||
Shares held in rabbi trust at cost 3,004 and 2,479 shares in 2006 and 2005, respectively | (84 | ) | (67 | ) | ||||
Deferred compensation obligation | 84 | 67 | ||||||
Total stockholders’ equity | 106,885 | 105,264 | ||||||
Total liabilities and stockholders’ equity | $ | 107,064 | $ | 105,276 | ||||
Statements of Income | ||||||||||||
(In thousands)Years ended December 31, | 2006 | 2005 | 2004 | |||||||||
Income: | ||||||||||||
Dividends received from subsidiaries | $ | 7,055 | $ | 7,000 | $ | 7,100 | ||||||
Interest and dividend income | 14 | 31 | 18 | |||||||||
Total interest and dividend income | 7,069 | 7,031 | 7,118 | |||||||||
Non-interest expense | 186 | 170 | 179 | |||||||||
Income before income taxes | 6,883 | 6,861 | 6,939 | |||||||||
Income tax benefit | 110 | 99 | 108 | |||||||||
Income before equity in undistributed earnings of subsidiaries | 6,993 | 6,960 | 7,047 | |||||||||
Equity in undistributed earnings of subsidiaries | 34 | 363 | 333 | |||||||||
Net income | $ | 7,027 | $ | 7,323 | $ | 7,380 | ||||||
The Parent Company only Statements of Changes in Stockholders’ Equity are identical to the consolidated statements and therefore are not presented here.
60
17. Parent Company Financial Statements(continued)
Statements Of Cash Flows | ||||||||||||
(In Thousands) Years Ended December 31, | 2006 | 2005 | 2004 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 7,027 | $ | 7,323 | $ | 7,380 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Equity in undistributed earnings of subsidiaries | (34 | ) | (363 | ) | (333 | ) | ||||||
Dividend from subsidiary in the form of land | (480 | ) | — | — | ||||||||
Decrease (increase) in current income tax receivable, net | 55 | (23 | ) | 22 | ||||||||
Decrease (increase) in deferred income tax asset, net | (7 | ) | (4 | ) | 7 | |||||||
Decrease (increase) in other assets | (1 | ) | 29 | (28 | ) | |||||||
Increase (decrease) in other liabilities | 167 | (1 | ) | (4 | ) | |||||||
Decrease (increase) in amount due from subsidiaries | — | 196 | (196 | ) | ||||||||
Share-based payment compensation | 5 | — | — | |||||||||
Net cash provided by operating activities | 6,732 | 7,157 | 6,848 | |||||||||
Cash flow from financing activities: | ||||||||||||
Payments to acquire treasury stock | (1,621 | ) | (4,487 | ) | (2,617 | ) | ||||||
Purchase of company stock for deferred compensation plan, net of distributions | (17 | ) | (8 | ) | (13 | ) | ||||||
Increase in deferred compensation obligation | 17 | 8 | 13 | |||||||||
Options exercised, including tax benefits | 785 | 1,572 | 684 | |||||||||
Dividends paid on common stock | (4,715 | ) | (4,583 | ) | (4,415 | ) | ||||||
Net cash used in financing activities | (5,551 | ) | (7,498 | ) | (6,348 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | 1,181 | (341 | ) | 500 | ||||||||
Cash and cash equivalents at beginning of year | 3,906 | 4,247 | 3,747 | |||||||||
Cash and cash equivalents at end of year | $ | 5,087 | $ | 3,906 | $ | 4,247 | ||||||
During the years ended December 31, 2006, 2005 and 2004, the Company made cash payments for income taxes of $18 thousand, $30 thousand and $20 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 $39 thousand, $42 thousand and $48 thousand during the years ended December 31, 2006, 2005 and 2004, respectively.
18. Ten-Year Statistical Summary (Unaudited)
(In thousands except per share data) | ||||||||||||||||||||||||||||||||||||||||
Years ended December 31, | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | 1997 | ||||||||||||||||||||||||||||||
Net income | $ | 7,027 | $ | 7,323 | $ | 7,380 | $ | 7,863 | $ | 9,814 | $ | 10,759 | $ | 11,111 | $ | 11,311 | $ | 10,914 | $ | 10,167 | ||||||||||||||||||||
Diluted earnings per share | 1.61 | 1.66 | 1.64 | 1.73 | 2.04 | 2.24 | 2.25 | 2.17 | 1.98 | 1.85 | ||||||||||||||||||||||||||||||
Cash dividends paid per share | 1.09 | 1.05 | 1.00 | 0.92 | 0.88 | 0.84 | 0.79 | 0.74 | 0.68 | 0.59 | ||||||||||||||||||||||||||||||
Book value per share, at year-end | 24.76 | 24.32 | 25.11 | 25.17 | 25.45 | 24.34 | 22.83 | 20.43 | 21.05 | 19.38 | ||||||||||||||||||||||||||||||
Return on average assets | 0.82 | % | 0.79 | % | 0.75 | % | 0.78 | % | 0.99 | % | 1.13 | % | 1.20 | % | 1.20 | % | 1.17 | % | 1.12 | % | ||||||||||||||||||||
Return on average equity | 6.74 | % | 6.84 | % | 6.71 | % | 7.08 | % | 8.39 | % | 9.53 | % | 10.93 | % | 10.66 | % | 10.05 | % | 10.51 | % | ||||||||||||||||||||
61
19.Quarterly Data (Unaudited)
Years ended december 31, | 2006 | 2005 | ||||||||||||||||||||||||||||||
(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 | $ | 10,085 | $ | 10,052 | $ | 10,001 | $ | 9,801 | $ | 9,621 | $ | 9,346 | $ | 9,069 | $ | 8,765 | ||||||||||||||||
Interest expense | 5,106 | 4,872 | 4,613 | 4,360 | 4,128 | 3,878 | 3,674 | 3,461 | ||||||||||||||||||||||||
Net interest income | 4,979 | 5,180 | 5,388 | 5,441 | 5,493 | 5,468 | 5,395 | 5,304 | ||||||||||||||||||||||||
Provision (credit) for loan losses | (9 | ) | 82 | 50 | — | — | — | — | (53 | ) | ||||||||||||||||||||||
Net interest income after provision (credit) for loan losses | 4,988 | 5,098 | 5,338 | 5,441 | 5,493 | 5,468 | 5,395 | 5,357 | ||||||||||||||||||||||||
Gains (losses) on securities, net | 259 | 168 | 119 | 251 | 253 | 238 | 244 | (56 | ) | |||||||||||||||||||||||
Other non-interest income | 477 | 292 | 279 | 360 | 290 | 329 | 354 | 265 | ||||||||||||||||||||||||
Non-interest expense | 3,053 | 2,942 | 3,058 | 3,307 | 3,097 | 3,189 | 3,185 | 3,043 | ||||||||||||||||||||||||
Income before income taxes | 2,671 | 2,616 | 2,678 | 2,745 | 2,939 | 2,846 | 2,808 | 2,523 | ||||||||||||||||||||||||
Income tax expense | 940 | 885 | 923 | 935 | 1,051 | 962 | 951 | 829 | ||||||||||||||||||||||||
Net income | $ | 1,731 | $ | 1,731 | $ | 1,755 | $ | 1,810 | $ | 1,888 | $ | 1,884 | $ | 1,857 | $ | 1,694 | ||||||||||||||||
Earnings per share (in dollars):(1) | ||||||||||||||||||||||||||||||||
Basic | $ | 0.40 | $ | 0.40 | $ | 0.41 | $ | 0.42 | $ | 0.44 | $ | 0.43 | $ | 0.42 | $ | 0.39 | ||||||||||||||||
Diluted | 0.40 | 0.40 | 0.40 | 0.41 | 0.43 | 0.43 | 0.42 | 0.38 | ||||||||||||||||||||||||
Weighted average common shares outstanding:(1) | ||||||||||||||||||||||||||||||||
Basic | 4,320 | 4,315 | 4,329 | 4,340 | 4,332 | 4,343 | 4,390 | 4,400 | ||||||||||||||||||||||||
Diluted | 4,353 | 4,349 | 4,364 | 4,377 | 4,371 | 4,398 | 4,452 | 4,470 | ||||||||||||||||||||||||
(1) | Computation of earnings per share is further described in Note 1. |
62
Massbank Corp. And Subsidiaries Stockholder Data
Years ended December 31, 2006 and 2005
Massbank Corp.’s common stock is currently traded on the NASDAQ Global Select Market under the symbol “MASB.” At December 31, 2006 there were 4,317,654 shares outstanding and 712 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 closing 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, | 2006 | |||||||||||
Fourth Quarter | $ | 33.63 | $ | 32.33 | $ | 0.28 | ||||||
Third Quarter | 33.94 | 32.44 | 0.27 | |||||||||
Second Quarter | 33.29 | 32.32 | 0.27 | |||||||||
First Quarter | 34.692 | 31.77 | 0.27 | |||||||||
Year ended december 31, | 2005 | |||||||||||
Fourth Quarter | $ | 33.48 | $ | 28.567 | $ | 0.27 | ||||||
Third Quarter | 35.12 | 33.13 | 0.26 | |||||||||
Second Quarter | 37.84 | 34.25 | 0.26 | |||||||||
First Quarter | 38.52 | 36.94 | 0.26 | |||||||||
Comparative Massbank Corp. Stock Performance Data
The following data compares the performance of the Common Stock of the Company (assuming reinvestment of dividends) to the total return of the S&P 500 Index. The S&P 500 Index is a well known, unmanaged index of the prices of 500 large-company common stocks selected by Standard & Poor’s. The data assumes a $100 initial investment in the Common Stock of MASSBANK Corp. and the stocks included in the S&P 500 Index.
Comparative cumulative Return Totals (years ended december 31,)
Comparative 5 year cumulative total return
2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||
Massbank Corp. | $ | 100.00 | $ | 122.26 | $ | 189.79 | $ | 169.67 | $ | 154.26 | $ | 158.84 | ||||||||||||
S&P500 Index | $ | 100.00 | $ | 78.03 | $ | 100.16 | $ | 110.92 | $ | 116.28 | $ | 134.43 | ||||||||||||
Comparative 10 Year Cumulative Total Return
1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||||||||||||||||||||
Massbank Corp. | $ | 100.00 | $ | 169.65 | $ | 143.01 | $ | 111.88 | $ | 115.43 | $ | 146.25 | $ | 178.81 | $ | 277.56 | $ | 248.14 | $ | 225.61 | $ | 232.31 | ||||||||||||||||||||||
S&P500 Index | $ | 100.00 | $ | 133.10 | $ | 170.82 | $ | 206.49 | $ | 187.84 | $ | 165.58 | $ | 129.21 | $ | 165.85 | $ | 183.66 | $ | 192.54 | $ | 222.59 | ||||||||||||||||||||||
Comparative 15 Year Cumulative Total Return
1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Massbank Corp. | $ | 100.00 | $ | 195.10 | $ | 211.62 | $ | 211.40 | $ | 300.16 | $ | 369.13 | $ | 626.23 | $ | 527.88 | $ | 412.99 | $ | 426.08 | $ | 539.85 | $ | 660.03 | $ | 1,024.57 | $ | 915.94 | $ | 832.79 | $ | 857.52 | ||||||||||||||||||||||||||||||||||||||||||
S&P500 Index | $ | 100.00 | $ | 107.43 | $ | 118.09 | $ | 119.61 | $ | 164.01 | $ | 201.21 | $ | 267.81 | $ | 343.70 | $ | 415.48 | $ | 377.95 | $ | 333.16 | $ | 259.98 | $ | 333.70 | $ | 369.53 | $ | 387.39 | $ | 447.87 | ||||||||||||||||||||||||||||||||||||||||||
Comparative 20 year cumulative total return
1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Massbank Corp. | $ | 100.00 | $ | 98.10 | $ | 136.05 | $ | 126.27 | $ | 96.66 | $ | 125.60 | $ | 245.05 | $ | 265.80 | $ | 265.51 | $ | 377.00 | $ | 463.62 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
S&P500 Index | $ | 100.00 | $ | 105.67 | $ | 122.94 | $ | 161.31 | $ | 156.27 | $ | 203.15 | $ | 218.25 | $ | 239.91 | $ | 242.99 | $ | 333.18 | $ | 408.75 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||||||||||||||
Massbank Corp. | $ | 786.54 | $ | 663.01 | $ | 518.71 | $ | 535.15 | $ | 678.05 | $ | 829.00 | $ | 1,286.85 | $ | 1,150.41 | $ | 1,045.97 | $ | 1,077.03 | ||||||||||||||||||||
S&P500 Index | $ | 544.05 | $ | 698.22 | $ | 844.05 | $ | 767.81 | $ | 676.82 | $ | 528.16 | $ | 677.92 | $ | 750.71 | $ | 786.99 | $ | 909.86 | ||||||||||||||||||||
Refer to page 7 of this report for performance graphs.
63
Officers and directors
Massbank Corp.
Massbank Corp.
OFFICERS
Gerard H. Brandi
Chairman, President and
Chief Executive Officer
Chairman, President and
Chief Executive Officer
Reginald E. Cormier
Senior Vice President, Treasurer and
Chief Financial Officer
Senior Vice President, Treasurer and
Chief Financial Officer
Robert S. Cummings
Secretary
Secretary
Donna H. West
Assistant Secretary
Assistant Secretary
Board of Directors
* Mathias B. Bedell
Retired, Bedell Brothers Insurance
Agency, Inc.
Retired, Bedell Brothers Insurance
Agency, Inc.
* Gerard H. Brandi
Chairman, President and
Chief Executive Officer,
Massbank Corp.
Chairman, President and
Chief Executive Officer,
Massbank Corp.
†* Allan S. Bufferd
Treasurer Emeritus,
Massachusetts Institute of Technology
Treasurer Emeritus,
Massachusetts Institute of Technology
Kathleen M. Camilli
President
Camilli Economics, LLC
President
Camilli Economics, LLC
* Stephen W. Carr
Retired Partner, Attorney
Goodwin Procter LLP
Retired Partner, Attorney
Goodwin Procter LLP
† Alexander S. Costello
Teacher, Brooks School
Teacher, Brooks School
O. Bradley Latham
Attorney, Principal
Latham, Latham & Lamond, P.C.
* Stephen E. Marshall
Retired, C.H. Cleaves Insurance
Agency, Inc.
Retired, C.H. Cleaves Insurance
Agency, Inc.
† Nancy L. Pettinelli
Executive Director,
Visiting Nurse Association
of Greater Lowell, Inc.
Executive Director,
Visiting Nurse Association
of Greater Lowell, Inc.
†* William F. Rucci, Jr.
Certified Public Accountant, Partner
Rucci, Bardaro & Barrett, PC
Certified Public Accountant, Partner
Rucci, Bardaro & Barrett, PC
* Member, Executive Committee
† Member, Audit Committee
† Member, Audit Committee
Officers and Directors
Massbank
Massbank
OFFICERS
Gerard H. Brandi
Chairman, President and
Chief Executive Officer
Chairman, President and
Chief Executive Officer
James L. Milinazzo
Senior Vice President, Lending
Senior Vice President, Lending
Donna H. West
Senior Vice President,
Community Banking and
Chief Operating Officer
Senior Vice President,
Community Banking and
Chief Operating Officer
Reginald E. Cormier
Senior Vice President, Treasurer
and Chief Financial Officer
Senior Vice President, Treasurer
and Chief Financial Officer
William F. Rivers
Vice President, Operations
Vice President, Operations
Richard J. Flannigan
Vice President and
Senior Trust Officer
Vice President and
Senior Trust Officer
Thomas J. Queeney
Vice President and
Senior Trust Officer
Vice President and
Senior Trust Officer
Joseph P. Orefice
Vice President and Director,
Information Technology
Vice President and Director,
Information Technology
Carol A. Axelrod
Loan Origination Officer
Loan Origination Officer
Kenneth R. Berard
Assistant Treasurer
Assistant Treasurer
David M. Bianco
Assistant Treasurer
Assistant Treasurer
Ernest G. Campbell, Jr.
Collections Officer
Collections Officer
Marianne J. Carpenter
Director, Human Resources
Director, Human Resources
Lisa A. DiCicco
Trust Operations Officer and
Executive Administrator
Trust Operations Officer and
Executive Administrator
Karen L. Flammia
Assistant Vice President
Assistant Vice President
Scott M. Forbes
Mortgage Origination Officer
Mortgage Origination Officer
Rachael E. Garneau
Assistant Vice President
Assistant Vice President
Martin J. Heneghan
Assistant Controller
Assistant Controller
Brian W. Hurley
Assistant Vice President,
Loan Operations
Assistant Vice President,
Loan Operations
Richard H. Jordan
Security/BSA Officer
Security/BSA Officer
Brian P. Mahoney
Director of Audit
Director of Audit
Kenneth A. Masson
Assistant Vice President,
Marketing
Assistant Vice President,
Marketing
Seda Sam
Assistant Treasurer
Assistant Treasurer
John J. Spinello
Controller
Controller
Shaun Tulley
Information Technology Officer
Information Technology Officer
Karen L. Trevisone
Assistant Treasurer
Assistant Treasurer
Margaret E. White
Assistant Treasurer
Assistant Treasurer
Patricia A. Witts
Assistant Treasurer
Assistant Treasurer
Michael J. Woods
Assistant Vice President,
Operations
Assistant Vice President,
Operations
Board of Directors
and
Executive Committee
and
Executive Committee
Mathias B. Bedell
Gerard H. Brandi,Chairman
Allan S. Bufferd
Stephen W. Carr
Robert S. Cummings,Clerk
Stephen E. Marshall
William F. Rucci, Jr.
Donna H.West
Gerard H. Brandi,Chairman
Allan S. Bufferd
Stephen W. Carr
Robert S. Cummings,Clerk
Stephen E. Marshall
William F. Rucci, Jr.
Donna H.West
64
Corporate Information
Massbank Corp.
123 Haven Street
Reading, MA 01867
(781) 662-0100
(978) 446-9200
FAX (781) 942-1022
123 Haven Street
Reading, MA 01867
(781) 662-0100
(978) 446-9200
FAX (781) 942-1022
Savings and Mortgage
24-Hour-Rate Lines
24-Hour-Rate Lines
(781) 662-0154
(978) 446-9285
(978) 446-9285
Notice of Shareholders’ Meeting
The Annual Meeting of the
Shareholders ofMassbank Corp.
will be held at 10:00 A.M.
on Tuesday, April 17, 2007 at the
Sheraton Ferncroft Resort
50 Ferncroft Road
Danvers, MA 01923
Shareholders ofMassbank Corp.
will be held at 10:00 A.M.
on Tuesday, April 17, 2007 at the
Sheraton Ferncroft Resort
50 Ferncroft Road
Danvers, MA 01923
Trademark
MASSBANK and its logo are
registered trademarks of
the Company
registered trademarks of
the Company
Form 10-K
Shareholders may obtain without
charge a copy of the Company’s
2006 Form 10-K. Written requests
should be addressed to:
Shareholder Services
Massbank Corp.
159 Haven Street
Reading, MA 01867
charge a copy of the Company’s
2006 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
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
containing a detailed description of
the plan by writing to:
Shareholder Services
Massbank Corp.
159 Haven Street
Reading, MA 01867
Transfer Agent
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, NY 10038
(800) 937-5449
(877) 777-0800
Website address:
www.amstock.com
Trust Company
59 Maiden Lane
New York, NY 10038
(800) 937-5449
(877) 777-0800
Website address:
www.amstock.com
Independent Registered
Public Accounting Firm
Public Accounting Firm
Parent, McLaughlin & Nangle
160 Federal Street
Boston, MA 02110-1713
160 Federal Street
Boston, MA 02110-1713
Legal Counsel
Goodwin Procter LLP
Exchange Place
Boston, MA 02109
Exchange Place
Boston, MA 02109
Massbank Branch Offices d/b/a
Massbankof Reading*
123 Haven Street
Reading, MA 01867
(781) 942-8188
(978) 446-9200
*Main Office
Reading, MA 01867
(781) 942-8188
(978) 446-9200
*Main Office
Massbankof Chelmsford
291 Chelmsford Street
Chelmsford, MA 01824
(978) 256-3751
Chelmsford, MA 01824
(978) 256-3751
17 North Road
Chelmsford, MA 01824
(978) 256-3733
Chelmsford, MA 01824
(978) 256-3733
Massbankof Dracut
45 Broadway Road
Dracut, MA 01826
(978) 441-0040
Dracut, MA 01826
(978) 441-0040
Massbankof Everett
738 Broadway
Everett, MA 02149
(617) 387-5115
Everett, MA 02149
(617) 387-5115
Massbankof Lowell
50 Central Street
Lowell, MA 01852
(978) 446-9200
Lowell, MA 01852
(978) 446-9200
755 Lakeview Avenue
Lowell, MA 01850
(978) 446-9216
Lowell, MA 01850
(978) 446-9216
Massbankof Medford
4110 Mystic Valley Parkway
Wellington Circle Plaza
Medford, MA 02155
(781) 395-4899
Wellington Circle Plaza
Medford, MA 02155
(781) 395-4899
Massbankof Melrose
476 Main Street
Melrose, MA 02176
(781) 662-0100
Melrose, MA 02176
(781) 662-0100
27 Melrose Street
Towers Plaza
Melrose, MA 02176
(781) 662-0165
Towers Plaza
Melrose, MA 02176
(781) 662-0165
Massbankof Stoneham
240 Main Street
Stoneham, MA 02180
(781) 662-0177
Stoneham, MA 02180
(781) 662-0177
Massbankof Tewksbury
1800 Main Street
Tewksbury, MA 01876
(978) 851-0300
Tewksbury, MA 01876
(978) 851-0300
Massbankof Westford
203 Littleton Road
Westford, MA 01886
(978) 692-3467
Westford, MA 01886
(978) 692-3467
Massbankof Wilmington
370 Main Street
Wilmington, MA 01887
(978) 658-4000
Wilmington, MA 01887
(978) 658-4000
211 Lowell Street, Unit G
Lucci’s Plaza
Wilmington, MA 01887
(978) 658-5775
Lucci’s Plaza
Wilmington, MA 01887
(978) 658-5775