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, 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 par value per share.
Outstanding at October 31, 2002: 4,670,700 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income (unaudited)
for the three months ended September 30, 2002 and 2001 4
and for the nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the nine months ended September 30, 2002
and 2001 6 - 7
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2002 and 2001 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 - 35
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 36
ITEM 4. Disclosure Controls and Procedures 37
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 38
ITEM 2. Changes in Securities and Use of Proceeds 38
ITEM 3. Defaults Upon Senior Securities 38
ITEM 4. Submission of Matters to a Vote of Security Holders 38
ITEM 5. Other Information 38
ITEM 6. Exhibits and Reports on Form 8-K 38
Signatures 39
Certifications 40 - 41
2
PART I. ITEM 1
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
September 30, December 31,
2002 2001
(unaudited)
Assets:
Cash and due from banks $ 10,116 $ 8,945
Short-term investments (Note 3) 225,248 236,382
- -----------------------------------------------------------------------------------------
Total cash and cash equivalents 235,364 245,327
Interest-bearing deposits in banks 4,102 6,490
Securities available for sale, at market value (amortized
cost of $383,984 in 2002 and $362,076 in 2001) 395,440 372,584
Trading securities, at market value 27,390 3,089
Loans: (Note 4)
Mortgage loans 309,559 296,469
Other loans 18,029 34,548
Allowance for loan losses (2,641) (2,643)
- -----------------------------------------------------------------------------------------
Net loans 324,947 328,374
Premises and equipment 6,767 6,927
Accrued interest receivable 4,198 3,950
Goodwill 1,090 1,090
Current income tax asset, net 203 208
Other assets 4,319 3,129
- -----------------------------------------------------------------------------------------
Total assets $1,003,820 $971,168
Liabilities and Stockholders' Equity:
Deposits $ 879,516 $849,684
Escrow deposits of borrowers 1,400 1,403
Employee stock ownership plan liability 156 156
Deferred income taxes 2,445 2,275
Other liabilities 2,634 2,746
- -----------------------------------------------------------------------------------------
Total liabilities 886,151 856,264
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, 7,577,329 and
7,494,980 shares issued, respectively 7,577 7,495
Additional paid-in capital 52,718 62,875
Retained earnings 94,014 99,996
- -----------------------------------------------------------------------------------------
154,309 170,366
Accumulated other comprehensive income: (Note 7)
Net unrealized gains on securities
available for sale, net of tax effect 7,170 6,443
Treasury stock at cost, 2,927,029 and
4,362,289 shares, respectively (Note 6) (43,654) (61,749)
Common stock acquired by ESOP (156) (156)
- -----------------------------------------------------------------------------------------
Total stockholders' equity 117,669 114,904
- -----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,003,820 $971,168
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) 2002 2001
- ------------------------------------------------------------------------------------
Interest and dividend income:
Mortgage Loans $ 5,166 $ 4,953
Other loans 297 526
Securities available for sale:
Mortgage-backed securities 3,625 4,815
Other securities 1,511 1,099
Trading securities 158 --
Federal funds sold 822 1,812
Other investments 149 312
- ------------------------------------------------------------------------------------
Total interest and dividend income 11,728 13,517
- ------------------------------------------------------------------------------------
Interest expense:
Deposits 5,602 8,064
- ------------------------------------------------------------------------------------
Total interest expense 5,602 8,064
- ------------------------------------------------------------------------------------
Net interest income 6,126 5,453
Provision for loan losses -- 12
- ------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,126 5,441
- ------------------------------------------------------------------------------------
Non-interest income:
Deposit account service fees 140 162
Gains (losses) on securities available for sale, net (80) 1,212
Gains on trading securities, net 30 4
Other 107 111
- ------------------------------------------------------------------------------------
Total non-interest income 197 1,489
- ------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 1,734 1,591
Occupancy and equipment 497 491
Data processing 134 121
Professional services 128 92
Advertising and marketing 53 40
Amortization of intangibles -- 83
Deposit insurance 45 45
Other 339 369
- ------------------------------------------------------------------------------------
Total non-interest expense 2,930 2,832
- ------------------------------------------------------------------------------------
Income before income taxes 3,393 4,098
Income tax expense 1,183 1,466
- ------------------------------------------------------------------------------------
Net income $ 2,210 $ 2,632
- ------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 4,669,659 4,678,601
Diluted 4,795,193 4,821,899
Earnings per share (in dollars):
Basic $ 0.47 $ 0.56
Diluted 0.46 0.55
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) 2002 2001
- ---------------------------------------------------------------------------------------
Interest and dividend income:
Mortgage Loans $ 15,570 $ 14,548
Other loans 1,085 1,848
Securities available for sale:
Mortgage-backed securities 11,670 14,298
Other securities 4,104 4,378
Trading securities 481 145
Federal funds sold 2,271 6,367
Other investments 537 931
- ---------------------------------------------------------------------------------------
Total interest and dividend income 35,718 42,515
- ---------------------------------------------------------------------------------------
Interest expense:
Deposits 17,639 25,452
- ---------------------------------------------------------------------------------------
Total interest expense 17,639 25,452
- ---------------------------------------------------------------------------------------
Net interest income 18,079 17,063
Provision for loan losses -- 36
- ---------------------------------------------------------------------------------------
Net interest income after provision for loan losses 18,079 17,027
- ---------------------------------------------------------------------------------------
Non-interest income:
Deposit account service fees 427 482
Gains on securities available for sale, net 1,669 3,107
Gains on trading securities, net 132 106
Other 461 517
- ---------------------------------------------------------------------------------------
Total non-interest income 2,689 4,212
- ---------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 5,360 4,874
Occupancy and equipment 1,491 1,582
Data processing 394 372
Professional services 424 341
Advertising and marketing 129 136
Amortization of intangibles 29 245
Deposit insurance 137 133
Other 988 1,007
- ---------------------------------------------------------------------------------------
Total non-interest expense 8,952 8,690
- ---------------------------------------------------------------------------------------
Income before income taxes 11,816 12,549
Income tax expense 4,254 4,484
- ---------------------------------------------------------------------------------------
Net income $ 7,562 $ 8,065
- ---------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 4,709,018 4,683,704
Diluted 4,838,536 4,808,994
Earnings per share (in dollars):
Basic $ 1.61 $ 1.72
Diluted 1.56 1.68
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, 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 -- -- 7,562 -- -- -- 7,562
Other comprehensive income,
net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 7) -- -- -- -- 727 -- 727
--------
Comprehensive income 8,289
Cash dividends paid ($0.66 per share) -- -- (3,115) -- -- -- (3,115)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 3 -- -- -- 3
Amortization of ESOP shares
committed to be released -- 183 -- -- -- -- 183
Purchase of treasury stock -- -- -- (4,346) -- -- (4,346)
Purchase of company stock for
deferred compensation plan (Note 6) -- 36 -- (36) -- -- --
Exercise of stock options
and related tax benefits 82 1,669 -- -- -- -- 1,751
Transfer resulting from three-for-two
stock split -- (12,045) (10,432) 22,477 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $7,577 $52,718 $ 94,014 $(43,654) $7,170 $(156) $117,669
See accompanying condensed notes to consolidated financial statements.
6
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 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 -- -- 8,065 -- -- -- 8,065
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 7) -- -- -- -- 2,704 -- 2,704
-------
Comprehensive income 10,769
Cash dividends paid
($0.63 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 treasury stock -- -- -- (1,412) -- -- (1,412)
Purchase of company stock for deferred
compensation plan (Note 6) -- 45 -- (45) -- -- --
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.
7
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
2002 2001
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 7,562 $ 8,065
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 501 654
Loan interest capitalized (21) (27)
Amortization of ESOP shares committed to be released 183 114
(Increase) decrease in accrued interest receivable (248) 1,487
Decrease in other liabilities (112) (250)
Decrease in current income tax asset, net 5 190
Amortization of premiums (accretion of discounts) on
securities, net 325 (588)
Net trading securities activity (25,202) 20,439
Gains on securities available for sale, net (1,736) (3,107)
More than temporary impairment writedown of securities
available for sale 67 --
Gains on trading securities, net (132) (106)
Decrease in deferred mortgage loan
origination fees, net of amortization (185) (30)
Deferred income tax (benefit) (51) (143)
Decrease in other assets 41 1,090
Provision for loan losses -- 36
Gains on sales of premises and equipment -- (4)
(Decrease) increase in escrow deposits of borrowers (3) 4
- ----------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (19,006) 27,824
- ----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of term federal funds -- (10,000)
Proceeds from maturities of term federal funds -- 40,000
Net decrease (increase) in interest bearing bank deposits 2,388 (13,453)
Proceeds from sales of investment securities available for sale 43,683 18,416
Proceeds from maturities of investment securities
available for sale 53,000 69,230
Purchases of investment securities
available for sale (166,475) (26,184)
Purchases of mortgage-backed securities (19,977) (50,169)
Principal repayments of mortgage-backed securities 69,002 56,083
Principal repayments of securities available for sale 5 3
Loans originated (75,839) (71,565)
Loan principal payments received 79,444 55,968
Purchases of premises & equipment (284) (2,535)
Proceeds from sales of premises and equipment -- 4
- ----------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (15,053) 65,798
- ----------------------------------------------------------------------------------------
8
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Nine Months Ended
September 30,
2002 2001
---- ----
(In thousands)
Cash flows from financing activities:
Net increase in deposits 29,803 18,650
Payments to acquire treasury stock (4,382) (1,457)
Purchase of Company stock for deferred compensation plan 36 45
Issuance of common stock under stock option plan 1,312 393
Tax benefit resulting from stock options exercised 439 99
Cash dividends paid on common stock (3,115) (2,950)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 3 6
- -----------------------------------------------------------------------------------------
Net cash provided by financing activities 24,096 14,786
- -----------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (9,963) 108,408
Cash and cash equivalents at beginning of period 245,327 122,021
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $235,364 $230,429
- -----------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $ 17,683 $ 25,518
Cash paid during the period for income taxes, net of refunds 3,857 4,336
Purchases of securities not settled at beginning of
period which settled during the period 47 60
Sales and maturities of securities not settled at
beginning of period which settled during the period 1,008 573
Non-cash transactions:
SFAS 115:
Increase in accumulated other comprehensive income 727 2,704
Increase in deferred tax liabilities 221 1,395
Purchases of securities not settled at end of period 138 6,461
Sales and maturities of securities not settled at end
of period 2,330 1,602
- ----------------------------------------------------------------------------------------
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
accounting principles generally accepted in the United States of America 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, 2002 and December 31, 2001, and its operating results for the
three months and nine months ended September 30, 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 year's consolidated financial statements were
reclassified to facilitate comparison with the current fiscal year. The
Company's reported per share amounts and weighted average common shares
outstanding for the current and prior year have been restated to reflect the
Company's three-for-two stock split of April 19, 2002.
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) September 30, 2002 December 31, 2001
- -------------------------------------------------------------------------------
Federal funds sold (overnight) $200,265 $204,294
Money market funds 24,983 32,088
- -------------------------------------------------------------------------------
Total short-term investments $225,248 $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 September 30, 2002, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$10,183,000 and commitments under existing home equity lines of credit and other
loans of approximately $40,529,000 which are not reflected on the consolidated
balance sheet. In addition, as of September 30, 2002, the Company had a
performance standby letter of credit conveyed to others in the amount of
$156,000.
(5) Basic Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share gives effect to all dilutive potential shares resulting from
stock options that were outstanding during the period.
10
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(6) 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 September 30, 2002 the trust held 23,400 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.
(7) 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, 2002 and 2001 is as follows:
For the Nine Months Ended
September 30, 2002
- ------------------------------------------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
------ ---------- ------
Unrealized gains on securities:
Unrealized holding gains arising
during period $ 2,617 $ (917) $ 1,700
Less: reclassification adjustment for
gains realized in net income 1,669 (696) 973
------- ------- -------
Net unrealized gains 948 (221) 727
------- ------- -------
Other comprehensive income $ 948 $ (221) $ 727
------- ------- -------
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
------- ------- -------
11
PART I. ITEM 2
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 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 provisions
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
- Continued extreme volatility in the equity markets
- 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
12
Results of Operations for the three months ended September 30, 2002 vs the three
months ended September 30, 2001
GENERAL
For the quarter ended September 30, 2002, MASSBANK Corp. reported net
income of $2,210,000, or $0.46 in diluted earnings per share compared to net
income of $2,632,000 or $0.55 in diluted earnings per share in the third quarter
of 2001. Basic earnings per share in the recent quarter were $0.47 per share,
compared to $0.56 per share in the third quarter of last year. The current and
prior year per share amounts reflect the three-for-two split of the Company's
common stock that occurred on April 19, 2002.
The Company's net income for the third quarter 2002 compared to the same
quarter of 2001 reflects an improvement of $685,000 in net interest income after
provision for loan losses. This increase, however, is offset by a decrease in
non-interest income of $1,292,000. In the third quarter 2002, the Company
recorded net losses on securities of $50,000 compared to net securities gains of
$1,216,000 during the same quarter last year. Net securities losses in the
recent quarter were comprised of $264,000 in gains on debt securities and
$314,000 in losses on equity securities. These losses on equity securities were
primarily attributable to the continued decline in equity securities prices
during recent months. Deposit account service fees and other non-interest income
declined by $26,000 in the recent quarter compared to the same quarter a year
ago. Earnings results for the third quarter 2002 also reflect an increase in
non-interest expense of $98,000 partially offset by a slight decline in the
Company's income tax rate.
Net interest income
Net interest income totaled $6,126,000 in the third quarter of 2002, an
increase of $673,000 from the same quarter a year ago. This is the fourth
consecutive quarter that the Company has increased its net interest income.
Improvements in net interest income are also expected in the fourth quarter of
2002. The increase in net interest income during the recent quarter was
principally attributable to an improvement in the Company's net interest margin
combined with the positive effect of average earning asset growth. The Company's
net interest margin for the three months ended September 30, 2002 was 2.51%, an
increase from 2.33% reported in the third quarter 2001. Average earning assets
for the quarter ended September 30, 2002 increased $38.0 million to $978.5
million, from $940.5 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 September 30, 2002, decreased $1,793,000 or 13.2% to
$11,751,000 from $13,544,000 for the three months ended September 30, 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 $38.0 million in average earning assets. As
reflected in the table on page 15 of this report, the yield on the Company's
average earning assets in the third quarter 2002 was 4.80%, down from 5.76% 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. As you can see from the table on
page 15 of this report, the average yield on the bank's overnight Federal funds
sold declined 176 basis points, from 3.46% in the third quarter of last year to
1.70% in the recent quarter. This contributed significantly to the bank's
decreased interest income in the recent quarter compared to the same quarter
last year.
13
Interest Expense
Total interest expense for the three months ended September 30, 2002
decreased $2,462,000, or 30.5% to $5,602,000 from $8,064,000 for the three
months ended September 30, 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, has resulted in a decline of 127 basis points in the Bank's cost
of funds, from 3.81% in the third quarter of 2001 to 2.54% in the recent
quarter. The Company's average deposits, as shown in the table on page 16,
increased $36.5 million to $875.4 million in the third quarter of 2002, from
$838.9 million in the third quarter 2001.
14
AVERAGE BALANCE SHEETS
Three Months Ended
September 30,
2002 2001
---- ----
Average Average
Average Interest Yield/ Average Interest Yield/
(In thousands) Balance Income Rate Balance Income Rate
(1) (1)
- ------------------------------------------------------------------------------------------
Assets:
Earning assets:
Federal funds sold $191,941 $ 822 1.70% $207,758 $ 1,812 3.46%
Short-term investments (4) 28,684 149 2.06 31,967 312 3.87
Investment securities (2) 170,042 1,534 3.61 86,346 1,126 5.22
Mortgage-backed securities (2) 229,751 3,625 6.31 292,538 4,815 6.58
Trading securities 29,764 158 2.12 5 -- --
Mortgage loans (3) 310,000 5,166 6.67 286,136 4,953 6.92
Other loans (3) 18,273 297 6.44 35,734 526 5.82
- -------------------------------------------------- ----------------
Total earning assets 978,455 $11,751 4.80% 940,484 $13,544 5.76%
Allowance for loan losses (2,642) (2,616)
- ------------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 975,813 937,868
Other assets 22,247 20,873
- ------------------------------------------------------------------------------------------
Total assets $998,060 $958,741
- ------------------------------------------------------------------------------------------
(1) Tax exempt income on equity securities and municipal bonds is included on a
tax equivalent basis.
(2) Average balances include unrealized gains on securities available for sale.
(3) Loans on non-accrual status are included in average balances.
(4) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
Continued on next page
15
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
September 30,
2002 2001
---- ----
Average Average
Average Interest Yield/ Average Interest Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand and NOW $ 83,404 $ 95 0.45% $ 81,128 $ 126 0.62%
Savings 494,035 3,224 2.59 357,917 3,005 3.33
Time certificates of deposit 297,927 2,283 3.04 399,849 4,933 4.89
- -------------------------------------------------- ----------------
Total deposits 875,366 5,602 2.54 838,894 8,064 3.81
Other liabilities 5,281 6,629
- ------------------------------------------------------------------------------------------
Total liabilities 880,647 845,523
Stockholders' equity 117,413 113,218
- ------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $998,060 $958,741
- ------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) 6,149 5,480
Less adjustment of tax-exempt
interest income 23 27
- ------------------------------------------------------------------------------------------
Net interest income $6,126 $5,453
- ------------------------------------------------------------------------------------------
Interest rate spread (5) 2.26% 1.95%
- ------------------------------------------------------------------------------------------
Net interest margin (6) 2.51% 2.33%
- ------------------------------------------------------------------------------------------
(5) Interest rate spread represents the difference between the yield on
earning assets and the cost of the Company's deposits.
(6) Net interest margin represents net interest income (tax equivalent basis)
divided by average interest earning assets.
16
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 third quarter of 2002. This compares to a $12,000 provision
for loan losses 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 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 affect 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 currently 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, 2002, the allowance for
loan losses was $2,641,000 representing 807.6% of nonaccrual loans. The Bank's
nonaccrual loans totaled $327,000 at September 30, 2002 down from $644,000 at
December 31, 2001 and $566,000 at September 30, 2001. The Bank had net loan
charge-offs of $1,000 in the recent quarter compared to net loan charge-offs of
$14,000 in the same quarter last year. Management believes that the allowance
for loan losses as of September 30, 2002 is adequate to cover the risks inherent
in the loan portfolio under current conditions.
17
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
(losses) on securities and other non-interest income.
Non-interest income decreased $1,292,000 to $197,000 in the recent quarter,
from $1,489,000 in the comparable quarter of the prior year.
In the third quarter 2002, the Company recorded net losses on securities
available for sale of $80,000 compared to net securities gains of $1,212,000
during the same quarter last year. Net losses from the sale of securities
available for sale in the recent quarter were comprised of $234,000 in gains on
debt securities and $287,000 in losses on equity securities. In addition, the
Company in the recent quarter recorded a charge to earnings of $27,000 due to
two equity securities in the bank's investment portfolio that suffered a loss in
market value that was considered by management to be other than temporary.
Net gains on trading securities increased to $30,000 in the recent quarter
from $4,000 in the same quarter last year. In the third quarter 2002, the
Company recorded net trading securities gains on sales of U.S. Treasury
obligations of $41,000. It also recorded mark-to-market losses on U.S. Treasury
obligations of $11,000 due to the recent volatility in the bond markets.
The losses from the sale of equity securities in the third quarter 2002
were primarily attributable to the continued decline in equity securities prices
during recent months. In the face of a stock market which has declined in the
last couple of years, the Company sought to maximize the value of its equity
securities by selling securities that it expected would decline in value. Over
the last 30 months the Company has taken approximately $8.2 million in gains on
equity securities available for sale and trading. Consequently, as a result of
the equity securities gains the Company has taken and the decline in equity
market prices, the net unrealized gains in the Company's equity securities
portfolio have been exhausted. During this same period falling interest rates
have increased the value of the Company's debt securities and as a result total
net unrealized gains on all securities available for sale were $11.5 million at
September 30, 2002. (See net unrealized gains on securities available for sale
at September 30, 2002 on page 29 of this report.) This is an increase of $948,
000 over net unrealized gains on securities available for sale at December 31,
2001. (See page 30 of this report) Net unrealized gains on securities available
for sale, net of tax effect, are a positive $7.2 million at the end of the third
quarter 2002. Due to the decline in equity market prices over the past nine
months the Company expects that opportunities for securities gains from the
equity portfolio will be substantially reduced in future quarters. In addition,
if these market conditions persist or deteriorate further, the Company may incur
losses on the sales of its equity securities.
The Bank's deposit account service fees and other non-interest income
declined to $140,000 and $107,000, respectively, in the third quarter of 2002
from $162,000 and $111,000, respectively, in the third quarter of 2001.
Non-Interest Expense
Non-interest expense increased $98,000 or 3.5% to $2,930,000 for the three
months ended September 30, 2002 compared to the same period in 2001. This
increase is due primarily to increases in salaries and employee benefits and
professional services expenses.
Salaries and employee benefits, the largest component of non-interest
expense increased $143,000 or 9.0% to $1,734,000 in the recent quarter, from
$1,591,000 in the comparable quarter of 2001. The majority of this increase is
due to higher pension costs of $91,000.
18
Amortization of intangibles expense decreased $83,000 in the third quarter
2002, compared to the third 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.
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.
Professional services expenses increased from $92,000 for the three months
ended September 30, 2001 to $128,000 for the three months ended September 30,
2002 due primarily to higher legal fees incurred in connection with operational
matters and ordinary routine litigation incidental to the Company's business.
All other non-interest expenses combined, consisting of occupancy and
equipment, data processing, advertising and marketing, deposit insurance and
other expenses increased $2,000 to $1,068,000 for the three months ended
September 30, 2002 from $1,066,000 for the three months ended September 30,
2001.
Income Tax Expense
The Company, the Bank and its subsidiaries file a consolidated federal
income tax return. The Parent Company, the Bank and its subsidiaries are subject
to a State of Massachusetts Corporate Excise Tax.
The Company recorded income tax expense of $1,183,000 in the third quarter
of 2002, a decrease of $283,000 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 and a decrease in effective income tax rate. The Company's income
before income taxes was $3,393,000 in the recent quarter compared to $4,098,000
for the same quarter a year ago. The effective income tax rate for the three
months ended September 30, 2002 and 2001 was 34.9% and 35.8%, respectively.
19
Results of Operations for the nine months ended September 30, 2002 vs the nine
months ended September 30, 2001
General
For the nine months ended September 30, 2002, the Company reported net
income of $7,562,000 or $1.56 in diluted earnings per share ($1.61 in basic
earnings per share) compared to net income of $8,065,000 or $1.68 in diluted
earnings per share ($1.72 in basic earnings per share) for the nine months ended
September 30, 2001. The current and prior year per share amounts reflect the
three-for-two split of the Company's common stock that occurred on April 19,
2002.
The Company's financial performance in the first nine months of 2002
reflects an increase in net interest income after provision for loan losses of
$1,052,000. This increase, however, is offset by a decrease in non-interest
income of $1,523,000 due primarily to lower securities gains in the first nine
months of 2002 when compared to the same period in 2001, a decrease in deposit
account service fees and other non-interest income of $111,000, and an increase
in non-interest expense of $262,000. The decrease in securities gains is
primarily due to the continued decline in equity securities prices during recent
months. Earnings results for the nine months ended September 30, 2002 also
reflect a slight increase in the Company's effective income tax rate.
Net Interest Income
Net interest income totaled $18,079,000 for the nine months ended September
30, 2002, compared to $17,063,000 for the same period in 2001. The increase of
$1,016,000 is primarily attributable to an increase in average earning assets,
and an increase in the Company's net interest margin.
The Company's net interest margin for the first nine months of 2002 was
2.50% compared to 2.45% for the same period last year. Average earning assets
for the nine months ended September 30, 2002 increased $34.8 million to $968.9
million from $934.1 million for the corresponding period in 2001.
The Company's interest rate spread for the first nine months of 2002
increased to 2.20% from 2.00% for the first nine months of last year. The yield
on the Company's average earning assets in the first nine months of 2002
decreased 116 basis points to 4.92% from 6.08% in the corresponding period of
2001. The Company's average cost of funds for the first nine months of 2002
decreased 136 basis points to 2.72% from 4.08% for the nine months ended
September 30, 2001.
20
AVERAGE BALANCE SHEETS
Nine Months Ended
September 30,
2002 2001
-------------- --------------
Average Average
Average Interest Yield/ Average Interest Yield/
(In thousands) Balance Income Rate Balance Income Rate
(1) (1)
- ------------------------------------------------------------------------------------------
Assets:
Earning assets:
Federal funds sold $178,964 $ 2,271 1.70% $192,905 $ 6,367 4.41%
Short-term investments (4) 31,824 537 2.26 27,384 928 4.53
Investment securities (2) 147,712 4,169 3.76 110,739 4,450 5.36
Mortgage-backed securities (2) 243,639 11,670 6.39 285,977 14,298 6.67
Trading securities 30,186 481 2.12 3,288 145 5.93
Mortgage loans (3) 308,910 15,570 6.72 277,565 14,548 6.99
Other loans (3) 27,666 1,085 5.24 36,241 1,848 6.79
- -------------------------------------------------- ----------------
Total earning assets 968,901 $35,783 4.92% 934,099 $42,584 6.08%
Allowance for loan losses (2,642) (2,609)
- ------------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 966,259 931,490
Other assets 22,353 20,356
- ------------------------------------------------------------------------------------------
Total assets $988,612 $951,846
(1) Tax exempt income on equity securities and municipal bonds is included on a
tax equivalent basis.
(2) Average balances include unrealized gains on securities available for sale.
(3) Loans on non-accrual status are included in average balances.
(4) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
Continued on next page
21
AVERAGE BALANCE SHEETS - (continued)
Nine Months Ended
September 30,
2002 2001
-------------- --------------
Average Average
Average Interest Yield/ Average Interest Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand and NOW $ 82,499 $ 273 0.44% $ 80,464 $ 370 0.62%
Savings 450,894 8,983 2.66 347,199 8,732 3.36
Time certificates of deposit 333,427 8,383 3.36 406,084 16,350 5.38
- -------------------------------------------------- ----------------
Total deposits 866,820 17,639 2.72 833,747 25,452 4.08%
Other liabilities 5,117 6,407
- ------------------------------------------------------------------------------------------
Total liabilities 871,937 840,154
Stockholders' equity 116,675 111,692
- ------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $988,612 $951,846
- ------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) 18,144 17,132
Less adjustment of tax-exempt
interest income 65 69
- ------------------------------------------------------------------------------------------
Net interest income $18,079 $17,063
- ------------------------------------------------------------------------------------------
Interest rate spread (5) 2.20% 2.00%
- ------------------------------------------------------------------------------------------
Net interest margin (6) 2.50% 2.45%
- ------------------------------------------------------------------------------------------
(5) Interest rate spread represents the difference between the yield on
earning assets and the cost of the Company's deposits.
(6) Net interest margin represents net interest income (tax equivalent basis)
divided by average interest earning assets.
22
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 Company did not record any
provision for loan losses in the first nine months of 2002. This compares to
$36,000 in provision for loan losses recorded in the first nine months of last
year. The Bank has not recorded any provision for loan losses in 2002 because it
has had minimal net loan charge-offs in the last two years. 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 affect 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 currently 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, 2002, the allowance for loan losses was $2,641,000 representing 807.6% of
nonaccrual loans. The Bank's nonaccrual loans totaled $327,000 at September 30,
2002 down from $644,000 at December 31, 2001 and $566,000 at September 30, 2001.
The Bank had net loan charge-offs for the nine months ended September 30, 2002
and 2001 of $2,000 and $16,000, respectively. Management believes that the
allowance for loan losses as of September 30, 2002 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 decreased $1,523,000 to $2,689,000 for the first nine
months of 2002 from $4,212,000 for the same period of the prior year. This
decrease is due primarily to lower securities gains in the first nine months of
2002.
23
Non-Interest Income (continued)
Net gains on securities available for sale totaled $1,669,000 in the first
nine months of 2002 compared to $3,107,000 in the same period last year.
Realized gains on the sale of equity securities and debt securities totaled
$1,392,000 and $344,000, respectively, for the nine months ended September 30,
2002. In addition, the Company in the first nine months of 2002 recorded a
charge to earnings of $67,000 due to equity securities in its investment
securities portfolio having suffered a loss in market value that was considered
by management to be other than temporary. The decrease in securities gains in
the first nine months of 2002 is primarily attributable to the continued decline
in equity securities prices during recent months. In the face of a stock market
which has declined in the last couple of years, the Company sought to maximize
the value of its equity securities by selling securities that it expected would
decline in value. Over the last 30 months the Company has taken approximately
$8.2 million in gains on equity securities available for sale and trading.
Consequently, as a result of the equity securities gains the Company has taken
and the decline in equity market prices, the net unrealized gains in the
Company's equity securities portfolio have been exhausted. During this same
period falling interest rates have increased the value of the Company's debt
securities and as a result net unrealized gains on all securities available for
sale were $11.5 million at September 30, 2002. (See net unrealized gains on
securities available for sale at September 30, 2002 on page 29 of this report.)
This is an increase of $948,000 over net unrealized gains on securities
available for sale at December 31, 2001. (See page 30 of this report) Net
unrealized gains on securities available for sale, net of tax effect, are a
positive $7.2 million at the end of the third quarter 2002. Due to the decline
in equity market prices over the past nine months the Company expects that
opportunities for securities gains from the equity portfolio will be
substantially reduced in future quarters. In addition, if these market
conditions persist or deteriorate further, the Company may incur losses on the
sales of its equity securities.
Net gains on trading securities increased to $132,000 for the first nine
months of 2002 from $106,000 for the same period last year. During the first
nine months of 2002, the Company recorded net trading securities gains on sales
of marketable equity securities and U.S. Treasury obligations of $22,000 and
$56,000, respectively. Net gains on trading securities in the first nine months
of 2002 also include mark-to-market gains on U.S. Treasury obligations of
$54,000. Falling interest rates and volatility in the bond markets have provided
the Company with trading gains that may not be available in future periods.
Trading gains in the bond portfolio are more likely during periods of falling
interest rates.
The Bank's deposit account service fees and other non-interest income
totaled $427,000 and $461,000, respectively, for the first nine months of 2002
compared to $482,000 and $517,000, respectively, for the first nine months of
2001. The decline in other non-interest income is due primarily to the assets in
the Company's deferred compensation plan having declined in market value in the
nine months ended September 30, 2002 versus having appreciated in value in the
same period last year. This decrease of $72,000 is offset by an equivalent
decline in deferred compensation expense under the salaries and employee
benefits expense component as reflected below.
Non-Interest Expense
Non-interest expense for the nine months ended September 30, 2002 increased
$262,000 or 3.0% to $8,952,000 from $8,690,000 for the same period last year.
This increase is due primarily to increases in salaries and employee benefits
and professional services expenses.
24
Salaries and employee benefits, the largest component of non-interest
expense increased $486,000 or $10.0% to $5,360,000 for the first nine months of
2002, from $4,874,000 for the comparable period of 2001. This increase reflects
an increase in salaries of $188,000 due primarily to merit increases, an
increase in pension costs of $256,000 and an increase in health insurance and
other employee related costs partially offset by a decrease in deferred
compensation expense referred to in the non-interest income section above.
Occupancy and equipment expenses declined $91,000 or 5.8% to $1,491,000 for
the first nine months of 2002, from $1,582,000 for the same period last year.
This decrease is due in part to the construction of one new branch and the
purchase of another branch, replacing existing leases and thus reducing net
occupancy expenses.
Professional services expense increased $83,000 or 24.3% to $424,000 for
the first nine months of 2002, from $341,000 for the same period last year. The
increase is due primarily to higher legal and audit fees.
Amortization of intangibles expense decreased $216,000 for the first nine
months of 2002, compared to the same period 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.
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, totaled
$1,648,000 for the nine months ended September 30, 2002, unchanged from the same
period last year.
Income Tax Expense
The provision for federal and state income taxes decreased to $4,254,000
for the nine months ended September 30, 2002 from $4,484,000 for the same period
in 2001. This decrease is due primarily to lower income before income taxes in
the first nine months of 2002 partially offset by a slight increase in the
Company's effective income tax rate. The Company's combined effective income tax
rate for the first nine months of 2002 is 36.0% compared to 35.7% for the same
period a year ago. The Company's income before income taxes was $11,816,000 for
the first nine months of 2002 compared to $12,549,000 for the first nine months
of 2001.
25
Financial Condition
The Company's total assets amounted to $1.004 billion as of September 30,
2002, an increase of $32.7 million or 3.4% from $971.2 million at December 31,
2001. This reflects an increase in total investments of $33.6 million or 3.4%
and a decrease in the Bank's loan portfolio of $3.4 million or less than 1%.
Cash and due from banks increased $1.2 million and all other assets increased
$1.3 million.
Loans
The loan portfolio decreased $3.4 million or less than 1% in the first nine
months of 2002. This includes a decline in commercial loans of $15.0 million due
to a loan with a single borrower that was repaid. At September 30, 2002, the
loan portfolio, net of allowance for loan losses, was $324.9 million
representing 32.4% 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 $307.1 million at September 30, 2002,
representing 93.7% of the total loan portfolio. See page 32 of this Form 10-Q
for a table setting forth the composition of the loan portfolio at September 30,
2002 and year-end 2001.
Lower interest rates in the first nine months of 2002 when compared to the
same period last year resulted in higher mortgage loan refinancing activity and
increased loan origination growth for the Bank. In the first nine months of
2002, the Bank originated loans of $75.8 million, an increase of $4.2 million or
5.9% from the $71.6 million in loans originated in the first nine months of last
year.
Asset Quality
Asset quality remains strong. Non-accrual loans, generally those loans
which are 90 days or more delinquent, were $327 thousand and $644 thousand,
respectively, at September 30, 2002 and December 31, 2001. This represents 0.10%
of total loans at September 30, 2002.
The Bank's allowance for loan losses at September 30, 2002 totaled $2.6
million, representing 808% of non-accrual loans and 0.81% 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. However, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on judgments
different from those of management. The Bank has no real estate acquired through
foreclosure at September 30, 2002.
26
Financial Condition (continued)
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 $29.8 million or 3.5% to
$879.5 million at September 30, 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 $131.6 million or 34.3%, partially offset by a
decrease in time certificates of deposit of $102.1 million or 26.6%. Other
deposits grew by $0.3 million during the first nine months of 2002. For
information concerning the composition of the Bank's deposits at September 30,
2002 and year-end 2001, see page 35 of this Form 10-Q.
Stockholders Equity
Total stockholders' equity increased to $117.7 million at September 30,
2002, representing a book value per share of $25.18, from $114.9 million
representing a book value per share of $24.34 at December 31, 2001. The
Company's book value per share as of year-end 2001 has been adjusted to reflect
the three-for-two split of the Company's common stock on April 19, 2002.
Investments
At September 30, 2002, the Company's investment portfolio, consisting of
investment securities (including mortgage-backed securities), short-term
investments and interest-bearing bank deposits totaled $652.2 million
representing 65.0% of total assets, compared to $618.5 million or 63.7% of total
assets at December 31, 2001. The investment securities portfolio included U.S.
government and agency obligations, mortgage-backed securities and collateralized
mortgage obligations. The Bank also maintains an equity securities portfolio,
valued at $13.3 million as of September 30, 2002, that has yielded substantial
realized and unrealized gains in recent years. While the Company's equity
securities portfolio has produced significant realized gains in recent years,
management does not expect this to continue under current market conditions. The
Company expects that opportunities for securities gains from the equity
portfolio will be substantially reduced in future quarters. In addition, if
these market conditions persist or deteriorate further, the Company may incur
losses on the sales of its equity securities. For further information concerning
the composition, maturity and market value of the Bank's investment securities,
see pages 29 through 31 of this Form 10-Q.
27
Financial Condition - Investments (continued)
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 $219.5 million at September 30, 2002 versus $265.0 million at year-end
2001. This decrease is due largely to the prepayments received during this
period of low interest rates.
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) 2002 2001
------------- ------------
U.S. Treasury obligations $27,387 $ 3,086
Investments in mutual funds 3 3
------ -------
Total $27,390 $ 3,089
28
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
September 30, 2002 with gross unrealized gains and losses, follows:
- -----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At September 30, 2002 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations $ 92,548 $ 2,266 $ -- $ 94,814
U.S. Government agency obligations 67,137 723 (6) 67,854
- -----------------------------------------------------------------------------------------
Total 159,685 2,989 (6) 162,668
- -----------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage
Association 17,069 1,209 -- 18,278
Federal Home Loan Mortgage
Corporation 189,504 10,043 -- 199,547
Federal National Mortgage
Association 857 35 -- 892
Collateralized mortgage
obligations 740 18 -- 758
- -----------------------------------------------------------------------------------------
Total mortgage-backed securities 208,170 11,305 -- 219,475
- -----------------------------------------------------------------------------------------
Total debt securities 367,855 14,294 (6) 382,143
- -----------------------------------------------------------------------------------------
Equity securities 16,129 259 (3,091) 13,297
- -----------------------------------------------------------------------------------------
Total securities available for sale 383,984 $ 14,553 $ (3,097) $395,440
- -----------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 11,456
- -----------------------------------------------------------------------------------------
Total securities available
for sale, net 395,440
- -----------------------------------------------------------------------------------------
Total investment securities, net $395,440
- -----------------------------------------------------------------------------------------
Trading securities $ 27,335 $ 27,390
- -----------------------------------------------------------------------------------------
29
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
- -----------------------------------------------------------------------------------------
30
Investments (continued)
The amortized cost and estimated market value of debt securities available
for sale by contractual maturity at September 30, 2002 and December 31, 2001 are
shown in the following tables. Actual maturities will differ from contractual
maturities because of callable government agency securities in the Bank's
portfolio that may be called prior to maturity.
September 30, 2002
-------------------------
Available for Sale
Amortized Market
Maturing: Cost Value
(In thousands)
Within 1 year $ 23,067 $ 23,426
After 1 year but within 5 years 132,481 135,026
After 5 years but within 10 years 4,000 4,082
After 10 years but within 15 years 137 134
-------- --------
U.S. Treasury and Government agency obligations (a) 159,685 162,668
Mortgage-backed securities 208,170 219,475
-------- --------
Total $367,855 $382,143
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
-------- --------
U.S. Treasury and Government agency obligations (b) 90,074 91,136
Mortgage-backed securities 256,900 265,031
-------- --------
Total $346,974 $356,167
(a) At September 30, 2002 the Bank's debt securities available for sale
portfolio included $67,000,000 (amortized cost) in callable securities with
a market value of $67,720,000.
(b) At December 31, 2001 the Bank's debt securities available for sale
portfolio included $4,000,000 (amortized cost) in callable securities with
a market value of $4,045,000.
31
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
- ---------------------------------------------------------------------------------------
At At
(In thousands) September 30, 2002 December 31, 2001
- ---------------------------------------------------------------------------------------
Mortgage loans:
Residential $307,283 $294,023
Commercial 2,464 2,641
Construction 844 993
- ---------------------------------------------------------------------------------------
310,591 297,657
Premium on loans 22 51
Deferred mortgage loan origination fees (1,054) (1,239)
- ---------------------------------------------------------------------------------------
Total mortgage loans 309,559 296,469
Other loans:
Consumer:
Installment 964 1,178
Guaranteed education 3,790 4,937
Other secured 696 873
Home equity lines of credit 12,261 12,271
Unsecured 203 201
- ---------------------------------------------------------------------------------------
Total consumer loans 17,914 19,460
Commercial 115 15,088
- ---------------------------------------------------------------------------------------
Total other loans 18,029 34,548
- ---------------------------------------------------------------------------------------
Total loans $327,588 $331,017
- ---------------------------------------------------------------------------------------
The Bank's loan portfolio decreased $3.4 million in the first nine months
of 2002, from $331.0 million at December 31, 2001 to $327.6 million at September
30, 2002. Mortgage loans increased $13.1 million, however, this increase was
offset by a decrease in consumer loans of $1.5 million and a decrease of $15.0
million in commercial loans. The decrease in commercial loans is due to a loan
with a single borrower that was repaid in the second quarter 2002. The loan was
refinanced with another financial institution.
Loan originations in the recent quarter increased slightly from the second
quarter 2002 to $21.5 million from $18.1 million. However, this reflects a
reduction from the $27.7 million in loans originated in the third quarter of
last year. Much of the Bank's loan origination volume is due to mortgage
refinancing. The Bank's mortgage refinancing volume declined in the third
quarter of 2002 compared to the third quarter of 2001, despite lower interest
rates. This was partly due to the Bank's less aggressive pricing strategy during
the recent quarter due to the continuing decline in mortgage interest rates.
Loan originations increased by $4.2 million to $75.8 million in the first
nine months of 2002 compared to $71.6 million in the first nine months of last
year.
32
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing
assets at September 30, 2002 and 2001, and December 31, 2001:
At At At
September 30, December 31 September 30,
(In thousands) 2002 2001 2001
- -----------------------------------------------------------------------------------
Non-Performing Assets:
Non-accrual loans $ 327 $ 644 $ 566
Real estate acquired through foreclosure -- -- --
- -----------------------------------------------------------------------------------
Total non-performing assets $ 327 $ 644 $ 566
- -----------------------------------------------------------------------------------
Allowance for loan losses $ 2,641 $ 2,643 $ 2,614
Allowance as a percent of
non-accrual loans 807.6 % 410.4 % 461.8 %
Allowance as a percent of
non-performing assets 807.6 % 410.4 % 461.8 %
Non-accrual loans as a percent
of total loans 0.10% 0.19% 0.17%
Non-performing assets as a percent
of total assets 0.03% 0.07% 0.06%
- -----------------------------------------------------------------------------------
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 September 30,
2002 as noted in the table above. The principal balance of non-accrual loans was
down to $327,000, or approximately 0.10% of total loans at September 30, 2002.
The Bank did not have any impaired loans as of September 30, 2002.
33
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Nine Months Ended
September 30,
2002 2001
- --------------------------------------------------------------------------------
(In thousands)
Balance at beginning of period $ 2,643 $ 2,594
Provision for loan losses -- 36
Recoveries of loans previously charged-off 1 1
Charge-offs (3) (17)
- --------------------------------------------------------------------------------
Balance at end of period $ 2,641 $ 2,614
- --------------------------------------------------------------------------------
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 affect 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 currently 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, 2002 the balance of the allowance for loan losses was
$2,641,000 representing 807.6% 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.
34
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 $29.8 million to $879.5 million at
September 30, 2002 from $849.7 million at December 31, 2001. For core deposit
growth, the Company has emphasized its tiered rate smart savings account and its
high rate silver savings account for bank customers that are age 65 and over.
Most of the growth in deposits during the first nine months of 2002 has been in
these accounts. During this period, savings and money market accounts increased
$131.6 million as depositors shifted from certificates of deposits to savings
accounts for increased liquidity in this low interest rate environment. The
Bank's deposits also grew as some depositors sought a safe harbor from the
equity markets. In the event the equity markets reverse, this could result in
deposit outflow for the Bank. The shift to savings accounts contributed to the
decrease in time certificates of deposit from $383.6 million at December 31,
2001 to $281.5 million at September 30, 2002.
The composition of the Bank's total deposits as of the dates shown are
summarized as follows:
September 30, December 31,
2002 2001
- ------------------------------------------------------------------------------
(In thousands)
Demand and NOW $ 82,512 $ 82,143
Savings and money market accounts 515,535 383,960
Time certificates of deposit 281,469 383,610
Deposit acquisition premium,
net of amortization -- (29)
- ------------------------------------------------------------------------------
Total deposits $879,516 $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
September 30, 2002, the Company had $1,090,000 of goodwill on its balance sheet.
35
PART I. ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in prices. The Company's investment securities portfolio
includes equity securities with a market value of approximately $13.3 million at
September 30, 2002. Movements in equity prices affect the value of the equity
portfolio and affect the amount of securities gains or losses that the Company
realizes from the sale of equity securities. The Company's debt securities
portfolio has a market value of approximately $382.1 million at September 30,
2002. Interest rate changes affect the value of the debt securities portfolio.
Rising interest rates would generally reduce the value of the debt securities
portfolio.
Interest Rate Risk
Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change the interest income and expense
streams associated with the Company's financial instruments also change thereby
impacting net interest income, the primary component of the Company's earnings.
The ongoing monitoring and management of this risk is an important component of
the Company's asset/liability management process. For additional information
about the Company's asset/liability management and interest rate risk, see the
Management Discussion and Analysis section of the Company's Form 10-K for the
year ended December 31, 2001.
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, investment securities called
before maturity 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 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, 2002 the Bank had $225.2
million or 22.4% of total assets and $190.1 million or 18.9% of total assets
invested, respectively, in overnight federal funds sold and money market funds,
and United States Treasury and Government agency 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
36
Liquidity and Capital Resources (continued)
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 September 30, 2002, the Bank had a leverage Tier I
capital to total assets ratio of 10.17%, a Tier I capital to risk- weighted
assets ratio of 30.11% and a total capital to risk-weighted assets ratio of
30.89%. The Company, on a consolidated basis, had ratios of leverage Tier I
capital to total assets of 10.87%, Tier I capital to risk-weighted assets of
32.15% and total capital to risk-weighted assets of 32.94% at September 30,
2002.
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.
PART I. ITEM 4
Disclosure Controls and Procedures
MASSBANK Corp. evaluated the design and operation of its disclosure
controls and procedures to determine whether they are effective in ensuring that
the disclosure of required information is timely made in accordance with the
Exchange Act and the rules and forms of the Securities and Exchange Commission.
This evaluation was made with the participation of MASSBANK Corp.'s principal
executive officer and principal financial officer within the 90-day period prior
to the filing of this Quarterly Report on Form 10-Q. The principal executive
officer and principal financial officer have concluded, based on their review,
that MASSANK Corp.'s disclosure controls and procedures, as defined at Exchange
Act Rules 13(a)-14(c) and 15d-14(c) are effective to ensure that information
required to be disclosed by MASSBANK Corp. in reports that it files under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. No
significant changes were made to MASSBANK Corp.'s internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
37
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, 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. Exhibit Index:
Exhibit Number:
10.3.16 Amended and Restated Employment Agreement with
Gerard H. Brandi dated as of October 28, 2002.
10.3.17 Amended and Restated Employment Agreement with
David F. Carroll dated as of October 28, 2002.
10.3.18 Amended and Restated Employment Agreement with
Reginald E. Cormier dated as of October 28, 2002.
10.3.19 Amended and Restated Employment Agreement with
Donald R. Washburn dated as of October 28, 2002.
10.3.20 Amended and Restated Employment Agreement with
Donna H. West dated as of October 28, 2002.
10.3.21 Form of Employment Agreement with Thomas J.
Queeney dated as of October 28, 2002.
11 Statement regarding computation of per share
earnings.
b. Reports on Form 8-K
None.
38
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 13, 2002 /s/ Gerard H. Brandi
---------------------------
(Signature)
Gerard H. Brandi
President and CEO
Date: November 13, 2002 /s/ Reginald E. Cormier
---------------------------
(Signature)
Reginald E. Cormier
Sr. V.P., Treasurer and CFO
39
CERTIFICATIONS
I, Gerard H. Brandi certify that:
1. I have reviewed this quarterly report on Form 10Q of MASSBANK Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers, and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
- designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
- evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date")' and
- presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
- all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
- any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002 /s/ Gerard H. Brandi
-------------------------------------
Gerard H. Brandi, President and CEO
(principal executive officer)
40
CERTIFICATIONS
I, Reginald E. Cormier certify that:
1. I have reviewed this quarterly report on Form 10Q of MASSBANK Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers, and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
- designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
- evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date")' and
- presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
- all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
- any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002 /s/ Reginald E. Cormier
----------------------
Reginald E. Cormier, Sr. V.P., Treasurer & CFO
(principal financial officer)
41