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 March 31, 2002
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 April 30, 2002: 4,763,625 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income (unaudited)
for the three months ended March 31, 2002 and 2001 4
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2002 (unaudited)
and the year ended December 31, 2001 5 - 6
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2002 and 2001 7 - 8
Condensed Notes to the Consolidated Financial Statements 9 - 10
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 28
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 29
ITEM 2. Changes in Securities 29
ITEM 3. Defaults Upon Senior Securities 29
ITEM 4. Submission of Matters to a Vote of Security Holders 29
ITEM 5. Other Information 29
ITEM 6. Exhibits and Reports on Form 8-K 29
Signature Page 30
2
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
March 31, December 31,
2002 2001
(unaudited)
Assets:
Cash and due from banks $ 10,374 $ 8,945
Short-term investments (Note 3) 179,802 236,382
- ----------------------------------------------------------------------------------
Total cash and cash equivalents 190,176 245,327
Interest-bearing deposits in banks 6,050 6,490
Securities available for sale, at market value (amortized
cost of $381,745 in 2002 and $362,076 in 2001) 389,508 372,584
Trading securities, at market value 38,743 3,089
Loans: (Note 4)
Mortgage loans 311,806 296,469
Other loans 34,069 34,548
Allowance for loan losses (2,643) (2,643)
- ----------------------------------------------------------------------------------
Net loans 343,232 328,374
Premises and equipment 6,831 6,927
Accrued interest receivable 4,785 3,950
Goodwill 1,090 1,090
Current income tax asset, net -- 208
Other assets 8,440 3,129
- ----------------------------------------------------------------------------------
Total assets $988,855 $971,168
Liabilities and Stockholders' Equity:
Deposits $867,482 $849,684
Escrow deposits of borrowers 1,428 1,403
Employee stock ownership plan liability 156 156
Current income taxes 1,152 --
Deferred income taxes 1,152 2,275
Other liabilities 2,739 2,746
- ----------------------------------------------------------------------------------
Total liabilities 874,109 856,264
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, 7,525,104 and
7,494,980 shares issued, respectively 7,525 7,495
Additional paid-in capital 63,557 62,875
Retained earnings 101,603 99,996
- ----------------------------------------------------------------------------------
172,685 170,366
Accumulated other comprehensive income: (Note 6)
Net unrealized gains on securities
available for sale, net of tax effect 4,761 6,443
Treasury stock at cost, 4,380,589 and
4,362,289 shares, respectively (Note 5) (62,544) (61,749)
Common stock acquired by ESOP (156) (156)
- ----------------------------------------------------------------------------------
Total stockholders' equity 114,746 114,904
- ----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $988,855 $971,168
See accompanying condensed notes to consolidated financial statements.
3
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
March 31,
(In thousands except share data) 2002 2001
- -------------------------------------------------------------------------------
Interest and dividend income:
Mortgage Loans $ 5,182 $ 4,788
Other loans 401 709
Securities available for sale:
Mortgage-backed securities 4,145 4,787
Other securities 1,231 1,836
Trading securities 128 113
Federal funds sold 725 2,369
Other investments 228 291
- -------------------------------------------------------------------------------
Total interest and dividend income 12,040 14,893
- -------------------------------------------------------------------------------
Interest expense:
Deposits 6,094 8,912
- -------------------------------------------------------------------------------
Total interest expense 6,094 8,912
- -------------------------------------------------------------------------------
Net interest income 5,946 5,981
Provision for loan losses -- 12
- -------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,946 5,969
- -------------------------------------------------------------------------------
Non-interest income:
Deposit account service fees 146 161
Gains on securities available for sale, net 999 773
Gains (losses) on trading securities, net (66) 84
Other 177 153
- -------------------------------------------------------------------------------
Total non-interest income 1,256 1,171
- -------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 1,826 1,588
Occupancy and equipment 521 578
Data processing 128 129
Professional services 144 102
Advertising and marketing 41 42
Amortization of intangibles 29 82
Deposit insurance 46 45
Other 300 301
- -------------------------------------------------------------------------------
Total non-interest expense 3,035 2,867
- -------------------------------------------------------------------------------
Income before income taxes 4,167 4,273
Income tax expense 1,517 1,528
- -------------------------------------------------------------------------------
Net income $ 2,650 $ 2,745
- -------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 3,155,854 3,132,567
Diluted 3,241,076 3,206,390
Earnings per share (in dollars):
Basic $ 0.84 $ 0.88
Diluted 0.82 0.86
See accompanying condensed notes to consolidated financial statements.
4
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 2002 (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, 2001 $7,495 $62,875 $99,996 $(61,749) $ 6,443 $(156) $114,904
Net Income -- -- 2,650 -- -- -- 2,650
Other comprehensive income,
net of tax:
Unrealized losses on securities,
net of reclassification adjustment (Note 6) -- -- -- -- (1,682) -- (1,682)
-----
Comprehensive income 968
Cash dividends paid ($0.33 per share) -- -- (1,044) -- -- -- (1,044)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 1 -- -- -- 1
Amortization of ESOP shares
committed to be released -- 54 -- -- -- -- 54
Purchase of treasury stock -- -- -- (795) -- -- (795)
Exercise of stock options
and related tax benefits 30 628 -- -- -- -- 658
- ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 $7,525 $63,557 $101,603 $(62,544) $ 4,761 $(156) $114,746
See accompanying condensed notes to consolidated financial statements.
5
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Year Ended December 31, 2001
(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 -- -- 10,759 -- -- -- 10,759
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 6) -- -- -- -- 471 -- 471
--------
Comprehensive income 11,230
Cash dividends paid
($1.26 per share) -- -- (3,935) -- -- -- (3,935)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 7 -- -- -- 7
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 151 -- -- -- -- 151
Purchase of treasury stock -- -- -- (1,989) -- -- (1,989)
Purchase of company stock for deferred
compensation plan (Note 5) -- 56 -- (56) -- -- --
Exercise of stock options
and related tax benefits 47 994 -- -- -- -- 1,041
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $7,495 $62,875 $99,996 $(61,749) $6,443 $(156) $114,904
See accompanying condensed notes to consolidated financial statements.
6
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 2,650 $ 2,745
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 188 206
Loan interest capitalized (7) (12)
Amortization of ESOP shares committed to be released 54 31
(Increase) decrease in accrued interest receivable (835) 474
Decrease in other liabilities (7) (70)
Increase in current income taxes 1,360 1,445
Amortization of premiums (accretion of discounts) on
securities, net 58 (198)
Net trading securities activity (35,720) 13,490
Gains on securities available for sale, net (999) (773)
Losses (gains) on trading securities, net 66 (84)
Decrease in deferred mortgage loan
origination fees, net of amortization (6) (55)
Deferred income tax benefit (61) (58)
Increase in other assets (376) (214)
Provision for loan losses -- 12
Gains on sales of premises and equipment -- (4)
Increase in escrow deposits of borrowers 25 22
- ------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (33,610) 16,957
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of term federal funds -- (10,000)
Proceeds from maturities of term federal funds -- 20,000
Net decrease (increase) in interest bearing bank deposits 440 (2,235)
Proceeds from sales of investment securities available for sale 7,406 7,877
Proceeds from maturities of investment securities
available for sale 7,000 21,000
Purchases of investment securities
available for sale (58,237) (4,453)
Purchases of mortgage-backed securities (10,011) (10,046)
Principal repayments of mortgage-backed securities 30,178 12,396
Principal repayments of securities available for sale 1 1
Loans originated (36,197) (12,578)
Loan principal payments received 21,343 14,531
Purchases of premises & equipment (53) (650)
Proceeds from sales of premises and equipment -- 4
- ------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (38,130) 35,847
- ------------------------------------------------------------------------------------------
7
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
(In thousands)
Cash flows from financing activities:
Net increase in deposits 17,769 13,567
Payments to acquire treasury stock (795) (1,183)
Purchase of Company stock for deferred compensation plan -- 16
Issuance of common stock under stock option plan 533 173
Tax benefit resulting from stock options exercised 125 29
Cash dividends paid on common stock (1,044) (987)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 1 2
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,589 11,617
- ------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (55,151) 64,421
Cash and cash equivalents at beginning of period 245,327 122,021
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $190,176 $186,442
- ------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $ 6,095 $ 8,933
Cash paid during the period for taxes, net of refunds 92 110
Purchases of securities executed but not settled at
beginning of period which settled during the period 46 60
Sales of securities executed but not settled at
beginning of period which settled during the period 1,009 573
Non-cash transactions:
SFAS 115:
(Decrease) increase in accumulated other comprehensive income (1,682) 1,450
(Decrease) increase in deferred tax liabilities (1,062) 808
Purchases of securities executed but not settled at end of period 24 273
Sales of securities executed but not settled at end of period 2,922 707
- ------------------------------------------------------------------------------------------
See accompanying condensed notes to consolidated financial statements.
8
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 March 31, 2002 and
December 31, 2001, and its operating results for the three months ended March
31, 2002 and 2001. The results of operations for any interim period are not
necessarily indicative of the results to be expected for the entire year.
Certain amounts in the prior years' consolidated financial statements were
reclassified to facilitate comparison with the current fiscal 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, 2001.
(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) March 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------
Federal funds sold (overnight) $155,053 $204,294
Money market funds 24,749 32,088
- --------------------------------------------------------------------------------
Total short-term investments $179,802 $236,382
- --------------------------------------------------------------------------------
The investments above are stated at cost which approximates market value and
have original maturities of less than 90 days.
(4) Commitments
At March 31, 2002, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$8,379,000 and commitments under existing home equity lines of credit and other
loans of approximately $40,692,000 which are not reflected on the consolidated
balance sheet. In addition, as of March 31, 2002, the Company had a performance
standby letter of credit conveyed to others in the amount of $156,000 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 (1) their attaining the age of 72, or (2)
their termination as a director of the Company. The plan was later amended to
allow the directors' compensation to be invested in Company stock held in an
irrevocable trust. At March 31, 2002 the trust held 14,800 shares of MASSBANK
Corp. stock that the Company has classified as treasury stock. The treasury
shares are considered outstanding in the computation of earnings per share and
book value per share.
9
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
three months ended March 31, 2002 and the year ended December 31, 2001 is as
follows:
For the Three Months Ended
March 31, 2002
- --------------------------------------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
------ ---------- ------
Unrealized losses on securities:
Unrealized holding (losses) arising
during period $(1,745) $ 644 $(1,101)
Less: reclassification adjustment for
gains realized in net income 999 (418) 581
------- ------- -------
Net unrealized losses (2,744) 1,062 (1,682)
------- ------- -------
Other comprehensive loss $(2,744) $ 1,062 $(1,682)
------- ------- -------
For the Year Ended
December 31, 2001
- --------------------------------------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
------ ---------- ------
Unrealized gains on securities:
Unrealized holding gains arising
during period $ 4,785 $(1,833) $ 2,952
Less: reclassification adjustment for
gains realized in net income 4,262 (1,781) 2,481
------- ------- -------
Net unrealized gains 523 (52) 471
------- ------- -------
Other comprehensive income $ 523 $ (52) $ 471
------- ------- -------
10
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2002
Forward-Looking Statement Disclosure.
This Form 10-Q may contain forward-looking information, including
information concerning the Company's expectations of future business prospects.
These forward-looking statements are made pursuant to the safe harbor provision
of the Private Securities Litigation Reform Act of 1995. The Company may also
make written or oral forward-looking statements in other documents filed with
the Securities and Exchange Commission ("SEC"), in annual reports to stock-
holders, in press releases and other written materials, and in oral statements
made by the Company's officers, directors or employees. You can identify
forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," "will," "should," and other
expressions which predict or indicate future events and trends and which do not
relate to historical matters. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the Company's
actual results or performance to be materially different from the results and
performance expressed or implied by the forward-looking statements. Forward-
looking statements include, but are not limited to, statements concerning the
Company's belief, expectations, or intentions concerning the Company's future
performance, the financial outlook of the markets it serves and the performance
and activities of its competitors. These statements reflect the Company's
current views, are based on numerous assumptions and are subject to numerous
risks, uncertainties and other factors including but not limited to the
following:
- Unexpected fluctuations in market interest rates
- Unexpected fluctuations in the market for equities, bonds, federal
funds and other financial instruments
- An increase in the level of non-performing assets
- An increase in competitive pricing pressures within the Company's
market which may result in the following:
. An increase in the Company's cost of funds
. Changes in volume of loan originations
. Limit the ability of the Company to attract and retain
banking customers
- Adverse legislative or regulatory developments
- Adverse impacts resulting from the continuing war on terrorism
- An increase in medical insurance and other employee-related costs
- The impact of inflation, and other factors described in the Company's
annual report on Form 10-K.
11
Results of Operations for the three months ended March 31, 2002
GENERAL
For the quarter ended March 31, 2002, MASSBANK Corp. reported net income of
$2,650,000, or $0.82 in diluted earnings per share compared to net income of
$2,745,000 or $0.86 in diluted earnings per share in the first quarter of 2001.
Basic earnings per share in the recent quarter were $0.84 per share compared to
$0.88 per share in the first quarter of the prior year.
The Company's net income in the first quarter 2002 compared to the same
quarter of 2001 reflects an increase in non-interest expense of $168,000, a
decrease in net interest income of $35,000 and a slight increase in the
Company's income tax rate. These items were partially offset by an improvement
in non-interest income of $85,000 due mainly to higher securities gains.
Net interest income
Net interest income totaled $5,946,000 in the first quarter of 2002, a
decrease of $35,000 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 March 31, 2002 was 2.49%, a decline
from 2.60%, reported in the first quarter of 2001. While the net interest margin
declined compared to the first quarter last year, it has increased sequentially
by 16 basis points over the last two quarters to 2.49%, from 2.33% in the third
quarter of 2001. Average earning assets for the quarter ended March 31, 2002
increased $32.6 million to $958.3 million, from $925.7 million in the same
quarter of 2001.
Interest and Dividend Income
Interest and dividend income on a fully taxable equivalent basis for the
three months ended March 31, 2002, decreased to $12,063,000 from $14,917,000 for
the three months ended March 31, 2001. The decrease in interest and dividend
income resulted from a decrease in yield on the Company's average earning
assets, partially offset by the higher interest income resulting from an
increase of $32.6 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 first quarter of 2002 was 5.04%, down from 6.45% in the same quarter of
2001.
The reduction in yield on the Company's average earning assets is primarily
attributable to lower market interest rates, especially the Federal Funds rate.
The Federal Reserve Bank cut the Federal Funds rate eight times during the
twelve months ended March 31, 2002, reducing the rate from 5.00% to 1.75%.
Interest Expense
Total interest expense for the three months ended March 31, 2002 decreased
$2,818,000, or 31.6% to $6,094,000 from $8,912,000 for the three months ended
March 31, 2001. 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 interest
expense due to higher 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 148 basis points, from 4.37% in the first
quarter of 2001 to 2.89% in the recent quarter. The Company's average deposits,
as shown in the table on page 14, increased $30.0 million to $856.3 million in
the first quarter of 2002, from $826.3 million in the first quarter of 2001.
12
AVERAGE BALANCE SHEETS
Three Months Ended
March 31,
2002 2001
---- ----
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 $174,469 $ 725 1.69% $168,030 $ 2,369 5.72%
Short-term investments (2) 37,919 228 2.44 21,474 288 5.44
Investment securities 125,336 1,254 4.00 135,728 1,863 5.49
Mortgage-backed securities 257,150 4,145 6.45 284,627 4,787 6.73
Trading securities 24,290 128 2.10 7,480 113 6.19
Mortgage loans (1) 304,845 5,182 6.80 271,595 4,788 7.05
Other loans (1) 34,338 401 4.73 36,762 709 7.78
- -------------------------------------------------- ----------------
Total earning assets 958,347 $12,063 5.04% 925,696 $14,917 6.45%
Allowance for loan losses (2,643) (2,601)
- ------------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 955,704 923,095
Other assets 22,259 19,711
- ------------------------------------------------------------------------------------------
Total assets $977,963 $942,806
- ------------------------------------------------------------------------------------------
13
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
March 31,
2002 2001
---- ----
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 $ 81,597 $ 89 0.44% $ 78,325 $ 119 0.62%
Savings 405,616 2,694 2.69 338,036 2,842 3.41
Time certificates of deposit 369,049 3,311 3.64 409,947 5,951 5.89
- -------------------------------------------------- ----------------
Total deposits 856,262 6,094 2.89 826,308 8,912 4.37
Other liabilities 5,402 6,262
- ------------------------------------------------------------------------------------------
Total liabilities 861,664 832,570
Stockholders' equity 116,298 110,236
- ------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $977,962 $942,806
- ------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) 5,969 6,005
Less adjustment of tax-exempt
interest income 23 24
- ------------------------------------------------------------------------------------------
Net interest income $ 5,946 $ 5,981
- ------------------------------------------------------------------------------------------
Interest rate spread 2.15% 2.08%
- ------------------------------------------------------------------------------------------
Net interest margin (3) 2.49% 2.60%
- ------------------------------------------------------------------------------------------
(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
Provision for Loan Losses
The provision for loan losses represents a charge against current earnings
and an addition to the allowance for loan losses. There was no provision for
loan losses in the first quarter of 2002. This compares to a $12,000 provision
for loan losses in the first 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 Statement of Financial Accounting Standard No. 114,
"Accounting by Creditors for Impairment of a Loan", general loss allocations for
various loan types based on loss experience factors and an unallocated allowance
which is maintained based on management's assessment of many factors including
the risk characteristics of the portfolio, concentrations of credit, current and
anticipated economic conditions that may effect the borrower's ability to pay,
and trends in loan delinquencies and charge-offs. Realized losses, net of
recoveries, are charged directly to the allowance. While management uses the
information available in establishing the allowance for loan losses, future
adjustments to the allowance may be necessary if economic conditions differ from
the assumptions used in making the evaluation. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from those of
management. At March 31, 2002, the allowance for loan losses was $2,643,000
representing 789.0% of nonaccrual loans. The Bank's nonaccrual loans totaled
$335,000 at March 31, 2002 down from $424,000 a year earlier. There were no net
loan charge-offs in the recent quarter. In the first quarter of last year the
Bank recorded net recoveries on loans previously charged-off of $1,000.
Management believes that the allowance for loan losses as of March 31, 2002 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 $85,000 to $1,256,000 in the recent
quarter, from $1,171,000 in the comparable quarter of the prior year. This
increase is due essentially to higher securities gains in the first quarter of
2002.
Net gains on securities totaled $933,000 in the first quarter of this year
compared to $857,000 in the first quarter of last year. Realized gains on the
sale of equity securities and debt securities totaled $996,000 and $3,000,
respectively, for the three months ended March 31, 2002. The Bank also recorded
losses of $66,000 on its trading account during this same period.
The Bank's deposit account service fees and other non-interest income
totaled $146,000 and $177,000, respectively, in the first quarter of 2002
compared to $161,000 and $153,000, respectively, in the first quarter of 2001,
reflecting a modest combined increase over the same quarter last year.
Non-Interest Expense
Non-interest expense increased $168,000 or 5.9% to $3,035,000 in the first
quarter of 2002 from $2,867,000 in the first quarter or 2001. The increase in
non-interest expense is primarily due to increases in salaries and employee
benefits and professional services expense.
Salaries and employee benefits, the largest component of non-interest
expense increased $238,000 or 15.0% to $1,826,000 in the recent quarter, from
$1,588,000 in the comparable quarter of 2001. This increase reflects higher
salaries due to merit increases and an increased number of employees, higher
pension costs and an increase in costs associated with various other employee
benefits.
Professional service expenses increased by $42,000 or 41.2% to $144,000 in
the first quarter of 2002 from $102,000 in the first quarter of last year. The
increase is due primarily to higher legal fees.
Occupancy and equipment expenses declined $57,000 to $521,000 in the recent
quarter, from $578,000 in the same quarter last year. This decrease is due in
part to the construction of a new branch and the purchase of another in
Chelmsford, replacing existing leases and reducing net occupancy expenses.
Amortization of intangibles expense decreased $53,000 to $29,000 in the
first quarter 2002, from $82,000 in the first quarter last year. This expense
decreased for the following reasons:
1. The deposit acquisition premium that the Bank recorded in 1992 in
connection with its acquisition of the deposits and certain assets of
the former Central Savings Bank, Lowell was fully amortized in February
2002.
16
2. On January 1, 2002 the Company adopted 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 a company's balance sheet would no longer be
amortized, but be reviewed for impairment periodically or upon the
occurrence of certain triggering events. At January 1, 2002 the Company
had $1,090,000 of goodwill on its balance sheet that was previously
being amortized at a rate of $25,000 per quarter.
All other non-interest expenses combined, consisting of data processing,
advertising and marketing, deposit insurance and other expenses, decreased
$2,000 to $515,000 for the three months ended March 31, 2002 from $517,000 for
the three months ended March 31, 2001.
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 $1,517,000 in the first quarter
of 2002, a decrease of $11,000 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 $4,167,000 in the recent
quarter compared to $4,273,000 for the same quarter a year ago. The effective
income tax rate for the three months ended March 31, 2002 and 2001 was 36.4% and
35.8%, respectively.
17
Financial Condition
The Company's total assets amounted to $988.9 million as of March 31, 2002,
an increase of $17.7 million or 1.8% from $971.2 million at December 31, 2001.
This reflects an increase in the Bank's loan portfolio, net of allowance for
loan losses, of $14.8 million or 4.5% and a decrease in total investments of
$4.4 million or 0.7%. Other assets increased $7.3 million.
Investments
At March 31, 2002, the Company's investment portfolio, consisting of
investment securities (including mortgage-backed securities), short-term
investments and interest-bearing bank deposits totaled $614.1 million or 62.1%
of total assets, compared to $618.5 million or 63.7% of total assets at December
31, 2001. The portfolio included U.S. government and agency obligations maturing
within five years, 15-year mortgage-backed securities and equity securities. For
further information concerning the composition, maturity and market value of the
Bank's investment securities, see pages 20 through 22 of this Form 10-Q.
Loans
The loan portfolio, net of allowance for loan losses, increased $14.8
million or 4.5% this recent quarter. At March 31, 2002, the loan portfolio, net
of allowance for loan losses, was $343.2 million representing 34.7% of total
assets compared to $328.4 million representing 33.8% of total assets at December
31, 2001.
The majority of loans in the portfolio are residential mortgages.
Residential mortgages amounted to $309.2 million at March 31, 2002, representing
89.4% of the loan portfolio. See page 23 of this Form 10-Q for a table setting
forth the composition of the loan portfolio at March 31, 2002 and year-end 2001.
Lower interest rates in the first quarter 2002 resulted in increased loan
origination growth for the Bank. In the first quarter 2002, the Bank originated
loans of $36.2 million, an increase of $23.6 million or approximately triple the
$12.6 million in loans originated in the first three months of 2001.
Asset Quality
Asset quality remains strong. Non-accrual loans, generally those loans
which are 90 days or more delinquent, were $335 thousand and $424 thousand,
respectively, at March 31, 2002 and 2001. This represents 0.10% of total loans
at March 31, 2002.
The Bank's allowance for loan losses at March 31, 2002 totaled $2.6
million, representing 789% of non-accrual loans and 0.76% of total loans. The
Bank believes that its allowance for loan losses is adequate to cover the risks
inherent in the loan portfolio under current conditions. The Bank has no real
estate acquired through foreclosure at March 31, 2002.
Deposits
Deposits have historically been the Bank's primary source of funds for
lending and investment activities. Deposit flows vary significantly and are
influenced by prevailing interest rates, market conditions, economic conditions
and competition. The Bank's management attempts to manage its deposits through
selective pricing and marketing. Deposits increased $17.8 million or 2.1% to
$867.5 million at March 31, 2002 from $849.7 million at December 31, 2001. This
increase was primarily the result of an increase in savings and money market
account deposits of $46.4 million or 12.1%, partially offset by a decrease in
time certificates of deposit of $30.1 million or 7.8%. Other deposits grew by
$1.5 million this past quarter. For information concerning deposit balances at
March 31, 2002 and year-end 2001, see page 26 of this Form 10-Q.
18
Financial Condition (continued)
Stockholders Equity
Total stockholders' equity decreased slightly to $114.7 million at March
31, 2002, representing a book value per share of $36.32, from $114.9 million
representing a book value per share of $36.51 at December 31, 2001. The
Company's book value per share was negatively affected this past quarter by the
decrease in the Company's unrealized gains on securities available for sale, net
of tax effect.
Investments
As previously noted, total investments consisting of investment securities,
short-term investments and interest-bearing bank deposits equaled $614.1 million
at March 31, 2002, down $4.4 million from $618.5 million at year-end 2001. 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
$13.6 million as of March 31, 2002, that has yielded substantial realized and
unrealized gains in recent years. While the Company's equity securities
portfolio has produced increased realized gains in recent years, management does
not expect this trend to continue. Management believes that the equity markets
will provide more moderate returns in the near future. This will result in lower
realized equity securities gains in 2002.
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 $243.8 million at March 31, 2002 versus $265.0 million at year-end 2001.
The Bank also maintains a portfolio of trading securities which consisted
of the following as of the dates shown:
March 31, December 31,
(In thousands) 2002 2001
------------- ------------
U.S. Treasury obligations $38,740 $ 3,086
Investments in mutual funds 3 3
------- -------
Total $38,743 $ 3,089
19
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
March 31, 2002 with gross unrealized gains and losses, follows:
- -----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At March 31, 2002 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations $114,069 $ 656 $ (760) $113,965
U.S. Government agency obligations 18,141 48 (83) 18,106
- -----------------------------------------------------------------------------------------
Total 132,210 704 (843) 132,071
- -----------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage
Association 20,445 912 -- 21,357
Federal Home Loan Mortgage
Corporation 214,038 6,076 (94) 220,020
Federal National Mortgage
Association 1,184 28 (2) 1,210
Collateralized mortgage
obligations 1,191 21 -- 1,212
- -----------------------------------------------------------------------------------------
Total mortgage-backed securities 236,858 7,037 (96) 243,799
- -----------------------------------------------------------------------------------------
Total debt securities 369,068 7,741 (939) 375,870
- -----------------------------------------------------------------------------------------
Equity securities 12,677 2,359 (1,398) 13,638
- -----------------------------------------------------------------------------------------
Total securities available for sale 381,745 $ 10,100 $ (2,337) $389,508
- -----------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 7,763
- -----------------------------------------------------------------------------------------
Total securities available
for sale, net 389,508
- -----------------------------------------------------------------------------------------
Total investment securities, net $389,508
- -----------------------------------------------------------------------------------------
Trading securities $ 38,824 $ 38,743
- -----------------------------------------------------------------------------------------
20
FINANCIAL CONDITION
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investment securities at
December 31, 2001 with gross unrealized gains and losses, follows:
- ------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At December 31, 2001 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations $ 79,932 $ 1,165 $ (214) $ 80,883
U.S. Government agency obligations 10,142 115 (4) 10,253
- ------------------------------------------------------------------------------------------
Total 90,074 1,280 (218) 91,136
- ------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage
Association 22,499 1,025 -- 23,524
Federal Home Loan Mortgage
Corporation 231,603 7,062 (31) 238,634
Federal National Mortgage
Association 1,346 38 (1) 1,383
Collateralized mortgage
obligations 1,452 38 -- 1,490
- ------------------------------------------------------------------------------------------
Total mortgage-backed securities 256,900 8,163 (32) 265,031
- ------------------------------------------------------------------------------------------
Total debt securities 346,974 9,443 (250) 356,167
- ------------------------------------------------------------------------------------------
Equity securities 15,102 3,931 (2,616) 16,417
- ------------------------------------------------------------------------------------------
Total securities available for sale 362,076 $ 13,374 $ (2,866) $372,584
- ------------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 10,508
- ------------------------------------------------------------------------------------------
Total securities available
for sale, net 372,584
- ------------------------------------------------------------------------------------------
Total investment securities, net $372,584
- ------------------------------------------------------------------------------------------
Trading securities $ 3,089 $ 3,089
- ------------------------------------------------------------------------------------------
21
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 March
31, 2002 and December 31, 2001 are as follows:
March 31, 2002
-------------------------
Available for Sale
Amortized Market
Maturing: Cost Value
(In thousands)
Within 1 year $ 27,970 $ 28,353
After 1 year but within 5 years 104,100 103,581
After 15 years 140 137
-------- -------
132,210 132,071
Mortgage-backed securities 236,858 243,799
-------- -------
$369,068 $375,870
December 31, 2001
------------------------
Available for Sale
Amortized Market
Maturing: Cost Value
(In thousands)
Within 1 year $ 28,993 $ 29,531
After 1 year but within 5 years 60,939 61,467
After 15 years 142 138
-------- -------
90,074 91,136
Mortgage-backed securities 256,900 265,031
-------- -------
$346,974 $356,167
22
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
- ---------------------------------------------------------------------------------------
At At
(In thousands) March 31, 2002 December 31, 2001
- ---------------------------------------------------------------------------------------
Mortgage loans:
Residential $309,536 $294,023
Commercial 2,605 2,641
Construction 857 993
- ---------------------------------------------------------------------------------------
312,998 297,657
Add: Premium on loans 42 51
Less: Deferred mortgage loan origination fees (1,234) (1,239)
- ---------------------------------------------------------------------------------------
Total mortgage loans 311,806 296,469
Other loans:
Consumer:
Installment 1,234 1,178
Guaranteed education 4,593 4,937
Other secured 842 873
Home equity lines of credit 12,086 12,271
Unsecured 180 201
- ---------------------------------------------------------------------------------------
Total consumer loans 18,935 19,460
Commercial 15,134 15,088
- ---------------------------------------------------------------------------------------
Total other loans 34,069 34,548
- ---------------------------------------------------------------------------------------
Total loans $345,875 $331,017
- ---------------------------------------------------------------------------------------
The Bank's loan portfolio increased $14.9 million during the first three
months of 2002, from $331.0 million at December 31, 2001 to $345.9 million at
March 31, 2002. Mortgage loans increased $15.3 million and consumer loans
decreased $0.4 million.
Loan originations increased by $23.6 million to $36.2 million in the first
three months of 2002 compared to $12.6 million in the first three months of last
year.
23
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing
assets at March 31, 2002 and 2001, and December 31, 2001:
At At At
March 31, December 31, March 31,
(In thousands) 2002 2001 2001
- ------------------------------------------------------------------------------------
Non-Performing Assets:
Non-accrual loans $ 335 $ 644 $ 424
Real estate acquired through foreclosure -- -- --
- ------------------------------------------------------------------------------------
Total non-performing assets $ 335 $ 644 $ 424
- ------------------------------------------------------------------------------------
Allowance for loan losses $ 2,643 $ 2,643 $ 2,607
Allowance as a percent of
non-accrual loans 789.0 % 410.4 % 614.9 %
Allowance as a percent of
non-performing assets 789.0 % 410.4 % 614.9 %
Non-accrual loans as a percent
of total loans 0.10% 0.19% 0.14%
Non-performing assets as a percent
of total assets 0.03% 0.07% 0.04%
- ------------------------------------------------------------------------------------
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, 2001 to March 31, 2002 as
noted in the table above. The principal balance of non-accrual loans was down to
$335,000, or approximately 0.10% of total loans at March 31, 2002.
The Bank did not have any impaired loans as of March 31, 2002.
24
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Three Months Ended
March 31,
2002 2001
- --------------------------------------------------------------------------------
(In thousands)
Balance at beginning of period $ 2,643 $ 2,594
Provision for loan losses -- 12
Recoveries of loans previously charged-off -- 1
Less: Charge-offs -- --
- --------------------------------------------------------------------------------
Balance at end of period $ 2,643 $ 2,607
- --------------------------------------------------------------------------------
The Company maintains an allowance for probable losses that are inherent in
the Company's loan portfolio. The allowance for loan losses is increased by
provisions charged to operations based on the estimated loan loss exposure
inherent in the portfolio. Management uses a methodology to systematically
measure the amount of estimated loan loss exposure inherent in the portfolio for
purposes of establishing a sufficient allowance for loan losses. The methodology
includes three elements: an analysis of individual loans deemed to be impaired
in accordance with the terms of Statement of Financial Accounting Standard No.
114, "Accounting by Creditors for Impairment of a Loan," general loss
allocations for various loan types based on loss experience factors and an
unallocated allowance which is maintained based on management's assessment of
many factors including the risk characteristics of the portfolio, concentrations
of credit, current and anticipated economic conditions that may effect the
borrower's ability to pay, and trends in loan delinquencies and charge-offs.
Realized losses, net of recoveries, are charged directly to the allowance. While
management uses the information available in establishing the allowance for loan
losses, future adjustments to the allowance may be necessary if economic
conditions differ from the assumptions used in making the evaluation. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on judgments
different from those of management.
At March 31, 2002 the balance of the allowance for loan losses was
$2,643,000 representing 789.0% 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.
25
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 $17.8 million to $867.5 million at
March 31, 2002 from $849.7 million at December 31, 2001.
The composition of the Bank's total deposits as of the dates shown are
summarized as follows:
March 31, December 31,
2002 2001
- ------------------------------------------------------------------------------
(In thousands)
Demand and NOW $ 83,595 $ 82,143
Savings and money market accounts 430,376 383,960
Time certificates of deposit 353,511 383,610
Deposit acquisition premium,
net of amortization -- (29)
- ------------------------------------------------------------------------------
Total deposits $867,482 $849,684
- ------------------------------------------------------------------------------
Recent Accounting Developments
"Goodwill and Other Intangible Assets"
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS 142 requires that upon adoption of the Statement, any
goodwill recorded on an entity's balance sheet would no longer be amortized.
This would include existing goodwill (i.e., recorded goodwill at the date the
financial statement is issued), as well as goodwill arising subsequent to the
effective date of the Statement. Goodwill will not be amortized but will be
reviewed for impairment periodically or upon the occurrence of certain
triggering events. This Statement is effective for fiscal years beginning after
December 15, 2001. The Company adopted the new standard on January 1, 2002. At
March 31, 2002, the Company had $1,090,000 of goodwill on its balance sheet.
26
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 and mortgage-backed securities amortization and prepayments,
sales or maturities of investment securities and income on earning assets. In
addition to loan payments and maturing investment securities, which are
relatively predictable sources of funds, the Bank maintains a high percentage of
its assets invested in overnight federal funds sold, which can be immediately
converted into cash and United States Treasury and Government agency securities,
which can be sold or pledged to raise funds. At March 31, 2002 the Bank had
$155.1 million or 15.7% of total assets and $170.8 million or 17.3% of total
assets invested, respectively, in overnight federal funds sold 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 components
include supplemental capital components such as qualifying allowance for loan
losses and 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 March 31, 2002, the Bank had a leverage Tier I
capital to total assets ratio of 10.36%, a Tier I capital to risk- weighted
assets ratio of 29.60% and a total capital to risk-weighted assets ratio of
30.49%. The Company, on a consolidated basis, had ratios of leverage Tier I
capital to total assets of 11.10%, Tier I capital to risk-weighted assets of
31.76% and total capital to risk-weighted assets of 32.66% at March 31, 2002.
27
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, 2001. There have been no material changes in reported market risks
faced by the Corporation since the filing of the Corporation's 2001 Annual
Report on Form 10-K.
28
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 March 31, 2002, 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.
29
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: May 10, 2002 /s/Gerard H. Brandi
---------------------------
(Signature)
Gerard H. Brandi
President and CEO
Date: May 10, 2002 /s/Reginald E. Cormier
---------------------------
(Signature)
Reginald E. Cormier
Sr. V.P., Treasurer and CFO
30