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 September 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 October 31, 2001: 3,135,341 shares.
1
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Income (unaudited)
for the three months ended September 30, 2001 and 2000 4
and for the nine months ended September 30, 2001 and 2000 5
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 2001 (unaudited)
and the year ended December 31, 2000 6 - 7
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 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)
September 30, December 31,
2001 2000
(unaudited)
Assets:
Cash and due from banks $ 16,465 $ 9,179
Short-term investments (Note 3) 213,964 112,842
- ------------------------------------------------------------------------------------------
Total cash and cash equivalents 230,429 122,021
Term federal funds sold -- 30,000
Interest-bearing deposits in banks 15,131 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 $373,945 in 2001 and $432,567 in 2000) 388,029 442,552
Trading securities, at market value 2 19,794
Loans: (Note 4)
Mortgage loans 290,195 272,951
Other loans 35,548 37,196
Allowance for loan losses (2,614) (2,594)
- ------------------------------------------------------------------------------------------
Net loans 323,129 307,553
Premises and equipment 6,098 3,932
Accrued interest receivable 4,268 5,755
Goodwill 1,115 1,189
Current income tax asset, net 94 284
Other assets 2,111 3,714
- ------------------------------------------------------------------------------------------
Total assets $970,406 $938,702
Liabilities and Stockholders' Equity:
Deposits $842,445 $823,625
Escrow deposits of borrowers 1,391 1,387
Employee stock ownership plan liability 312 312
Deferred income taxes 3,670 2,418
Other liabilities 7,326 2,717
- ------------------------------------------------------------------------------------------
Total liabilities 855,144 830,459
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, 7,469,414 and
7,447,982 shares issued, respectively 7,469 7,448
Additional paid-in capital 62,304 61,674
Retained earnings 98,286 93,165
- ------------------------------------------------------------------------------------------
168,059 162,287
Accumulated other comprehensive income: (Note 6)
Net unrealized gains on securities
available for sale, net of tax effect 8,676 5,972
Treasury stock at cost, 4,345,989 and
4,300,489 shares, respectively (Note 5) (61,161) (59,704)
Common stock acquired by ESOP (312) (312)
- ------------------------------------------------------------------------------------------
Total stockholders' equity 115,262 108,243
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $970,406 $938,702
See accompanying condensed notes to consolidated financial statements.
3
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
September 30,
(In thousands except share data) 2001 2000
- -------------------------------------------------------------------------------
Interest and dividend income:
Mortgage Loans $ 4,953 $ 4,879
Other loans 526 783
Securities available for sale:
Mortgage-backed securities 4,815 4,669
Other securities 1,099 2,327
Federal funds sold 1,812 2,504
Other investments 312 64
- -------------------------------------------------------------------------------
Total interest and dividend income 13,517 15,226
- -------------------------------------------------------------------------------
Interest expense:
Deposits 8,064 9,079
- -------------------------------------------------------------------------------
Total interest expense 8,064 9,079
- -------------------------------------------------------------------------------
Net interest income 5,453 6,147
Provision for loan losses 12 15
- -------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,441 6,132
- -------------------------------------------------------------------------------
Non-interest income:
Deposit account service fees 162 169
Gains on securities, net 1,216 580
Other 111 196
- -------------------------------------------------------------------------------
Total non-interest income 1,489 945
- -------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 1,591 1,671
Occupancy and equipment 491 504
Data processing 121 116
Professional services 92 135
Advertising and marketing 40 51
Amortization of intangibles 83 82
Other 414 335
- -------------------------------------------------------------------------------
Total non-interest expense 2,832 2,894
- -------------------------------------------------------------------------------
Income before income taxes 4,098 4,183
Income tax expense 1,466 1,486
- -------------------------------------------------------------------------------
Net income $ 2,632 $ 2,697
- -------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 3,119,067 3,216,527
Diluted 3,214,599 3,292,370
Earnings per share (in dollars):
Basic $0.84 $0.84
Diluted 0.82 0.82
See accompanying condensed notes to consolidated financial statements.
4
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine months ended
September 30,
(In thousands except share data) 2001 2000
- -------------------------------------------------------------------------------
Interest and dividend income:
Mortgage Loans $ 14,548 $ 14,803
Other loans 1,848 2,240
Securities available for sale:
Mortgage-backed securities 14,298 14,227
Other securities 4,378 7,112
Trading securities 145 53
Federal funds sold 6,367 6,006
Other investments 931 410
- -------------------------------------------------------------------------------
Total interest and dividend income 42,515 44,851
- -------------------------------------------------------------------------------
Interest expense:
Deposits 25,452 26,121
- -------------------------------------------------------------------------------
Total interest expense 25,452 26,121
- -------------------------------------------------------------------------------
Net interest income 17,063 18,730
Provision for loan losses 36 45
- -------------------------------------------------------------------------------
Net interest income after provision for loan losses 17,027 18,685
- -------------------------------------------------------------------------------
Non-interest income:
Deposit account service fees 482 515
Gains on securities, net 3,213 2,433
Other 517 602
- -------------------------------------------------------------------------------
Total non-interest income 4,212 3,550
- -------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 4,874 5,140
Occupancy and equipment 1,582 1,577
Data processing 372 361
Professional services 341 801
Advertising and marketing 136 169
Amortization of intangibles 245 247
Other 1,140 1,104
- -------------------------------------------------------------------------------
Total non-interest expense 8,690 9,399
- -------------------------------------------------------------------------------
Income before income taxes 12,549 12,836
Income tax expense 4,484 4,594
- -------------------------------------------------------------------------------
Net income $ 8,065 $ 8,242
- -------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 3,122,469 3,236,156
Diluted 3,205,996 3,311,474
Earnings per share (in dollars):
Basic $2.58 $2.55
Diluted 2.52 2.49
See accompanying condensed notes to consolidated financial statements.
5
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 2001 (unaudited)
(In thousands except share data)
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL
------ ------- -------- --------- ------------- --------- --------
Balance at December 31, 2000 $7,448 $61,674 $93,165 $(59,704) $5,972 $(312) $108,243
Net Income -- -- 8,065 -- -- -- 8,065
Other comprehensive income,
net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 6) -- -- -- -- 2,704 -- 2,704
------ ------- -------- -------- ------------ -------- --------
Comprehensive income 10,769
Cash dividends declared and paid
($0.945 per share) -- -- (2,950) -- -- -- (2,950)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 6 -- -- -- 6
Amortization of ESOP shares
committed to be released -- 114 -- -- -- -- 114
Purchase of Company stock for
deferred compensation plan (Note 5) -- 45 -- (45) -- -- --
Purchase of treasury stock -- -- -- (1,412) -- -- (1,412)
Exercise of stock options
and related tax benefits 21 471 -- -- -- -- 492
___________________________________________________________________________________________________________________________
Balance at September 30, 2001 $7,469 $62,304 $98,286 $(61,161) $8,676 $(312) $115,262
See accompanying condensed notes to consolidated financial statements.
6
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Year Ended December 31, 2000 (unaudited)
(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)
Nine Months Ended
September 30,
2001 2000
-------- ---------
(In thousands)
Cash flows from operating activities:
Net income $ 8,065 $ 8,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 654 657
Loan interest capitalized (27) (31)
Amortization of ESOP shares committed to be released 114 69
Decrease (increase) in accrued interest receivable 1,487 (757)
Decrease in other liabilities (250) (599)
Decrease in current income tax asset, net 190 421
Accretion of discounts on securities, net of amortization
of premiums (588) (649)
Net trading securities activity 20,439 6,569
Gains on securities available for sale, net (3,107) (2,078)
Gains on trading securities, net (106) (355)
Decrease in deferred mortgage loan
origination fees, net of amortization (30) (117)
Deferred income tax benefit (143) (90)
Decrease (increase) in other assets 1,090 (1,309)
Provision for loan losses 36 45
Gains on sales of real estate acquired through foreclosure -- (8)
Gains on sales of premises and equipment (4) --
Increase (decrease) in escrow deposits of borrowers 4 (37)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,824 9,973
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of term federal funds (10,000) (10,000)
Proceeds from maturities of term federal funds 40,000 --
Net (increase) decrease in interest bearing bank deposits (13,453) 2,324
Proceeds from sales of investment securities available for sale 18,416 28,700
Proceeds from maturities of investment securities
available for sale 69,230 29,000
Purchases of investment securities available for sale (26,184) (48,479)
Purchases of mortgage-backed securities (50,169) (28,652)
Principal repayments of mortgage-backed securities 56,083 35,503
Principal repayments of investment securities available for sale 3 3
Loans originated (71,565) (22,304)
Loan principal payments received 55,968 33,692
Purchases of premises & equipment (2,535) (251)
Proceeds from sales of premises and equipment 4 --
Proceeds from sales of real estate acquired through foreclosure -- 70
- -----------------------------------------------------------------------------------------------
Net cash provided by investing activities 65,798 19,606
- -----------------------------------------------------------------------------------------------
8
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Nine Months Ended
September 30,
2001 2000
-------- --------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 18,650 1,464
Payments to acquire treasury stock (1,457) (2,698)
Purchase of Company stock for deferred compensation plan 45 347
Issuance of common stock under stock option plan 393 77
Tax benefit resulting from stock options exercised 99 4
Cash dividends paid on common stock (2,950) (2,869)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 6 8
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 14,786 (3,667)
- ------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 108,408 25,912
Cash and cash equivalents at beginning of period 122,021 121,404
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $230,429 $147,316
- ------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $ 25,518 $ 26,119
Cash paid during the period for taxes, net of refunds 4,336 4,250
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 in accumulated other comprehensive income 2,704 878
Increase in deferred tax liabilities 1,395 399
Purchases of securities executed but not settled at end of period 6,461 253
Sales of securities executed but not settled at end of period 1,602 1,962
- ------------------------------------------------------------------------------------------
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 September 30, 2001
and December 31, 2000, and its operating results for the three and nine months
ended September 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) September 30, 2001 December 31, 2000
- -------------------------------------------------------------------------------------------
Federal funds sold (overnight) $109,087 $112,711
Term federal funds sold (less than 90 days) 80,000 --
Money market funds 24,877 131
- -------------------------------------------------------------------------------------------
Total short-term investments $213,964 $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 September 30, 2001, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$12,472,000 and commitments under existing home equity lines of credit and other
loans of approximately $35,612,000 which are not reflected on the consolidated
balance sheet. In addition, as of September 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 September 30, 2001 the trust held 14,500
shares of MASSBANK Corp. common 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
nine months ended September 30, 2001 and the year ended December 31, 2000 is as
follows:
For the Nine Months Ended
September 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 $7,205 $(2,692) $4,513
Less: reclassification adjustment for
gains realized in net income 3,107 (1,298) 1,809
------ ------- ------
Net unrealized gains 4,098 (1,394) 2,704
------ ------- ------
Other comprehensive income $4,098 $(1,394) $2,704
------ ------- ------
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
September 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 September 30, 2001
GENERAL
For the quarter ended September 30, 2001, MASSBANK Corp. reported net
income of $2,632,000 or $0.82 in diluted earnings per share compared to net
income of $2,697,000, or $0.82 in diluted earnings per share in the third
quarter of 2000. Basic earnings per share in the recent quarter were $0.84 per
share, unchanged from the same quarter of last year.
The Company's net income in the third quarter 2001 compared to the third
quarter of 2000 includes an increase in securities gains of $636,000, a
reduction in non-interest expense of $62,000 and a decrease in the provision
for loan losses of $3,000. Offsetting these improvements was a decrease in net
interest income of $694,000 resulting primarily from a decline in net interest
margin partially offset by an increase in average earning assets. In addition,
the Company's 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 151,800 shares of its common stock,
in the last twelve months, pursuant to its stock repurchase program.
12
AVERAGE BALANCE SHEETS
Three Months Ended
September 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 $207,758 $ 1,812 3.46% $151,918 $ 2,504 6.54%
Short-term investments (2) 31,967 312 3.87 4,008 61 6.02
Investment securities 86,346 1,126 5.22 167,144 2,364 5.66
Mortgage-backed securities 292,538 4,815 6.58 268,229 4,669 6.96
Trading securities 5 -- -- 39 -- --
Mortgage loans (1) 286,136 4,953 6.92 278,662 4,879 7.00
Other loans (1) 35,734 526 5.82 36,826 783 8.40
- ---------------------------------------------------------------------------------------
Total earning assets 940,484 $13,544 5.76% 906,826 $15,260 6.73%
Allowance for loan losses (2,616) (2,569)
- ---------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 937,868 904,257
Other assets 20,873 20,581
- ---------------------------------------------------------------------------------------
Total assets $958,741 $ 924,838
Continued on next page
13
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
September 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 $ 81,128 $ 126 0.62% $ 76,149 $ 124 0.64%
Savings 357,917 3,005 3.33 341,608 2,932 3.41
Time certificates of deposit 399,849 4,933 4.89 401,761 6,023 5.95
- ------------------------------------------------------------------------------------------
Total deposits 838,894 8,064 3.81 819,518 9,079 4.40
Other liabilities 6,629 3,018
- ------------------------------------------------------------------------------------------
Total liabilities 845,523 822,536
Stockholders' equity 113,218 102,302
- ------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $958,741 $924,838
- ------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) 5,480 6,181
Less adjustment of tax-exempt
interest income 27 34
- ------------------------------------------------------------------------------------------
Net interest income $5,453 $ 6,147
- ------------------------------------------------------------------------------------------
Interest rate spread 1.95% 2.33%
- ------------------------------------------------------------------------------------------
Net interest margin (3) 2.33% 2.73%
- ------------------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
Three months ended
September 30,
(in thousands) 2001 2000
------- -------
Interest and Dividend Income $13,517 $15,226
Interest Expense 8,064 9,079
------- -------
Net Interest Income $ 5,453 $ 6,147
- --------------------------------------------------------------------------------
Net interest income decreased $694,000 or 11.3% in the three month
Comparison. This was primarily due to lower interest rates and more assets than
liabilities maturing or repricing during the period.
Interest and Dividend Income
Interest and dividend income on a fully taxable equivalent basis for the
three months ended September 30, 2001, decreased to $13,544,000 from $15,260,000
for the three months ended September 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 $33.7 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 third quarter of 2001 was 5.76%,
down from 6.73% in the same quarter of 2000.
The reduction in yield on the Company's average earning asets is primarily
attributable to lower market interest rates, especially the Federal Funds rate.
The Federal Reserve Bank has cut the Federal Funds rate eight times during the
twelve months ended September 30, 2001, reducing the rate from 6.50% to 3.00%.
Interest Expense
Total interest expense for the three months ended September 30, 2001
decreased $1,015,000, or 11.2% to $8,064,000 from $9,079,000 for the three
months ended September 30, 2000. The decrease in interest expense is due
primarily to a reduction in the Bank's average cost of funds partially offset by
an increase in average deposits. A decrease in the Bank's deposit rates, due to
declining market interest rates in the last twelve months, caused the Bank's
cost of funds to decrease 59 basis points, from 4.40% in the third quarter of
2000 to 3.81% in the recent quarter. The Company's average deposits, as shown
in the table on page 14, increased $19.4 million to $838.9 million in the third
quarter of 2001, from $819.5 million in the third quarter of 2000.
15
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 third quarter of 2001 was $12,000 compared to $15,000 in the third
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 September 30, 2001, the allowance for loan losses was
$2,614,000 representing 461.8% of nonaccrual loans. The bank's nonaccrual loans
totaled $566,000 at September 30, 2001, essentially unchanged from year-end
2000. The bank had net loan charge-offs of $14,000 in the recent quarter versus
no net loan charge-offs in the same quarter last year. Management believes that
the allowance for loan losses as of September 30, 2001 is adequate to cover the
risks inherent in the loan portfolio under current conditions.
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 $544,000 to $1,489,000 for the recent
quarter, from $945,000 for the comparable quarter of the prior year. This
increase is due essentially to higher securities gains
Net gains on securities totaled $1,216,000 in the third quarter of this
year compared to $580,000 in the third quarter of last year. All gains realized
in the recent quarter were from the sale of equity securities.
The bank's deposit account service fees and other non-interest income
totaled $162,000 and $111,000, respectively, in the third quarter of 2001
compared to $169,000 and $196,000, respectively, in the third quarter of 2000.
The decrease in other non-interest income reflects a decline in income earned on
the bank's deferred compensation plan assets during the recent quarter due
primarily to the unfavorable performance of the stock market. This decrease was
offset by a corresponding decrease in deferred compensation plan expense which
is included in salaries and employee benefits.
Non-Interest Expense
Non-interest expense decreased $62,000 or 2.1% to $2,832,000 in the third
quarter of 2001, from $2,894,000 in the third quarter of 2000.
The decrease in non-interest expense was primarily due to lower salaries
and employee benefits resulting from the previously disclosed reduction in
deferred compensation plan expense, as well as a decrease in professional
services expenses due to lower legal fees. These decreases were offset in part,
by increases in various other non-interest expenses.
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.
16
The Company recorded income tax expense of $1,466,000 in the third quarter
of 2001, a decrease of $20,000 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, partially offset by a slight increase in effective income
tax rate. The Company's income before income taxes was $4,098,000 in the recent
quarter compared to $4,183,000 for the same quarter a year ago. The effective
income tax rate for the three months ended September 30, 2001 and 2000 was 35.8%
and 35.5%, respectively.
Results of Operations for the nine months ended September 30, 2001
General
For the nine months ended September 30, 2001, the Company reported net
income of $8,065,000 or $2.52 in diluted earnings per share ($2.58 in basic
earnings per share) versus $8,242,000 or $2.49 in diluted earnings per share
($2.55 in basic earnings per share), in the first nine months of 2000.
The Company's financial performance in the first nine months of 2001
reflects an increase in non-interest income of $662,000 and decreases in non-
interest expense and provision for loan losses of $709,000 and $9,000,
respectively. These improvements were offset by a decrease in net interest
income of $1,667,000 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 nine months of 2001 were positively
affected by the reduced number of average common shares outstanding as a result
of the Company's repurchase of 151,800 shares of its common stock, in the last
twelve months, pursuant to its stock repurchase program.
Net Interest Income
Net interest income totaled $17,063,000 for the nine months ended
September 30, 2001, compared to $18,730,000 for the same period in 2000. The
$1,667,000 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 nine months of 2001 was
2.45% compared to 2.78% for the same period last year. This was caused by lower
interest rates and more assets than liabilities maturing or repricing during the
period. Average earning assets for the nine months ended September 30, 2001
increased $31.2 million to $934.1 million from $902.9 million for the
corresponding period in 2000.
The Company's interest rate spread for the first nine months of 2001
decreased to 2.00% from 2.37% for the first nine months of last year. The yield
on the Company's average earning assets in the first nine months of 2001
decreased 56 basis points to 6.08% from 6.64% in the corresponding period of
2000. The Company's average cost of funds for the first nine months of 2001
decreased 19 basis points to 4.08% from 4.27% for the nine months ended
September 30, 2000.
17
AVERAGE BALANCE SHEETS
Nine Months Ended
September 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 $192,905 $ 6,367 4.41% $128,617 $ 6,006 6.24%
Short-term investments (2) 27,384 928 4.53 9,305 402 5.77
Investment securities 110,739 4,450 5.36 172,471 7,213 5.58
Mortgage-backed securities 285,977 14,298 6.67 271,666 14,227 6.98
Trading securities 3,288 145 5.93 1,388 53 5.05
Mortgage loans (1) 277,565 14,548 6.99 282,822 14,803 6.98
Other loans (1) 36,241 1,848 6.79 36,677 2,240 8.10
- ---------------------------------------------------------------------------------------
Total earning assets 934,099 $42,584 6.08% 902,946 $44,944 6.64%
Allowance for loan losses (2,609) (2,567)
- ---------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 931,490 900,379
Other assets 20,356 21,032
- ---------------------------------------------------------------------------------------
Total assets $951,846 $ 921,411
Continued on next page
18
AVERAGE BALANCE SHEETS - (continued)
Nine Months Ended
September 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 $ 80,464 $ 370 0.62% $ 75,350 $ 366 0.65%
Savings 347,199 8,732 3.36 345,825 8,838 3.41
Time certificates of deposit 406,084 16,350 5.38 396,837 16,917 5.69
- ---------------------------------------------------- ---------------
Total deposits 833,747 25,452 4.08% 818,012 26,121 4.27%
Other liabilities 6,407 3,142
- ------------------------------------------------------------------------------------------
Total liabilities 840,154 821,154
Stockholders' equity 111,692 100,257
- ------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $951,846 $921,411
- ------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) 17,132 18,823
Less adjustment of tax-exempt
interest income 69 93
- ------------------------------------------------------------------------------------------
Net interest income $17,063 $18,730
- ------------------------------------------------------------------------------------------
Interest rate spread 2.00% 2.37%
- ------------------------------------------------------------------------------------------
Net interest margin (3) 2.45% 2.78%
- ------------------------------------------------------------------------------------------
(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 nine months of 2001 was $36,000
compared to $45,000 for the same period in 2000. This decrease is essentially
due to the bank's low net loan charge-offs. Loan charge-offs net of recoveries
for the nine months ended September 30, 2001 and 2000 were $16,000 and $24,000,
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 nine months of 2001 increased $662,000
to $4,212,000 from $3,550,000 for the same period last year. This improvement
is due to an increase in net securities gains. Net securities gains totaled
$3,213,000 for the nine months ended September 30, 2001 compared to $2,433,000
for the nine months ended September 30, 2000. Deposit account service fees and
other non-interest income combined decreased $118,000 to $999,000 for the first
nine months of 2001, from $1,117,000 for the same period in 2000. This decrease
is primarily attributable to reduced earnings on the bank's deferred
compensation plan assets due to the unfavorable performance of the stock market.
A corresponding reduction of $90,000 in deferred compensation plan expense is
also reflected in salaries and employee benefits.
Non-Interest Expense
Non-interest expense for the first nine months of 2001 decreased $709,000
or 7.5% to $8,690,000 from $9,399,000 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 $266,000 or 5.2% to $4,874,000 in the first nine months of
2001, from $5,140,000 in the comparable period of 2000. This reduction is due,
in part, to the decrease in deferred compensation plan expense previously
disclosed under non-interest income, 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.
Also contributing to the decrease in salaries and employee benefits expense were
higher loan origination expenses being deferred due to the bank's significantly
higher loan origination volume.
Professional services expenses decreased $460,000 or 57.4% to $341,000 in
the first nine months of 2001, from $801,000 in the first nine months of last
year. This decrease is due principally to legal fees and other expenses the
Company incurred 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, increased $17,000 to $3,475,000 for the nine
months ended September 30, 2001 from $3,458,000 for the nine months ended
September 30, 2000.
Income Tax Expense
The provision for federal and state income taxes decreased to $4,484,000
for the nine months ended September 30, 2001 from $4,594,000 for the same period
in 2000. This decrease is due primarily to a decrease in income before income
taxes for the first nine months of 2001 and a reduction in the Company's
effective income tax rate. The Company's combined effective income tax rate for
the first nine months of 2001 is 35.7% compared to 35.8% for the same period a
year ago.
20
Financial Condition
The Company's total assets increased $31.7 million to $970.4 million as of
September 30, 2001 from $938.7 million as of December 31, 2000. The growth in
total assets reflects an increase in total investments of $10.0 million and an
increase in the bank's loan portfolio, net of allowance for loan losses, of
$15.6 million. Other assets increased $6.1 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 $10.0 million from $607.1 million at
December 31, 2000 to $617.1 million at September 30, 2001. The mix of the
Company's investments at September 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 September 30, 2001, net of allowance for loan losses,
amounted to $323.1 million compared to $307.5 million at December 31, 2000, an
increase of $15.6 million. The growth in the loan portfolio reflects an
increase in mortgage loans of $17.2 million, partially offset by a decrease of
$1.6 million in the bank's consumer loan portfolio. The decline in mortgage
interest rates in the first nine months 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 nine months of 2001 increased by $49.3 million to
$71.6 million from $22.3 million for the first nine months of last year.
Total deposits were $842.4 million at September 30, 2001 reflecting an
increase of $18.8 million or 2.3% from $823.6 million at year-end 2000.
Total stockholders' equity increased $7.0 million to $115.3 million at
September 30, 2001 representing a book value of $36.73 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 $8.1 million in the first nine months of 2001, an increase in net
unrealized gains, net of tax, on the Company's securities available for sale
portfolio of $2.7 million and the issuance of common stock under the Company's
stock option plan. These were partially offset by the payment of $3.0 million
in dividends to stockholders and the cost of shares of treasury stock
repurchased during the first nine 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 nine months 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 $617.1 million at September 30, 2001, up $10.0 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 $16.0 million as of
September 30, 2001, that has yielded substantial 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 $289.8 million at September 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:
September 30, December 31,
(In thousands) 2001 2000
----- -------
U.S. Treasury obligations $ -- $19,791
Investments in mutual funds 2 3
----- -------
Total $ 2 $19,794
22
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at September 30, 2001 with gross unrealized gains and losses, follows:
- ------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At September 30, 2001 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations $ 73,486 $ 1,424 $ -- $ 74,910
U.S. Government agency obligations 7,143 151 (4) 7,290
- ----------------------------------------------------------------------------------------
Total 80,629 1,575 (4) 82,200
- ----------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage
Association 24,817 1,355 -- 26,172
Federal Home Loan Mortgage
Corporation 249,876 10,429 -- 260,305
Federal National Mortgage
Association 1,524 57 -- 1,581
Collateralized mortgage
obligations 1,718 36 -- 1,754
- ----------------------------------------------------------------------------------------
Total mortgage-backed securities 277,935 11,877 -- 289,812
- ----------------------------------------------------------------------------------------
Total debt securities 358,564 13,452 -- 372,012
- ----------------------------------------------------------------------------------------
Equity securities 15,381 4,265 (3,629) 16,017
- ----------------------------------------------------------------------------------------
Total securities available for sale 373,945 $17,717 $(3,633) $388,029
- ----------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 14,084
________________________________________________________________________________________
Total securities available
for sale, net 388,029
________________________________________________________________________________________
Total investment securities, net $388,029
________________________________________________________________________________________
Trading securities $ 2 $ 2
________________________________________________________________________________________
23
FINANCIAL CONDITION
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of invenstment 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
September 30, 2001 and December 31, 2000 are as follows:
September 30, 2001
---------------------------------------------
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 43,992 $ 44,694 $ -- $ --
After 1 year but within 5 years 36,494 37,367 -- --
After 15 years 143 139 -- --
-------- -------- ---------------- ------
80,629 82,200 -- --
Mortgage-backed securities 277,935 289,812 -- --
-------- -------- ---------------- ------
$358,564 $372,012 $ -- $ --
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) September 30, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Mortgage loans:
Residential $287,361 $270,330
Commercial 2,792 3,117
Construction 1,231 683
- --------------------------------------------------------------------------------
291,384 274,130
Premium on loans 65 105
Deferred mortgage loan origination fees (1,254) (1,284)
- --------------------------------------------------------------------------------
Total mortgage loans 290,195 272,951
Other loans:
Consumer:
Installment 1,511 1,829
Guaranteed education 5,378 6,266
Other secured 884 1,169
Home equity lines of credit 12,480 12,624
Unsecured 209 224
- --------------------------------------------------------------------------------
Total consumer loans 20,462 22,112
Commercial 15,086 15,084
- --------------------------------------------------------------------------------
Total other loans 35,548 37,196
- --------------------------------------------------------------------------------
Total loans $325,743 $310,147
- --------------------------------------------------------------------------------
The bank's loan portfolio increased $15.6 million during the first nine
months of 2001, from $310.1 million at December 31, 2000 to $325.7 million at
September 30, 2001. Mortgage loans increased $17.2 million and consumer loans
decreased $1.6 million.
Loan originations increased by $49.3 million to $71.6 million in the first
nine months of 2001 compared to $22.3 million in the first nine months of last
year.
26
NON-PERFORMING ASSETS
The following table shows the composition of the bank's non-performing
assets at September 30, 2001 and 2000, and December 31, 2000:
At At At
September 30, December 31, September 30,
(In thousands) 2001 2000 2000
- -----------------------------------------------------------------------------------------
Non-Performing Assets:
Non-accrual loans $ 566 $ 565 $ 838
Real estate acquired through foreclosure -- -- --
- -----------------------------------------------------------------------------------------
Total non-performing assets $ 566 $ 565 $ 838
- -----------------------------------------------------------------------------------------
Allowance for loan losses $ 2,614 $ 2,594 $ 2,579
Allowance as a percent of
non-accrual loans 461.8 % 459.1 % 307.8 %
Allowance as a percent of
non-performing assets 461.8 % 459.1 % 307.8 %
Non-accrual loans as a percent
of total loans 0.17% 0.18% 0.27%
Non-performing assets as a percent
of total assets 0.06% 0.06% 0.09%
- -----------------------------------------------------------------------------------------
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 as noted in the table above totaled $566,000
representing 0.06% of total assets at September 30, 2001, essentially unchanged
from December 31, 2000.
The bank did not have any impaired loans as of September 30, 2001.
27
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Nine Months Ended
September 30,
2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Balance at beginning of period $2,594 $2,555
Provision for loan losses 36 45
Recoveries of loans previously charged-off 1 3
Less: Charge-offs (17) (24)
- --------------------------------------------------------------------------------
Balance at end of period $2,614 $2,579
- --------------------------------------------------------------------------------
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 September 30, 2001 the balance of the allowance for loan losses was
$2,614,000 representing 461.8% 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 $18.8 million to $842.4 million at
September 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:
September 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Demand and NOW $ 81,572 $ 79,952
Savings and money market accounts 364,440 334,948
Time certificates of deposit 396,519 408,981
Deposit acquisition premium,
net of amortization (86) (256)
- --------------------------------------------------------------------------------
Total deposits $842,445 $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. The Company will adopt the new standard on January 1, 2002.
At September 30, 2001, the Company had $1,115,000 of goodwill on its balance
sheet that is being amortized at a rate of $99,000 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
September 30, 2001 the bank had $134.0 million or 13.8% of total assets and
$82.2 million or 8.5% 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 September 30, 2001, the bank had a leverage Tier I
capital to total assets ratio of 10.70%, a Tier I capital to risk-weighted
assets ratio of 30.09% and a total capital to risk-weighted assets ratio of
30.95%. The Company, on a consolidated basis, had ratios of leverage Tier I
capital to total assets of 11.02%, Tier I capital to risk-weighted assets of
31.01% and total capital to risk-weighted assets of 31.87% at September 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 September 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
None
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: November 9, 2001 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: November 9, 2001 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
Sr. V.P., Treasurer and CFO
33