SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to____________
Commission File Number 0-15137
MASSBANK Corp.
(Exact name of registrant as specified in its charter)
Delaware 04-2930382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 HAVEN STREET
Reading, Massachusetts 01867
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (781) 662-0100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the issuer's classes of common stock,
as of the latest practicable date is:
Class: Common stock $1.00 per share.
Outstanding at July 31, 2001: 3,135,675 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
------
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Income (unaudited)
for the three months ended June 30, 2001 and 2000 4
and for the six months ended June 30, 2001 and 2000 5
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 2001 (unaudited)
and the year ended December 31, 2000 6 - 7
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2001 and 2000 8 - 9
Condensed Notes to the Consolidated Financial Statements 10 - 11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 31
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 32
ITEM 2. Changes in Securities 32
ITEM 3. Defaults Upon Senior Securities 32
ITEM 4. Submission of Matters to a Vote of Security Holders 32
ITEM 5. Other Information 32
ITEM 6. Exhibits and Reports on Form 8-K 32
Signature Page 33
2
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
June 30, December 31,
2001 2000
Assets: (unaudited)
Cash and due from banks $ 10,740 $ 9,179
Short-term investments (Note 3) 228,502 112,842
- ---------------------------------------------------------------------------------------
Total cash and cash equivalents 239,242 122,021
Term federal funds sold -- 30,000
Interest-bearing deposits in banks 4,869 1,678
Securities held to maturity, at amortized cost
(market value of $230 in 2000) -- 230
Securities available for sale, at market value (amortized
cost of $371,307 in 2001 and $432,567 in 2000) 381,959 442,552
Trading securities, at market value 3 19,794
Loans: (Note 4)
Mortgage loans 282,570 272,951
Other loans 35,861 37,196
Allowance for loan losses (2,616) (2,594)
- ---------------------------------------------------------------------------------------
Net loans 315,815 307,553
Premises and equipment 5,755 3,932
Accrued interest receivable 4,330 5,755
Goodwill 1,140 1,189
Current income tax asset, net 426 284
Other assets 3,315 3,714
- ---------------------------------------------------------------------------------------
Total assets $956,854 $938,702
Liabilities and Stockholders' Equity:
Deposits $839,001 $823,625
Escrow deposits of borrowers 1,316 1,387
Employee stock ownership plan liability 312 312
Deferred income taxes 2,520 2,418
Other liabilities 2,490 2,717
- ---------------------------------------------------------------------------------------
Total liabilities 845,639 830,459
Stockholders' Equity:
Preferred stock, par value $1.00 per share;
2,000,000 shares authorized, none issued -- --
Common stock, par value $1.00 per share;
10,000,000 shares authorized, 7,466,164 and
7,447,982 shares issued, respectively 7,466 7,448
Additional paid-in capital 62,148 61,674
Retained earnings 96,634 93,165
- ---------------------------------------------------------------------------------------
166,248 162,287
Accumulated other comprehensive income: (Note 6)
Net unrealized gains on securities
available for sale, net of tax effect 6,424 5,972
Treasury stock at cost, 4,345,589 and
4,300,489 shares, respectively (Note 5) (61,145) (59,704)
Common stock acquired by ESOP (312) (312)
- ---------------------------------------------------------------------------------------
Total stockholders' equity 111,215 108,243
- ---------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $956,854 $938,702
See accompanying condensed notes to consolidated financial statements.
3
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
June 30,
(In thousands except share data) 2001 2000
- -------------------------------------------------------------------------------
Interest and dividend income:
Mortgage Loans $ 4,807 $ 4,914
Other loans 613 741
Securities available for sale:
Mortgage-backed securities 4,696 4,748
Other securities 1,443 2,380
Trading securities 32 12
Federal funds sold 2,186 2,002
Other investments 328 118
- -------------------------------------------------------------------------------
Total interest and dividend income 14,105 14,915
- -------------------------------------------------------------------------------
Interest expense:
Deposits 8,476 8,621
- -------------------------------------------------------------------------------
Total interest expense 8,476 8,621
- -------------------------------------------------------------------------------
Net interest income 5,629 6,294
Provision for loan losses 12 15
- -------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,617 6,279
- -------------------------------------------------------------------------------
Non-interest income:
Deposit account service fees 159 172
Gains on securities, net 1,140 886
Other 253 235
- -------------------------------------------------------------------------------
Total non-interest income 1,552 1,293
- -------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 1,695 1,649
Occupancy and equipment 513 501
Data processing 122 117
Professional services 147 498
Advertising and marketing 54 63
Amortization of intangibles 80 83
Other 380 414
- -------------------------------------------------------------------------------
Total non-interest expense 2,991 3,325
- -------------------------------------------------------------------------------
Income before income taxes 4,178 4,247
Income tax expense 1,490 1,530
- -------------------------------------------------------------------------------
Net income $ 2,688 $ 2,717
- -------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 3,115,920 3,229,032
Diluted 3,196,908 3,304,904
Earnings per share (in dollars):
Basic $0.86 $0.84
Diluted 0.84 0.82
See accompanying condensed notes to consolidated financial statements.
4
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six months ended
June 30,
(In thousands except share data) 2001 2000
- -------------------------------------------------------------------------------
Interest and dividend income:
Mortgage Loans $ 9,595 $ 9,924
Other loans 1,322 1,457
Securities available for sale:
Mortgage-backed securities 9,483 9,558
Other securities 3,279 4,785
Trading securities 145 53
Federal funds sold 4,555 3,502
Other investments 619 346
- -------------------------------------------------------------------------------
Total interest and dividend income 28,998 29,625
- -------------------------------------------------------------------------------
Interest expense:
Deposits 17,388 17,042
- -------------------------------------------------------------------------------
Total interest expense 17,388 17,042
- -------------------------------------------------------------------------------
Net interest income 11,610 12,583
Provision for loan losses 24 30
- -------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,586 12,553
- -------------------------------------------------------------------------------
Non-interest income:
Deposit account service fees 320 346
Gains on securities, net 1,997 1,853
Other 406 406
- -------------------------------------------------------------------------------
Total non-interest income 2,723 2,605
- -------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 3,283 3,469
Occupancy and equipment 1,091 1,073
Data processing 251 245
Professional services 249 666
Advertising and marketing 96 118
Amortization of intangibles 162 165
Other 726 769
- -------------------------------------------------------------------------------
Total non-interest expense 5,858 6,505
- -------------------------------------------------------------------------------
Income before income taxes 8,451 8,653
Income tax expense 3,018 3,108
- -------------------------------------------------------------------------------
Net income $ 5,433 $ 5,545
- -------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 3,124,198 3,246,078
Diluted 3,201,623 3,321,132
Earnings per share (in dollars):
Basic $1.74 $1.71
Diluted 1.70 1.67
See accompanying condensed notes to consolidated financial statements.
5
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 2001 (unaudited)
(In thousands except share data)
ACCUMULATED
ADDITIONAL OTHER COMMON STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) BY ESOP TOTAL
------ ------- -------- --------- -------------- --------- --------
Balance at December 31, 2000 $7,448 $61,674 $93,165 $(59,704) $5,972 $(312) $108,243
Net Income -- -- 5,433 -- -- -- 5,433
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 6) -- -- -- -- 452 -- 452
--------
Comprehensive income 5,885
Cash dividends declared and paid
($0.63 per share) -- -- (1,968) -- -- -- (1,968)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 4 -- -- -- 4
Amortization of ESOP shares
committed to be released -- 67 -- -- -- -- 67
Purchase of Company stock for
deferred compensation plan (Note 5) -- 30 -- (30) -- -- --
Purchase of treasury stock -- -- -- (1,411) -- -- (1,411)
Exercise of stock options
and related tax benefits 18 377 -- -- -- -- 395
________________________________________________________________________
Balance at June 30, 2001 $7,466 $62,148 $96,634 $(61,145) $6,424 $(312) $111,215
See accompanying condensed notes to consolidated financial statements.
6
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands except share data)
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) BY ESOP TOTAL
------ ------- -------- --------- -------------- --------- --------
Balance at December 31, 1999 $7,407 $60,591 $85,873 $(53,890) $1,966 $(468) $101,479
Net income -- -- 11,111 -- -- -- 11,111
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 6) -- -- -- -- 4,006 -- 4,006
------ ------- -------- -------- ------------- -------- --------
Comprehensive income 15,117
Cash dividends declared and paid
($1.185 per share) -- -- (3,829) -- -- -- (3,829)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 10 -- -- -- 10
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 93 -- -- -- -- 93
Purchase of treasury stock -- -- -- (5,448) -- -- (5,448)
Purchase of company stock for deferred
compensation plan (Note 5) -- 366 -- (366) -- -- --
Exercise of stock options
and related tax benefits 41 624 -- -- -- -- 665
________________________________________________________________________________
Balance at December 31, 2000 $7,448 $61,674 $93,165 $(59,704) $ 5,972 $(312) $108,243
See accompanying condensed notes to consolidated financial statements.
7
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
2001 2000
-------- ------
(In thousands)
Cash flows from operating activities:
Net income $ 5,433 $ 5,545
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 423 447
Loan interest capitalized (20) (22)
Amortization of ESOP shares committed to be released 67 45
Decrease in accrued interest receivable 1,425 232
Decrease in other liabilities (227) (363)
(Increase) decrease in current income tax asset, net (142) 175
Accretion of discounts on securities, net of amortization
of premiums (407) (422)
Net trading securities activity 20,442 6,559
Gains on securities available for sale, net (1,894) (1,544)
Gains on trading securities, net (103) (309)
Decrease in deferred mortgage loan
origination fees, net of amortization (65) (70)
Deferred income tax benefit (113) (42)
Decrease in other assets 1,126 113
Provision for loan losses 24 30
Gains on sales of real estate acquired through foreclosure -- (8)
Gains on sales of premises and equipment (4) --
Decrease in escrow deposits of borrowers (71) (128)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,894 10,238
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of term federal funds (10,000) --
Proceeds from maturities of term federal funds 40,000 --
Net (increase) decrease in interest bearing bank deposits (3,191) 2,345
Proceeds from sales of investment securities available for sale 15,473 22,122
Proceeds from maturities of investment securities
available for sale 52,230 25,000
Purchases of investment securities
available for sale (8,326) (44,000)
Purchases of mortgage-backed securities (30,167) (13,748)
Principal repayments of mortgage-backed securities 33,304 23,650
Principal repayments of investment securities available for sale 2 2
Loans originated (43,901) (14,749)
Loan principal payments received 35,673 22,535
Purchases of premises & equipment (2,058) (162)
Proceeds from sales of premises and equipment 4 --
Proceeds from sales of real estate acquired through foreclosure -- 70
- -----------------------------------------------------------------------------------------------
Net cash provided by investing activities 79,043 23,065
- -----------------------------------------------------------------------------------------------
8
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Six Months Ended
June 30,
2001 2000
-------- --------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 15,264 1,640
Payments to acquire treasury stock (1,441) (2,084)
Purchase of Company stock for deferred compensation plan 30 346
Issuance of common stock under stock option plan 317 63
Tax benefit resulting from stock options exercised 78 4
Cash dividends paid on common stock (1,968) (1,903)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 4 5
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 12,284 (1,929)
- ------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 117,221 31,374
Cash and cash equivalents at beginning of period 122,021 121,404
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $239,242 $152,778
- ------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $ 17,440 $ 17,047
Cash paid during the period for taxes, net of refunds 3,195 2,965
Purchases of securities executed but not settled at
beginning of period which settled during the period 60 117
Sales of securities executed but not settled at
beginning of period which settled during the period 573 202
Non-cash transactions:
SFAS 115:
Increase (decrease) in accumulated other comprehensive income 452 (2,647)
Increase (decrease) in deferred tax liabilities 215 (1,853)
Purchases of securities executed but not settled at end of period 272 100
Sales of securities executed but not settled at end of period 1,511 701
- ------------------------------------------------------------------------------------------
See accompanying condensed notes to consolidated financial statements.
9
MASSBANK CORP.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial condition and results of operations of MASSBANK Corp. (the
"Company") essentially reflect the operations of its subsidiary, MASSBANK (the
"Bank"). All significant intercompany balances and transactions have been
eliminated in consolidation.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, and in the opinion of management,
include all adjustments of a normal recurring nature necessary for the fair
presentation of the financial condition of the Company as of June 30, 2001 and
December 31, 2000, and its operating results for the three and six months ended
June 30, 2001 and 2000. The results of operations for any interim period are
not necessarily indicative of the results to be expected for the entire year.
The information in this report should be read in conjunction with the
financial statements and related notes included in the Annual Report on Form
10-K for the year ended December 31, 2000.
(2) Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents consist of
cash and due from banks, and short-term investments with original maturities of
less than 90 days.
(3) Short-Term Investments
Short-term investments consist of the following:
- -------------------------------------------------------------------------------------------------------------------
At At
(In thousands) June 30, 2001 December 31, 2000
- -------------------------------------------------------------------------------------------------------------------
Federal funds sold (overnight) $203,854 $112,711
Money market funds 24,648 131
- -------------------------------------------------------------------------------------------------------------------
Total short-term investments $228,502 $112,842
- -------------------------------------------------------------------------------------------------------------------
The investments above are stated at cost which approximates market value and
have original maturities of less than 90 days.
(4) Commitments
At June 30, 2001, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$11,294,000 and commitments under existing home equity lines of credit and other
loans of approximately $34,459,000 which are not reflected on the consolidated
balance sheet. In addition, as of June 30, 2001, the Company had a performance
standby letter of credit conveyed to others in the amount of $312,000 which is
also not reflected on the consolidated balance sheet.
(5) Directors Deferred Compensation Plan
In 1988, the Company established a deferred compensation plan for its
directors. The plan allows the Company's directors to defer receipt of all or a
portion of their compensation until the earlier of: (1) their attaining the age
of 72, or (2) their termination as a director of the Company. In 2000, the plan
was amended to allow the directors' compensation to be invested in Company stock
held in an irrevocable trust. At June 30, 2001 the trust held 14,100 shares of
MASSBANK Corp. stock that the Company has classified as treasury stock. The
treasury shares are considered outstanding in the computation of earnings per
share and book value per share.
10
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(6) Comprehensive Income
Comprehensive income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources." It includes all changes in equity during a period
except those resulting from investments by and distributions to shareholders.
The term "comprehensive income" describes the total of all components of
comprehensive income including net income.
The Company's other comprehensive income and related tax effect for the
six months ended June 30, 2001 and the year ended December 31, 2000 is as
follows:
For the Six Months Ended
June 30, 2001
- --------------------------------------------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
---------- ---------- ----------
Unrealized gains on securities:
Unrealized holding gains arising during period $2,561 $(1,006) $1,555
Less: reclassification adjustment for
gains realized in net income 1,894 (791) 1,103
------ ------- ------
Net unrealized gains 667 (215) 452
------ ------- ------
Other comprehensive income $ 667 $ (215) $ 452
------ ------- ------
For the Year Ended
December 31, 2000
- --------------------------------------------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
---------- ---------- ----------
Unrealized gains on securities:
Unrealized holding gains arising during period $9,377 $(3,613) $5,764
Less: reclassification adjustment for
gains realized in net income 3,049 (1,291) 1,758
------ ------- ------
Net unrealized gains 6,328 (2,322) 4,006
------ ------- ------
Other comprehensive income $6,328 $(2,322) $4,006
------ ------- ------
11
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2001
Cautionary Statement.
Certain statements contained in this report or incorporated herein by
reference are "forward-looking statements." We may also make forward-looking
statements in other written documents we file with the Securities and Exchange
Commission, in our annual reports to stockholders, in press releases and other
written materials, and in oral statements made by our officers, directors or
employees. You can identify forward-looking statements by the use of the words
"believe," "expect," "anticipate," "intend," "estimate," "assume" and other
similar expressions which predict or indicate future events and trends and which
do not relate to historical matters. You should not rely on forward-looking
statements, because they involve known and unknown risks, uncertainties and
other factors, some of which are beyond the control of the Company. These
risks, uncertainties and other factors may cause the actual results, performance
or achievements of the Company to be materially different from the anticipated
future results, performance or achievements expressed or implied by the forward-
looking statements.
Some of the factors that might cause these differences include the
following: fluctuations in interest rates, price volatility in the stock and
bond markets, inflation, government regulations and economic conditions and
competition in the geographic and business areas in which the Company conducts
its operations; and increases in loan defaults. You should carefully review all
of these factors, and you should be aware that there may be other factors that
could cause these differences. These forward-looking statements were based on
information, plans and estimates at the date of this report, and we do not
promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
Results of Operations for the three months ended June 30, 2001
GENERAL
For the quarter ended June 30, 2001, MASSBANK Corp. reported net income of
$2,688,000 or $0.84 in diluted earnings per share compared to net income of
$2,717,000, or $0.82 in diluted earnings per share in the second quarter of
2000. Basic earnings per share in the recent quarter increased to $0.86 from
$0.84 per share in the second quarter of the prior year.
The Company's net income in the second quarter 2001 compared to the same
quarter of 2000 reflects an increase in non-interest income of $259,000, a
reduction in non-interest expense of $334,000 and a decrease in the provision
for loan losses of $3,000. These improvements were offset by a decrease in net
interest income of $665,000 resulting primarily from a decline in net interest
margin partially offset by an increase in average earning assets. In addition,
the Company's favorable earnings per share performance in the recent quarter was
positively affected by the reduced number of average common shares outstanding
as a result of the Company's repurchase of 173,300 shares of its common stock in
the last twelve months, pursuant to its stock repurchase program.
12
AVERAGE BALANCE SHEETS
Three Months Ended
June 30,
2001 2000
--------------------------- --------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
- ---------------------------------------------------------------------------------------
Assets:
Earning assets:
Federal funds sold $202,492 $ 2,186 4.33% $128,287 $ 2,002 6.26%
Short-term investments (2) 28,597 328 4.60 7,703 115 6.01
Investment securities 110,687 1,461 5.28 173,306 2,409 5.56
Mortgage-backed securities 280,677 4,696 6.69 270,231 4,748 7.03
Trading securities 2,460 32 5.15 860 12 5.32
Mortgage loans (1) 274,804 4,807 7.00 282,942 4,914 6.95
Other loans (1) 36,239 613 6.75 36,545 741 8.10
- ---------------------------------------------------------------------------------------
Total earning assets 935,956 $14,123 6.04% 899,874 $14,941 6.64%
Allowance for loan losses (2,609) (2,573)
- ---------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 933,347 897,301
Other assets 20,469 21,949
- ---------------------------------------------------------------------------------------
Total assets $953,816 $ 919,250
13
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
June 30,
2001 2000
--------------------------- ---------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
- ------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand and NOW $ 81,907 $ 125 0.61% $ 76,842 $ 124 0.65%
Savings 345,425 2,886 3.35 345,497 2,929 3.40
Time certificates of deposit 408,568 5,465 5.37 394,686 5,568 5.66
- ------------------------------------------------------------------------------------------
Total deposits 835,900 8,476 4.07 817,025 8,621 4.23
Other liabilities 6,326 3,108
- ------------------------------------------------------------------------------------------
Total liabilities 842,226 820,133
Stockholders' equity 111,590 99,117
- ------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $953,816 $919,250
- ------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) 5,647 6,320
Less adjustment of tax-exempt
interest income 18 26
- ------------------------------------------------------------------------------------------
Net interest income $5,629 $ 6,294
- ------------------------------------------------------------------------------------------
Interest rate spread 1.97% 2.41%
- ------------------------------------------------------------------------------------------
Net interest margin (3) 2.41% 2.81%
- ------------------------------------------------------------------------------------------
(1) Loans on non-accrual status are included in the average balance.
(2) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
(3) Net interest income (tax equivalent basis) before provision for loan losses
divided by average interest-earning assets.
(4) Includes average net unrealized gains or losses on securities available for
sale.
14
Net Interest Income
Net interest income totaled $5,629,000 in the second quarter of 2001, a
decrease of $665,000 from the same quarter a year ago. This decrease was
principally attributable to a decline in net interest margin partially offset
by the positive effect of average earning asset growth. The Company's net
interest margin for the three months ended June 30, 2001 was 2.41%, a decline
from 2.81% reported in the second quarter of 2000. The Company's average
earning assets increased $36.1 million to $936.0 million in the recent quarter,
from $899.9 million in the same quarter last year.
Interest and Dividend Income
Interest and dividend income on a fully taxable equivalent basis for the
three months ended June 30, 2001, decreased to $14,123,000 from $14,941,000
for the three months ended June 30, 2000. The decrease in interest and dividend
income resulted from a decrease in yield on the Company's average earning
assets, partially offset by an increase of $36.1 million in average earning
assets. As reflected in the table on page 13 of this report, the yield on the
Company's average earning assets in the second quarter of 2001 was 6.04%, down
from 6.64% in the same quarter of 2000.
The Federal Reserve Bank has cut the Federal Funds rate six times in the
last twelve months, reducing the rate from 6.50% to 3.75%. This decrease,
because of the Bank's high volume of Federal Funds sold, reduced the overall
yield on MASSBANK's earning assets. The yield on the Bank's other earning
assets, except mortgage loans, also decreased due primarily to a decrease in
market interest rates in the last twelve months.
Interest Expense
Total interest expense for the three months ended June 30, 2001 decreased
$145,000, or 1.7% to $8,476,000 from $8,621,000 for the three months ended
June 30, 2000. This decrease is due to a decrease in the Company's average cost
of funds partially offset by an increase in average deposits. The Company's
average cost of funds for the recent quarter was 4.07%, down from 4.23% for the
comparable quarter in 2000. The Company's average deposits, as shown in the
table on page 14, increased $18.9 million to $835.9 million in the second
quarter of 2001, from $817.0 million in the second quarter of 2000.
Provision for Loan Losses
The provision for loan losses represents a charge against current earnings
and an addition to the allowance for loan losses. The provision for loan losses
in the second quarter of 2001 was $12,000 compared to $15,000 in the second
quarter of last year. In determining the amount to provide for loan losses, the
key factor is the adequacy of the allowance for loan losses. Management uses a
methodology to systematically measure the amount of estimated loan loss exposure
inherent in the portfolio for purposes of establishing a sufficient allowance
for loan losses. The methodology includes three elements: an analysis of
individual loans deemed to be impaired in accordance with the terms of SFAS 114,
general loss allocations for various loan types based on loss experience factors
and an unallocated allowance which is maintained based on management's
assessment of many factors including the risk characteristics of the portfolio,
concentrations of credit, current and anticipated economic conditions that may
effect the borrower's ability to pay, and trends in loan delinquencies and
charge-offs. At June 30, 2001, the allowance for loan losses was $2,616,000
representing 554.2% of nonaccrual loans. The Bank's nonaccrual loans totaled
$472,000 at June 30, 2001 down from $953,000 a year earlier. The Bank had net
loan charge-offs of $3,000 in the recent quarter compared to net charge-offs of
$20,000 in the same quarter last year. Management believes that the allowance
for loan losses as of June 30, 2001 is adequate to cover the risks inherent in
the loan portfolio under current conditions.
15
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
on securities and other non-interest income.
Non-interest income increased by $259,000 to $1,552,000 for the recent
quarter, from $1,293,000 for the comparable quarter of the prior year. This
increase is due essentially to higher net securities gains in the second quarter
of 2001.
Net gains on securities totaled $1,140,000 in the second quarter of this
year compared to $886,000 in the second quarter of last year. Realized gains on
the sale of equity securities and debt securities totaled $1,130,000 and
$11,000, respectively for the three months ended June 30, 2001. The Bank also
recorded a mark-to-market loss of $1,000 on its trading account during this same
period.
The Bank's deposit account service fees and other non-interest income
totaled $159,000 and $253,000, respectively, in the second quarter of 2001
compared to $172,000 and $235,000, respectively, in the second quarter of 2000.
Non-Interest Expense
Non-interest expense decreased $334,000 or 10.0% to $2,991,000 in the
second quarter of 2001, from $3,325,000 in the second quarter of 2000. The
decrease in non-interest expense is primarily due to a decrease in professional
services expenses.
Professional services expenses decreased $351,000 or 70.5% to $147,000 in
the second quarter of 2001 from $498,000 in the second quarter last year. The
decrease is due primarily to legal fees and other expenses the Company incurred
in the second quarter last year in defending the Company's registered trademarks
against infringement. All other non-interest expenses combined, consisting of
salaries and employee benefits, occupancy and equipment, data processing,
advertising and marketing, amortization of intangibles and other expenses,
increased $17,000 to $2,844,000 for the three months ended June 30, 2001 from
$2,827,000 for the three months ended June 30, 2000.
Income Tax Expense
The Company, the Bank and its subsidiaries file a consolidated federal
income tax return. The Parent Company is subject to a State of Delaware
Franchise Tax and a State of Massachusetts Bank Excise Tax and the Bank's
subsidiaries are subject to a State of Massachusetts Corporate Excise Tax.
The Company recorded income tax expense of $1,490,000 in the second quarter
of 2001, a decrease of $40,000 when compared to the same quarter last year.
The decrease in income tax expense is due primarily to a decrease in income
before income taxes. The Company's income before income taxes was $4,178,000 in
the recent quarter compared to $4,247,000 for the same quarter a year ago. The
effective income tax rate for the three months ended June 30, 2001 and 2000 was
35.7% and 36.0%, respectively.
16
Results of Operations for the six months ended June 30, 2001
General
For the six months ended June 30, 2001, the Company reported net income of
$5,433,000 or $1.70 in diluted earnings per share ($1.74 in basic earnings per
share) compared to net income of $5,545,000 or $1.67 in diluted earnings per
share ($1.71 in basic earnings per share) earned in the first half of 2000.
The Company's financial performance in the first six months of 2001
reflects an increase in non-interest income of $118,000 and decreases in non-
interest expense and provision for loan losses of $647,000 and $6,000,
respectively. These improvements were offset by a decrease in net interest
income of $973,000 resulting primarily from a decline in net interest margin
partially offset by an increase in average earning assets. Additionally, the
earnings per share results for the first half of 2001 were positively affected
by the reduced number of average common shares outstanding as a result of the
Company's repurchase of 173,300 shares of its common stock, in the last twelve
months, pursuant to its stock repurchase program.
Net Interest Income
Net interest income totaled $11,610,000 for the six months ended June 30,
2001, compared to $12,583,000 for the same period in 2000. The $973,000
decrease is primarily attributable to a decrease in the Company's net interest
margin, partially offset by an increase in average earning assets.
The Company's net interest margin for the first six months of 2001 was
2.50% compared to 2.81% for the same period last year. Average earning assets
for the six months ended June 30, 2001 increased $29.9 million to $930.9 million
from $901.0 million for the corresponding period in 2000.
The Company's interest rate spread for the first half of 2001 decreased to
2.02% from 2.40% for the first six months of last year. The yield on the
Company's average earning assets in the first half of 2001 decreased 35 basis
points to 6.24% from 6.59% in the corresponding period of 2000. The Company's
average cost of funds for the first half of 2001 increased 3 basis points to
4.22% from 4.19% for the six months ended June 30, 2000.
17
AVERAGE BALANCE SHEETS
Six Months Ended
June 30,
2001 2000
--------------------------- --------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
- ---------------------------------------------------------------------------------------
Assets:
Earning assets:
Federal funds sold $185,356 $ 4,555 4.96% $116,839 $ 3,502 6.03%
Short-term investments (2) 25,055 616 4.96 11,982 341 5.71
Investment securities 123,139 3,324 5.40 175,164 4,848 5.54
Mortgage-backed securities 282,641 9,483 6.71 273,404 9,558 6.99
Trading securities 4,956 145 5.93 2,069 53 5.10
Mortgage loans (1) 273,208 9,595 7.02 284,926 9,924 6.97
Other loans (1) 36,499 1,322 7.27 36,601 1,457 7.95
- ---------------------------------------------------------------------------------------
Total earning assets 930,854 $29,040 6.24% 900,985 $29,683 6.59%
Allowance for loan losses (2,605) (2,566)
- ---------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 928,249 898,419
Other assets 20,092 21,260
- ---------------------------------------------------------------------------------------
Total assets $948,341 $ 919,679
18
AVERAGE BALANCE SHEETS - (continued)
Six Months Ended
June 30,
2001 2000
--------------------------- --------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
- ------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand and NOW $ 80,126 $ 244 0.61% $ 74,946 $ 242 0.65%
Savings 341,751 5,728 3.38 347,957 5,906 3.41
Time certificates of deposit 409,253 11,416 5.63 394,348 10,894 5.56
- ------------------------------------------------------------------------------------------
Total deposits 831,130 17,388 4.22% 817,251 17,042 4.19%
Other liabilities 6,294 3,205
- ------------------------------------------------------------------------------------------
Total liabilities 837,424 820,456
Stockholders' equity 110,917 99,223
- ------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $948,341 $919,679
- ------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) 11,652 12,641
Less adjustment of tax-exempt
interest income 42 58
- ------------------------------------------------------------------------------------------
Net interest income $11,610 $12,583
- ------------------------------------------------------------------------------------------
Interest rate spread 2.02% 2.40%
- ------------------------------------------------------------------------------------------
Net interest margin (3) 2.50% 2.81%
- ------------------------------------------------------------------------------------------
(1) Loans on non-accrual status are included in the average balance.
(2) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
(3) Net interest income (tax equivalent basis) before provision for loan losses
divided by average interest-earning assets.
(4) Includes the effects of SFAS No. 115.
19
Provision for Loan Losses
The provision for loan losses for the first half of 2001 was $24,000
compared to $30,000 for the same period in 2000. This decrease is essentially
due to a decrease in the Bank's net loan charge-offs. Loan charge-offs net of
recoveries for the six months ended June 30, 2001 and 2000 were $2,000 and
$21,000, respectively.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains on
securities and other non-interest income.
Non-interest income for the first six months of 2001 increased $118,000 to
$2,723,000 from $2,605,000 for the same period last year. This improvement is
due to an increase in net securities gains. Net securities gains totaled
$1,997,000 for the six months ended June 30, 2001 compared to $1,853,000 for
the six months ended June 30, 2000. Deposit account service fees and other
non-interest income combined decreased $26,000 to $726,000 for the first half
of 2001, from $752,000 for the first half of 2000.
Non-Interest Expense
Non-interest expense for the first half of 2001 decreased $647,000 or 9.9%
to $5,858,000 from $6,505,000 for the same period last year. This decrease is
due primarily to decreases in salaries and employee benefits and professional
services expenses.
Salaries and employee benefits, the largest component of non-interest
expense decreased $186,000 or 5.4% to $3,283,000 in the first half of 2001,
from $3,469,000 in the comparable period of 2000. This reduction is due in
part to a decrease in salaries and lower expenses associated with various
employee benefits, including profit sharing and incentive compensation bonus
payments. The bank has operated with fewer people than in the prior year
resulting in a reduction in personnel-related expenses.
Professional services expenses decreased $417,000 or 62.6% to $249,000 in
the first half of 2001, from $666,000 in the first half of last year. This
decrease is due principally to legal fees and other expenses the Company
incurred in the first six months of last year in defending the Company's
registered trademarks against infringement.
All other non-interest expenses combined, consisting of occupancy and
equipment, data processing, advertising and marketing, amortization of
intangibles and other expenses, decreased $44,000 to $2,326,000 for the six
months ended June 30, 2001 from $2,370,000 for the six months ended June 30,
2000.
Income Tax Expense
The provision for federal and state income taxes decreased to $3,018,000
for the six months ended June 30, 2001 from $3,108,000 for the same period in
2000. This decrease is due primarily to a decrease in income before income
taxes for the first half of 2001 and a reduction in the Company's effective
income tax rate. The Company's combined effective income tax rate for the
first half of 2001 is 35.7% compared to 35.9% for the same period a year ago.
20
Financial Condition
The Company's total assets increased $18.2 million to $956.9 million as of
June 30, 2001 from $938.7 million as of December 31, 2000. The growth in total
assets reflects an increase in total investments of $8.2 million and an increase
in the bank's loan portfolio, net of allowance for loan losses, of $8.3 million.
Other assets increased $1.7 million since year-end 2000.
The Company's total investments consisting of investment securities and
other short-term investments, including term federal funds sold and interest-
bearing bank deposits increased $8.2 million from $607.1 million at December 31,
2000 to $615.3 million at June 30, 2001. The mix of the Company's investments
at June 30, 2001 compared to year-end 2000 reflects an increase in short-term
investments. This provides the Company with the flexibility to invest some of
these funds for a longer duration as the interest rate curve steepens. The
higher yields on long-term investments would increase the Company's net
interest margin.
The loan portfolio at June 30, 2001, net of allowance for loan losses,
amounted to $315.8 million compared to $307.5 million at December 31, 2000, an
increase of $8.3 million. The growth in the loan portfolio reflects an increase
in mortgage loans of $9.6 million, partially offset by a decrease of $1.3
million in the bank's consumer loan portfolio. The decline in mortgage interest
rates in the first half of 2001 compared to the same period in 2000 has sparked
the demand for mortgage refinancings. As a result, total loan originations for
the first half of 2001 increased by $29.2 million to $43.9 million from $14.7
million for the first six months of last year.
Total deposits were $839.0 million at June 30, 2001 reflecting an increase
of $15.4 million or 1.9% from $823.6 million at year-end 2000.
Total stockholders' equity increased $3.0 million to $111.2 million at
June 30, 2001 representing a book value of $35.48 per share, from $108.2 million
representing a book value of $34.25 per share at December 31, 2000.
Contributing to the increase in total stockholders' equity was the Company's net
income of $5.4 million in the first half of 2001, an increase in net unrealized
gains, net of tax, on the Company's securities available for sale of $0.5
million and the issuance of common stock under the Company's stock option plan.
These were partially offset by the payment of $2.0 million in dividends to
stockholders and the cost of shares of treasury stock repurchased during the
first six months of 2001 in the amount of $1.4 million. The Company's book
value per share was also positively affected by the Company's repurchase of
44,200 shares of its common stock, at less than current book value, during the
first half of 2001 pursuant to its stock repurchase program.
21
Investments
As previously noted, total investments consisting of investment securities,
short-term investments, term federal funds sold, and interest-bearing bank
deposits equaled $615.3 million at June 30, 2001, up $8.2 million from $607.1
million at year-end 2000. These investments are principally in federal funds
sold, short-term U.S. Treasury and government agency obligations and government
agency fifteen year mortgage-backed securities. The Bank also maintains an
equity securities portfolio, valued at $18.8 million as of June 30, 2001, that
has yielded substantial realized and unrealized gains in recent years. Nearly
all of the Bank's investment securities are classified as available for sale or
trading securities. Management evaluates its investment alternatives in order
to properly manage the mix of assets on its balance sheet. Investment
securities available for sale and trading securities provide liquidity,
facilitate interest rate sensitivity management and enhance the Bank's ability
to respond to customers' needs should loan demand increase and/or deposits
decline.
The Bank continues to maintain a large proportion of its securities
portfolio in government agency mortgage-backed securities. These represent an
attractive investment with minimal credit risk, no servicing responsibilities,
and no delinquencies. The Bank's investment in mortgage-backed securities
totaled $286.1 million at June 30, 2001 versus $287.2 million at year-end 2000.
The Bank also maintains a portfolio of trading securities which consisted
of the following as of the dates shown:
June 30, December 31,
(In thousands) 2001 2000
----- -------
U.S. Treasury obligations $ -- $19,791
Investments in mutual funds 3 3
----- -------
Total $ 3 $19,794
22
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at June 30, 2001 with gross unrealized gains and losses, follows:
- ----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At June 30, 2001 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations $ 74,795 $ 1,162 $ -- $ 75,957
U.S. Government agency obligations 1,144 1 (4) 1,141
- ----------------------------------------------------------------------------------------
Total 75,939 1,163 (4) 77,098
- ----------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage
Association 26,946 860 -- 27,806
Federal Home Loan Mortgage
Corporation 249,918 4,653 (41) 254,530
Federal National Mortgage
Association 1,724 44 (9) 1,759
Collateralized mortgage
obligations 1,981 27 -- 2,008
- ----------------------------------------------------------------------------------------
Total mortgage-backed securities 280,569 5,584 (50) 286,103
- ----------------------------------------------------------------------------------------
Total debt securities 356,508 6,747 (54) 363,201
- ----------------------------------------------------------------------------------------
Equity securities 14,799 6,757 (2,798) 18,758
- ----------------------------------------------------------------------------------------
Total securities available for sale 371,307 $13,504 $(2,852) $381,959
- ----------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 10,652
________________________________________________________________________________
Total securities available
for sale, net 381,959
________________________________________________________________________________
Total investment securities, net $381,959
________________________________________________________________________________
Trading securities $ 2 $ 3
________________________________________________________________________________
23
FINANCIAL CONDITION
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investment securities
at December 31, 2000 with gross unrealized gains and losses, follows:
- ----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At December 31, 2000 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
Securities held to maturity:
Other bonds and obligations $ 230 $ -- $ -- $ 230
- ----------------------------------------------------------------------------------------
Total securities held to maturity $ 230 $ -- $ -- $ 230
- ----------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations $125,630 $ 827 $ (1) $126,456
U.S. Government agency obligations 9,147 -- (14) 9,133
- ----------------------------------------------------------------------------------------
Total 134,777 827 (15) 135,589
- ----------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage
Association 30,847 543 (3) 31,387
Federal Home Loan Mortgage
Corporation 247,925 3,322 (125) 251,122
Federal National Mortgage
Association 2,230 43 (9) 2,264
Collateralized mortgage
obligations 2,465 12 (37) 2,440
- ----------------------------------------------------------------------------------------
Total mortgage-backed securities 283,467 3,920 (174) 287,213
- ----------------------------------------------------------------------------------------
Total debt securities 418,244 4,747 (189) 422,802
- ----------------------------------------------------------------------------------------
Equity securities 14,323 7,132 (1,705) 19,750
- ----------------------------------------------------------------------------------------
Total securities available for sale 432,567 $11,879 $(1,894) $442,552
- ----------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 9,985
- ----------------------------------------------------------------------------------------
Total securities available
for sale, net 442,552
- ----------------------------------------------------------------------------------------
Total investment securities, net $ 442,782
- ----------------------------------------------------------------------------------------
Trading securities $ 19,786 $ 19,794
- ----------------------------------------------------------------------------------------
24
Investments (continued)
The amortized cost and estimated market value of debt securities held to
maturity and debt securities available for sale by contractual maturity at
June 30, 2001 and December 31, 2000 are as follows:
June 30, 2001
---------------------------------------------
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 52,989 $ 53,522 $ -- $
--
After 1 year but within 5 years 22,805 23,436 -- --
After 15 years 145 140 -- --
-------- -------- ---------------- ------
75,939 77,098 -- --
Mortgage-backed securities 280,569 286,103 -- --
-------- -------- ---------------- ------
$356,508 $363,201 $ -- $
--
December 31, 2000
---------------------------------------------
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 90,841 $ 91,025 $ -- $
--
After 1 year but within 5 years 43,789 44,420 230 230
After 15 years 147 144 -- --
-------- -------- ---------------- ------
134,777 135,589 230 230
Mortgage-backed securities 283,467 287,213 -- --
-------- -------- ---------------- ------
$418,244 $422,802 $230 $230
25
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
- -----------------------------------------------------------------------------
At At
(In thousands) June 30, 2001 December 31, 2000
- -----------------------------------------------------------------------------
Mortgage loans:
Residential $279,891 $270,330
Commercial 2,805 3,117
Construction 1,015 683
- -----------------------------------------------------------------------------
283,711 274,130
Premium on loans 78 105
Deferred mortgage loan origination fees (1,219) (1,284)
- -----------------------------------------------------------------------------
Total mortgage loans 282,570 272,951
Other loans:
Consumer:
Installment 1,705 1,829
Guaranteed education 5,728 6,266
Other secured 1,047 1,169
Home equity lines of credit 12,114 12,624
Unsecured 197 224
- -----------------------------------------------------------------------------
Total consumer loans 20,791 22,112
Commercial 15,070 15,084
- -----------------------------------------------------------------------------
Total other loans 35,861 37,196
- -----------------------------------------------------------------------------
Total loans $318,431 $310,147
- -----------------------------------------------------------------------------
The Bank's loan portfolio increased $8.3 million during the first six
months of 2001, from $310.1 million at December 31, 2000 to $318.4 million at
June 30, 2001. Mortgage loans increased $9.6 million and consumer loans
decreased $1.3 million.
Loan originations increased by $29.2 million to $43.9 million in the first
six months of 2001 compared to $14.7 million in the first six months of last
year.
26
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing
assets at June 30, 2001 and 2000, and December 31, 2000:
At At At
June 30, December 31, June 30,
(In thousands) 2001 2000 2000
- -------------------------------------------------------------------------------
Non-Performing Assets:
Non-accrual loans $ 472 $ 565 $ 953
Real estate acquired through foreclosure -- -- --
- -------------------------------------------------------------------------------
Total non-performing assets $ 472 $ 565 $ 953
- -------------------------------------------------------------------------------
Allowance for loan losses $ 2,616 $ 2,594 $ 2,564
Allowance as a percent of
non-accrual loans 554.2 % 459.1 % 269.0 %
Allowance as a percent of
non-performing assets 554.2 % 459.1 % 269.0 %
Non-accrual loans as a percent
of total loans 0.15% 0.18% 0.30%
Non-performing assets as a percent
of total assets 0.05% 0.06% 0.10%
- -------------------------------------------------------------------------------
The Bank generally does not accrue interest on loans which are 90 days or
more past due. It is the Bank's policy to place such loans on non-accrual
status and to reverse from income all interest previously accrued but not
collected and to discontinue all amortization of deferred loan fees.
Non-performing assets decreased from December 31, 2000 to June 30, 2001 as
noted in the table above. The principal balance of non-accrual loans was down
to $472,000, or approximately 0.15% of total loans at June 30, 2001.
The Bank did not have any impaired loans as of June 30, 2001.
27
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Six Months Ended
June 30,
2001 2000
- ----------------------------------------------------------------
(In thousands)
Balance at beginning of period $2,594 $2,555
Provision for loan losses 24 30
Recoveries of loans previously charged-off 1 2
Less: Charge-offs (3) (23)
- ----------------------------------------------------------------
Balance at end of period $2,616 $2,564
- ----------------------------------------------------------------
The Company maintains an allowance for probable losses that are inherent
in the Company's loan portfolio. The allowance for loan losses is increased
by provisions charged to operations based on the estimated loan loss exposure
inherent in the portfolio. Management uses a methodology to systematically
measure the amount of estimated loan loss exposure inherent in the portfolio
for purposes of establishing a sufficient allowance for loan losses. The
methodology includes three elements: an analysis of individual loans deemed to
be impaired in accordance with the terms of Statement of Financial Accounting
Standard No. 114, general loss allocations for various loan types based on loss
experience factors and an unallocated allowance which is maintained based on
management's assessment of many factors including the risk characteristics of
the portfolio, concentrations of credit, current and anticipated economic
conditions that may effect the borrower's ability to pay, and trends in loan
delinquencies and charge-offs. Realized losses, net of recoveries, are charged
directly to the allowance. While management uses the information available in
establishing the allowance for loan losses, future adjustments to the allowance
may be necessary if economic conditions differ from the assumptions used in
making the evaluation. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
At June 30, 2001 the balance of the allowance for loan losses was
$2,616,000 representing 554.2% of non-accrual loans. Management believes that
the allowance for loan losses is adequate to cover the risks inherent in the
portfolio under current conditions.
28
DEPOSITS
Deposit accounts of all types have traditionally been the primary source
of funds for the Bank's lending and investment activities. The Bank's deposit
flows are influenced by prevailing interest rates, competition and other market
conditions. The Bank's management attempts to manage its deposits through
selective pricing and marketing.
The Bank's total deposits increased by $15.4 million to $839.0 million at
June 30, 2001 from $823.6 million at December 31, 2000.
The composition of the Bank's total deposits as of the dates shown are
summarized as follows:
June 30, December 31,
2001 2000
- -------------------------------------------------------------
(In thousands)
Demand and NOW $ 84,388 $ 79,952
Savings and money market accounts 348,681 334,948
Time certificates of deposit 406,076 408,981
Deposit acquisition premium,
net of amortization (144) (256)
- -------------------------------------------------------------
Total deposits $839,001 $823,625
- -------------------------------------------------------------
Recent Accounting Developments
"Accounting for Derivative Instruments and Hedging Activities"
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
These Statements establish comprehensive accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. They require that an entity recognize all derivatives as either
assets or liabilities in its balance sheet and measure those instruments at fair
market value. Under these Statements, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. The
Company adopted these Statements on January 1, 2001. The adoption of these
Statements did not have a material effect on the Company's consolidated
financial statements.
29
Recent Accounting Developments (continued)
"Goodwill and Other Intangible Assets"
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No.142, "Goodwill and Other
Intangible Assets." SFAS 142 requires that upon adoption of the Statement, any
goodwill recorded on an entity's balance sheet would no longer be amortized.
This would include existing goodwill (i.e., recorded goodwill at the date the
financial statement is issued), as well as goodwill arising subsequent to the
effective date of the Statement. Goodwill will not be amortized but will be
reviewed for impairment periodically or upon the occurrence of certain
triggering events. This Statement is effective for fiscal years beginning after
December 15, 2001. At June 30, 2001, the Company had $1,140,000 of goodwill on
its balance sheet that is being amortized at a rate of $99,000 annually. The
Company also had $144,000 of other intangible assets being amortized at a rate
of $230,000 annually.
Liquidity and Capital Resources
The Bank must maintain a sufficient amount of cash and assets which can
readily be converted into cash in order to meet cash outflows from normal
depositor requirements and loan demands. The Bank's primary sources of funds
are deposits, loan amortization and prepayments, sales or maturities of
investment securities and income on earning assets. In addition to loan
payments and maturing investment securities, which are relatively predictable
sources of funds, the Bank maintains a high percentage of its assets invested
in short-term investments (overnight federal funds sold and money market funds),
which can be immediately converted into cash, and United States Treasury and
Government agency securities, which can be sold or pledged to raise funds. At
June 30, 2001 the Bank had $228.5 million or 23.9% of total assets and $77.1
million or 8.1% of total assets invested, respectively, in short-term
investments and United States obligations.
The Bank is a Federal Deposit Insurance Corporation ("FDIC") insured
institution subject to the FDIC regulatory capital requirements. The FDIC
regulations require all FDIC insured institutions to maintain minimum levels
of Tier 1 capital. Highly rated banks (i.e., those with a composite rating
of 1 under the CAMELS rating system) are required to maintain a minimum leverage
ratio of Tier 1 capital to total assets of at least 3.00%. An additional 100
to 200 basis points are required for all but these most highly rated
institutions. The Bank is also required to maintain a minimum level of
risk-based capital. Under the risk-based capital standards, FDIC insured
institutions must maintain a Tier 1 capital to risk-weighted assets ratio of
4.00% and are generally expected to meet a minimum total qualifying capital to
risk-weighted assets ratio of 8.00%. The risk-based capital guidelines take
into consideration risk factors, as defined by the regulators, associated with
various categories of assets, both on and off the balance sheet. Under the
guidelines, capital strength is measured in two tiers which are used in
conjunction with risk adjusted assets to determine the risk-based capital
ratios. Tier II capital components include supplemental capital components such
as qualifying allowance for loan losses, qualifying subordinated debt and up to
45 percent of the pre-tax net unrealized holding gains on certain available for
sale equity securities. Tier I capital plus the Tier II capital components are
referred to as total qualifying capital.
The capital ratios of the Bank and the Company currently exceed the minimum
regulatory requirements. At June 30, 2001, the Bank had a leverage Tier I
capital to total assets ratio of 10.75%, a Tier I capital to risk-weighted
assets ratio of 30.22% and a total capital to risk-weighted assets ratio of
31.52%. The Company, on a consolidated basis, had ratios of leverage Tier I
capital to total assets of 10.95%, Tier I capital to risk-weighted assets of
30.76% and total capital to risk-weighted assets of 32.07% at June 30, 2001.
30
Impact Of Inflation And Changing Prices
MASSBANK Corp.'s financial statements presented herein have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time, due to the fact that substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity and Liquidity
See discussion and analysis of interest rate sensitivity and liquidity
provided in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2000. There have been no material changes in reported market
risks faced by the Corporation since the filing of the Corporation's 2000
Annual Report on Form 10-K.
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their
business. As of June 30, 2001, none of these actions individually
or in the aggregate is believed by management to be material to the
financial condition of MASSBANK Corp. or the Bank.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of MASSBANK Corp. held on
April 17, 2001, stockholders voted affirmatively on the following
proposal:
1.) To elect four Directors to serve until the 2002 Annual Meeting of
Stockholders, three Directors to serve until the 2003 Annual Meeting
of Stockholders and four Directors to serve until the 2004 Annual
Meeting of Stockholders.
Elected at Meeting Term
Mathias B. Bedell 3 Years
Gerard H. Brandi 1 Year
Allan S. Bufferd 2 Years
Peter W. Carr 1 Year
Alexander S. Costello 3 Years
Robert S. Cummings 1 Year
Leonard Lapidus 3 Years
Stephen E. Marshall 3 Years
Nancy L. Pettinelli 2 Years
Herbert G. Schurian 1 Year
Dr. Donald B. Stackhouse 2 Years
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
1. Exhibit No. 11.1: Statement regarding computation of per
share earnings.
b. Reports on Form 8-K
None.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSBANK Corp. & Subsidiaries
_____________________________
(Registrant)
Date: August 13, 2001 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: August 13, 2001 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
Sr. V.P., Treasurer and CFO
33