1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K /x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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) (Zip Code) Registrant's telephone number, including area code: (781) 662-0100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share (Title of Class) 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.____ The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price for the registrant's common stock on March 15, 2000 as reported by NASDAQ, was $82,604,308. As of March 15, 2000, there were 3,264,193 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of MASSBANK Scorpios 1999 Annual Report to Stockholders are incorporated by reference in Parts I, II, III and IV of this Form 10-K. Portions of the Definitive Notice of Annual Meeting and Proxy Statement for the 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. 2 Cautionary Statement. Certain statements contained in this report or incorporated herein by reference are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume" and other similar expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: fluctuations in interest rates, price volatility in the stock and bond markets, inflation, government regulations and economic conditions and competition in the geographic and business areas in which the Company conducts its operations; and increases in loan defaults. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. PART I Item 1. Business Business of MASSBANK Corp. General MASSBANK Corp. (the "Company") is a general business corporation incorporated under the laws of the State of Delaware on August 11, 1986. MASSBANK Corp. was organized for the purpose of becoming the holding company for MASSBANK (the "Bank"). The Company is a one-bank holding company registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. As of and since December 2, 1986, the effective date of the reorganization whereby MASSBANK Corp. became the holding company for the Bank, the Bank has been a wholly-owned subsidiary of MASSBANK Corp. The only office of MASSBANK Corp., and its principal place of business, is located at the main office of the Bank at 123 Haven Street, Reading, Massachusetts 01867. MASSBANK Corp. currently has no material assets other than its investment in the Bank. The Company's primary business, therefore, is managing its investment in the stock of the Bank. MASSBANK Corp. is classified by the Commonwealth of Massachusetts as a securities corporation for tax purposes which restricts its business to buying, selling, dealing in, or holding securities on its own behalf. In the future, MASSBANK Corp. may become an operating company or acquire banks or companies engaged in bank-related activities. 2 3 The principal sources of revenues for MASSBANK Corp. (the "Parent Company") only are dividends from the Bank and, to a lesser extent, interest income received from its interest-bearing bank deposits. These revenues are used primarily for the payment of dividends to stockholders and for the purchase of stock pursuant to the Company's stock repurchase program. MASSBANK Corp.'s (Parent Company) only assets at December 31, 1999 were represented by its investment in the Bank of $101.4 million and other assets of $0.9 million. The Company's liabilities consisted of loan indebtedness of $0.5 million and other liabilities of less than $0.3 million. The proceeds of the loan were used to purchase shares of the Company's common stock for the Employee Stock Ownership Plan ("ESOP"). See Note 17 to the Consolidated Financial Statements for Parent Company only financial information. At December 31, 1999 MASSBANK Corp. on a consolidated basis had total assets of $924.7 million, deposits of $818.1 million, and stockholders' equity of $101.5 million which represents 11.0% of total assets. Book value per share at December 31, 1999 was $30.65. The Company does not own or lease any real or personal property. Instead it intends to utilize during the immediate future the premises, equipment and furniture of the Bank without the direct payment of rental fees to the Bank. Competition The primary business of MASSBANK Corp. currently is the ongoing business of the Bank. Therefore, the competitive conditions faced by MASSBANK Corp. currently are the same as those faced by the Bank. See "Business of MASSBANK - Competition." In addition, many banks and financial institutions have formed holding companies. It is likely that these holding companies will attempt to acquire commercial banks, thrift institutions or companies engaged in bank-related activities. MASSBANK Corp. would face competition in undertaking any such acquisitions and in operating any such entity subsequent to its acquisition. Employees MASSBANK Corp. does not employ any persons; its management also serves as management of, and is paid by, the Bank. See "Item 10 - Directors and Executive Officers of the Registrant." MASSBANK Corp. utilizes the support staff of the Bank from time to time and does not pay any separate salaries or expenses in connection therewith. Dividends MASSBANK Corp. paid total cash dividends of $1.11 per share in 1999 compared to $1.02 per share in 1998 and $0.885 per share in 1997. The Company's dividend payout ratios (cash dividends paid divided by net income) for 1999, 1998 and 1997 were 33%, 33% and 31%, respectively. Stock Repurchase Program During 1999, the Company purchased 210,967 shares of its common stock pursuant to its ongoing stock repurchase program. At December 31, 1999 there were 91,231 shares available for repurchase under the current program. 3 4 Preferred Stock Purchase Rights In January 2000, the Company adopted a new Shareholder Rights Plan to replace an existing Plan which was expiring. Accordingly, the Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right for each outstanding share of MASSBANK Corp. common stock. These Rights, which expire January 18, 2010, entitle their holders to purchase from the Company one one-thousandth of a share (a "unit") of Series B Junior Participating Cumulative Preferred Stock, par value $1.00 per share ("preferred stock") at a cash exercise price of $136.00 per unit, subject to adjustment. The Rights will trade separately from the common stock and will become exercisable when a person or group has acquired 11% or more of the outstanding common stock, upon a tender offer that would result in a person or group acquiring 11% or more of the outstanding common stock, or upon the declaration by the Board of Directors that any person holding 10% or more of the outstanding shares of common stock is an "adverse person". In the event a person or group acquires 11% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person", each Right would entitle its holder (except if the holder is a person or group described above) to receive upon exercise sufficient units of preferred stock to equal a value of two times the exercise price of the Right. In the event the Company is acquired in a merger or other business combination transaction or if 50% or more of the Company's assets or earning power is sold, each holder may receive upon exercise common stock of the acquiring company having a market value equal to two times the exercise price of the Right. The Rights are redeemable in whole, but not in part, by the Board of Directors at a price of $.01 per Right any time before a person or group acquires 11% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person". 4 5 Business of MASSBANK General MASSBANK is a Massachusetts-chartered savings bank founded in 1872 as the Melrose Savings Bank. In 1983, the Reading Savings Bank was merged into the Melrose Savings Bank and the name of the resulting institution was changed to MASSBANK for Savings. In 1986, the Bank converted from mutual to stock form of ownership. In 1996, the name of the bank was changed from "MASSBANK for Savings" to "MASSBANK". The Bank is primarily engaged in the business of attracting deposits from the general public through its fifteen full service banking offices in Reading, Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Stoneham, Tewksbury, Westford and Wilmington, and originating residential and commercial real estate mortgages, construction loans, commercial loans, and a variety of consumer loans. The Bank invests a significant portion of its funds in U.S. Treasury and Government agency securities, mortgage-backed securities, federal funds sold, and other authorized investments. The Bank also invests a portion of its funds in equity securities traded on a national securities exchange or quoted on the NASDAQ System. The Bank's earnings depend largely upon net interest income, which is the difference between the interest and dividend income derived by the Bank from its loans and investments and the interest paid by the Bank on its deposits and borrowed funds. The Company's earnings results are also affected by the provision for loan losses; non-interest income, such as fee-based revenues and net securities gains or losses; non-interest expense; and income taxes. The Bank's deposits are insured to applicable limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC") and excess deposit accounts are insured by the Depositors Insurance Fund ("DIF"), a private industry-sponsored deposit insurer. The Bank recognizes that loan and investment opportunities change over time and that yields derived from such opportunities can vary significantly even when the risks associated with those opportunities are comparable. By developing a relatively liquid loan and investment portfolio, the Bank has attempted to position itself so as to be able to take advantage of these changing opportunities. Consequently, the Bank expects that the relative mix of its loan and investment portfolios will change over time in response to changing market conditions. 5 6 Market Area The Bank is headquartered in Reading, Massachusetts, which is located approximately 15 miles north of Boston. The Bank's market area includes a significant portion of eastern Massachusetts and is served by a network of 15 branch offices located on a broad arc stretching from Melrose and Everett in the south, Dracut in the north, and Westford in the west. The Bank's general market area consists of the municipalities in which it operates banking offices and all of the contiguous cities and towns. The Bank currently operates banking offices in the municipalities of Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Reading, Stoneham, Tewksbury, Westford and Wilmington. Lending Activities The Bank's net loan portfolio totaled $322.8 million at December 31, 1999. The following table sets forth information concerning the Bank's loan portfolio by type of loan at the dates shown: - ------------------------------------------------------------------------------------------- (In thousands) At December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------- Mortgage loans: Residential: Conventional $286,429 $280,681 $243,482 $216,832 $209,408 FHA and VA 740 1,181 1,843 2,515 3,244 Commercial 2,471 2,257 3,861 4,121 6,975 Construction 232 730 492 1,388 1,516 - ------------------------------------------------------------------------------------------- Total mortgage loans 289,872 284,849 249,678 224,856 221,143 Add: premium on loans 159 259 343 325 388 Less: deferred mortgage loan origination fees (1,451) (1,454) (1,223) (1,042) (928) - ------------------------------------------------------------------------------------------- Mortgage loans, net 288,580 283,654 248,798 224,139 220,603 - ------------------------------------------------------------------------------------------- Other loans: Consumer: Installment 1,418 1,547 2,199 1,967 1,988 Guaranteed education 7,037 7,967 8,934 9,729 10,420 Other secured 1,318 1,366 1,600 1,611 2,012 Home equity lines of credit 11,737 10,159 10,470 11,316 13,144 Unsecured 225 235 266 271 265 - ------------------------------------------------------------------------------------------- Total consumer loans 21,735 21,274 23,469 24,894 27,829 Commercial 15,050 61 36 628 753 - ------------------------------------------------------------------------------------------- Total other loans 36,785 21,335 23,505 25,522 28,582 - ------------------------------------------------------------------------------------------- Total loans 325,365 304,989 272,303 249,661 249,185 Less: Allowance for loan losses (2,555) (2,450) (2,334) (2,237) (2,529) - ------------------------------------------------------------------------------------------- Net loans $322,810 $302,539 $269,969 $247,424 $246,656 - ------------------------------------------------------------------------------------------- 6 7 The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 1999: Maturity/Scheduled Payments (1) Within One to Five to After (In thousands) one year five years ten years ten years Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $ 193 $10,753 $76,243 $198,698 $285,887 Commercial & construction 405 149 950 1,189 2,693 - ------------------------------------------------------------------------------------------- Total mortgage loans 598 10,902 77,193 199,887 288,580 Other loans 16,466 2,627 4,715 12,977 36,785 - ------------------------------------------------------------------------------------------- Total loans $17,064 $13,529 $81,908 $212,864 $325,365 - ------------------------------------------------------------------------------------------- (1) Loan amounts are accumulated as if the entire balance came due on the last contractual payment date. Accordingly, the amounts do not reflect proceeds from contractual loan amortization or anticipated prepayments. The following table shows the amounts, included in the table above, which are due after one year and which have fixed or adjustable interest rates: Total Due After One Year Fixed Adjustable (In thousands) Rate Rate Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $246,871 $38,823 $285,694 Commercial & construction 179 2,109 2,288 - ------------------------------------------------------------------------------------------- Total mortgage loans 247,050 40,932 287,982 Other loans 1,547 18,772 20,319 - ------------------------------------------------------------------------------------------- Total loans $248,597 $59,704 $308,301 - ------------------------------------------------------------------------------------------- Mortgage Lending. The Bank believes that the repayment periods of long- term first mortgage loans, the general resistance of the public to variable rate mortgage instruments and the highly competitive nature of the mortgage industry require a prudent approach to mortgage lending. Consequently, as part of its policy of generally attempting to match the maturities of its assets and its liabilities, the Bank has kept its mortgage loan portfolio to a level at which the Bank believes there is an acceptable risk-to-reward ratio in light of opportunities in the market-place and its long-term objectives. The Bank's net loan portfolio represented approximately 34.9% and 32.0% of the Company's total assets at December 31, 1999, and 1998, respectively. The Bank realizes that this low level of loans with respect to assets in relation to the securities portfolio results in a reduction in yield; however, the Bank believes that this reduction would be more than offset in risk and loss associated with lending during periods of economic decline. In today's economic climate, the Bank would prefer a more even mix of loans and securities. However, there remains a tremendous amount of competition for mortgages in the Bank's area, and developing a quality loan portfolio takes time. In 1999, the Bank's total loan portfolio continued to grow, showing a 6.7% increase to $325.4 million compared to $305.0 million at the end of 1998. 7 8 Mortgage Lending (continued) Loan originations come from a number of sources, including referrals from real estate brokers, walk-in customers, purchasers of property owned by existing customers and refinancings for existing customers. In addition to actively soliciting loan referrals, the Bank conducts an advertising and promotion program, directed both toward the general public and real estate professionals who might refer potential borrowers. Substantially all of the real estate loans originated by the Bank during 1999 were secured by real estate located in the Bank's primary lending area, reflecting the Bank's commitment to serve the credit needs of the local communities in which it operates banking offices. The Bank makes both conventional fixed and adjustable-rate loans on one- to-four family residential properties for a term of ten to thirty years. The Bank currently retains all of the mortgages it originates for its own portfolio. These are primarily 10, 12, 15 or 20 year fixed rate and adjustable rate mortgages. The few long-term (25 or 30 year) fixed rate mortgage loans that the Bank originates from time to time are also added to the loan portfolio. Adjustable rate mortgage loans ("ARMs") have rates that are re-set at either 1, 3, 5 or 10 year intervals and provide a margin over various mortgage indices. In recent years, the Bank has instituted several new loan programs which have been well received by customers. It instituted a program featuring a 5/1 and 7/1 year ARM product with an initial fixed rate for 5 or 7 years and a 1 year adjustable rate thereafter. A special First Time Home Buyers Program has also been instituted featuring a discounted 7/1 ARM. This program is designed for first-time home buyers meeting certain income and property location restrictions. The Bank has also introduced the "Home Town Advantage" mortgage program which has produced some good results. This program offers homebuyers a (0.125) percent discount on their mortgage rate if they purchase residential property located in one of the communities where the bank operates a banking office. At December 31, 1999, 1-4 family residential mortgage loans totaled $285.9 million, or 87.9% of the total loan portfolio, compared to $280.7 million, or 92.0% of the total loan portfolio, at December 31, 1998. Residential mortgage loan originations amounted to $55.2 million during 1999, down from $93.8 million in 1998. Origination volumes are sensitive to interest rates and are affected by the interest rate environment. In 1999, the upturn in interest rates significantly reduced the demand for mortgage refinancings. Consequently, the Bank was not able to reach the prior year's level of residential mortgage loan originations. The Bank also originates construction loans and mortgage loans secured by commercial or investment property such as multifamily housing, strip shopping centers, office buildings and retail buildings. At December 31, 1999, commercial and multifamily real estate mortgages and construction loans totaled approximately $2.7 million, or 0.8% of the total loan portfolio, compared to $3.0 million, or 1.0% of the total loan portfolio, at December 31, 1998. In 1999, commercial and multifamily real estate mortgage loan and construction loan originations amounted to $0.8 million. 8 9 Mortgage Lending (continued) The total amount of first mortgage loans held by the Bank at December 31, 1999 was $288.6 million as indicated in the maturity distribution table appearing on page six. Of this amount, $41.3 million was subject to interest rate adjustments. The remaining $247.3 million in fixed rate mortgage loans represents 26.7% of the Company's total assets. Fees received for originating loans and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. The Bank also receives fees and charges relating to existing loans, primarily late charges and prepayment penalties. Other Loans. The Bank makes a variety of consumer loans and had a consumer loan portfolio of approximately $21.7 million at December 31, 1999 representing 6.7% of the Bank's total loan portfolio. Of this amount $7.0 million or 2.2% of the total loan portfolio are education loans made under the Massachusetts Higher Education Assistance Corporation. The Bank may sell education loans in the future. The balance of the Bank's consumer loan portfolio consists of home equity lines of credit and installment consumer credit contracts such as automobile loans, home improvement loans and other secured and unsecured financings. These loans totaled $14.7 million at December 31, 1999, representing 4.5% of the Bank's total loan portfolio. At December 31, 1999, the Bank also had $15.1 million in outstanding loans to commercial enterprises not secured by real estate. Loan Approval. The Bank's loan approval process for all loans generally includes a review of an applicant's financial statements, credit history, banking history and verification of employment. For mortgage loans, the Bank generally obtains an independent appraisal of the subject property. The Bank has a formal lending policy approved by the Board of Directors of the Bank which delegates levels of loan approval authority to Bank personnel. All loans in excess of established limits require approval of the Bank's Board of Directors. The Bank issues commitments to prospective borrowers to make loans subject to certain conditions for generally up to 60 days. The interest rate applicable to the committed loans is usually the rate in effect at the time the application fee is paid. At December 31, 1999, the Bank had issued commitments on residential first mortgage loans totaling $2,829,000, and had commitments to advance funds on construction loans and unused credit lines, including unused portions of home equity lines of credit, of $65,000 and $31,693,000, respectively. Loan Delinquencies. It is the Bank's policy to manage its loan portfolio so as to recognize problem loans at an early stage and thereby minimize loan losses. Loans are considered delinquent when any payment of principal or interest is 30 days or more past due. The Bank generally commences collection procedures, however, when accounts are 15 days past due. It is the Bank's practice to generally discontinue accrual of interest on all loans for which payments are more than 90 days past due. Loans delinquent for 90 or more days, as shown in the table on the following page, totaled $795,000 at December 31, 1999. 9 10 Real Estate Acquired through Foreclosure. Real estate acquired through foreclosure is comprised of foreclosed properties where the Bank has actually received title and loans determined to be substantially repossessed. Real estate loans that are substantially repossessed include only those loans for which the Bank has taken possession of the collateral but has not completed legal foreclosure proceedings. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Real estate acquired through foreclosure is recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received, less estimated costs to sell the property following foreclosure. Operating expenses and any subsequent provisions to reduce the carrying value to fair value are charged to current period earnings. Gains and losses upon disposition are reflected in earnings as realized. As of year-end 1999, MASSBANK had $62 thousand in real estate acquired through foreclosure in its balance sheet. Non-Performing Assets The following table shows the composition of non-performing assets at the dates shown: - ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Nonaccrual loans: Mortgage loans: Residential: Conventional $ 655 $ 845 $1,536 $1,468 $2,016 FHA and VA -- -- 9 13 14 Commercial -- -- -- -- -- Consumer 140 159 226 120 398 - ------------------------------------------------------------------------------------------------ Total nonaccrual loans 795 1,004 1,771 1,601 2,428 - ------------------------------------------------------------------------------------------------ Real estate acquired through foreclosure: Residential: Conventional 62 86 -- 503 255 - ------------------------------------------------------------------------------------------------ Total real estate acquired through foreclosure 62 86 -- 503 255 - ------------------------------------------------------------------------------------------------ Total non-performing assets $ 857 $1,090 $1,771 $2,104 $2,683 - ------------------------------------------------------------------------------------------------ Percent of non-performing loans to total loans 0.24% 0.33% 0.65% 0.64% 0.97% Percent of non-performing assets to total assets 0.09% 0.12% 0.19% 0.24% 0.31% The reduction in interest income associated with nonaccrual loans is as follows: - ------------------------------------------------------------------------------------------------ (In thousands) Years Ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Interest income that would have been recorded under original terms $ 64 $ 84 $163 $149 $204 Interest income actually recorded 51 61 97 78 60 - ------------------------------------------------------------------------------------------------ Reduction in interest income $ 13 $ 23 $ 66 $ 71 $144 - ------------------------------------------------------------------------------------------------ 10 11 Allowance for Loan Losses. The allowance for loan losses is increased by provisions charged to operations based on management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, 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 available in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. The following table sets forth the activity in the allowance for loan losses during the years indicated: - ------------------------------------------------------------------------------------------------ (In thousands) Years ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Balance at beginning of year $2,450 $2,334 $2,237 $2,529 $2,566 Glendale Co-Operative Bank acquisition -- -- 105 -- -- Provision for loan losses 140 193 260 160 170 Charge-offs: Residential real estate (62) (81) (221) (480) (124) Consumer loans (14) (22) (12) (25) (30) Other loans -- -- (94) (37) (95) Recoveries: Residential real estate 39 17 34 83 41 Commercial real estate -- -- 20 -- -- Consumer loans 2 6 1 7 1 Other Loans -- 3 4 -- -- - ------------------------------------------------------------------------------------------------ Net charge-offs (35) (77) (268) (452) (207) - ------------------------------------------------------------------------------------------------ Balance at end of year $2,555 $2,450 $2,334 $2,237 $2,529 - ------------------------------------------------------------------------------------------------ Net loan charge offs as a percent of average loans outstanding during the period 0.01% 0.03% 0.10% 0.18% 0.08% Allowance for loan losses as a percent of total loans outstanding at year-end 0.79% 0.80% 0.86% 0.90% 1.01% Allowance for loan losses as a percent of nonaccrual loans 321.4 % 244.0 % 131.8 % 139.7 % 104.2 % - ------------------------------------------------------------------------------------------------ 11 12 Investment Activities The Bank believes that investment opportunities in United States Government, corporate and other securities are at times more attractive than the opportunities present in the loan market. As compared to loans, these investments of the Bank are generally shorter-term and hence more liquid, are subject to lower risk of loss, and present an opportunity for appreciation. In addition, these investments often permit the Bank to better match the maturities of its assets and its liabilities. The Bank's investment portfolio is managed by its officers in accordance with an investment policy approved by the Bank's Board of Directors. The objectives of that policy are to provide a level of liquidity, earnings and diversification consistent with the exercise of prudent investment judgment. The policy authorizes the senior management of the Bank to make and execute investment decisions and requires that those persons report all investment transactions to the Bank's Board of Directors at each of its regular meetings. In addition, management is required to report all gains or losses on all securities transactions at each meeting of the Bank's Board of Directors. Purchases and sales of securities by the Bank are generally required to be made on a competitive basis and all investments must be permitted by applicable law. The Bank invests in a wide variety of securities and obligations, including: Federal funds sold (which are sold only to institutions included on the Bank's internally-prepared approved list of adequately capitalized institutions); commercial paper and bankers' acceptances; United States Treasury and Government agency obligations; United States agency guaranteed and other mortgage-backed securities; investment grade corporate debt securities (generally limited to those rated A or better by Standard & Poor's); mutual funds; and equity securities traded on a national securities exchange or quoted on the NASDAQ System. Under the investment policy management determines the appropriate classification of securities at the time of purchase. Those securities that the Company has the intent and the ability to hold to maturity are classified as securities held to maturity and are carried at amortized historical cost. Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in market conditions, interest rates, changes in prepayment risk, the need to increase regulatory capital and other factors. Income on debt securities available for sale is accrued and included in interest and dividend income. The specific identification method is used to determine realized gains or losses on sales of securities available for sale which are also reported in non-interest income under the caption "gains on securities." When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings. 12 13 Investment Activities (continued) Investments classified as trading securities are stated at market with unrealized gains or losses included in earnings. Income on trading securities is accrued and included in interest and dividend income. All of the Company's mortgage-backed securities are currently classified as available for sale. At times of low loan demand, short-term mortgage-backed securities may be used as substitutes for loans as certain of their financial characteristics are very similar to short-term mortgage loans. At December 31, 1999, the Company's investments, which consists of securities held to maturity, securities available for sale (including mortgage-backed securities), trading securities, short-term investments, term federal funds sold and interest-bearing deposits in banks totaled $578.5 million, representing 62.6% of the Company's total assets. 13 14 The following table sets forth the composition of the Company's investment portfolio as of the dates indicated: Investment Portfolio - ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Federal funds sold: Overnight federal funds $ 86,211 $123,207 $ 85,241 Term federal funds -- 25,000 20,000 - ------------------------------------------------------------------------------------------------ Total federal funds sold 86,211 148,207 105,241 Money market funds 24,717 24,569 24,514 Interest-bearing deposits in bank 3,841 2,033 2,083 - ------------------------------------------------------------------------------------------------ Total federal funds sold and other short-term investments $114,769 $174,809 $131,838 - ------------------------------------------------------------------------------------------------ Percent of total assets 12.4% 18.5% 14.2% - ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Securities held to maturity: (a) Other bonds and obligations $ 230 $ 354 $ 372 - ------------------------------------------------------------------------------------------------ Total securities held to maturity $ 230 $ 354 $ 372 Securities available for sale: (b) U.S. Treasury obligations 137,615 114,981 123,021 U.S. Government agency obligations 16,015 8,992 9,813 Marketable equity securities 21,537 21,580 17,545 Investments in mutual funds -- -- 1,114 Mortgage-backed securities 282,335 272,573 330,731 - ------------------------------------------------------------------------------------------------ Total securities available for sale 457,502 418,126 482,224 Trading securities: (b) U.S. Treasury obligations 4,956 29,707 18,542 Investments in mutual funds 1,086 1,086 2,718 - ------------------------------------------------------------------------------------------------ Total trading securities 6,042 30,793 21,260 - ------------------------------------------------------------------------------------------------ Total securities $463,774 $449,273 $503,856 - ------------------------------------------------------------------------------------------------ Percent of total assets 50.2% 47.5% 54.4% - ------------------------------------------------------------------------------------------------ Total investments $578,543 $624,082 $635,694 Total investments as a percent of total assets 62.6% 65.9% 68.7% - ------------------------------------------------------------------------------------------------ (a) At amortized cost. (b) At market value. 14 15 The following tables present the carrying value of debt securities held to maturity and available for sale at December 31, 1999 maturing within stated periods with the weighted average interest yield from securities falling within the range of maturities: Debt Securities Held to Maturity Other bonds and (Dollars in thousands) obligations (1) Total - ------------------------------------------------------------------------------------------------ Maturing after 1 but within 5 years Amount $ 230 $ 230 Yield 6.80% 6.80% - ------------------------------------------------------------------------------------------------ Total Amount $ 230 $ 230 Yield 6.80% 6.80% Average life in years 1.29 1.29 Debt Securities Available for Sale U.S. U. S. Government Mortgage- Treasury agency backed (Dollars in thousands) obligations obligations securities (2) Total - ------------------------------------------------------------------------------------------------ Maturing within 1 year Amount $ 52,845 $6,992 $ 523 $ 60,360 Yield 6.09% 5.19% 5.33% 5.98% Maturing after 1 but within 5 years Amount 82,707 9,000 3,869 95,576 Yield 5.93% 5.46% 8.06% 5.97% Maturing after 5 but within 10 years Amount 2,966 -- 56,571 59,537 Yield 5.85% -- 6.88% 6.83% Maturing after 10 but within 15 years Amount -- -- 221,202 221,202 Yield 6.79% 6.79% Maturing after 15 years Amount -- 151 4,103 4,254 Yield 7.68% 6.16% 6.21% - ------------------------------------------------------------------------------------------------ Total Amount $138,518 $16,143 $286,268 $440,929 Yield 5.99% 5.36% 6.81% 6.50% - ------------------------------------------------------------------------------------------------ Average life in years 1.87 0.97 Average contractual maturity in years 11.86 15 16 (1) Yields on tax exempt obligations have been computed on a tax equivalent basis. (2) Mortgage-backed securities are based on contractual maturities. Actual maturities will differ from contractual maturities due to scheduled amortization and prepayments. At December 31, 1999, the Company did not have an investment in any issuer (other than securities of the U.S. Government and Government Agencies) in excess of 10% of stockholders equity. 16 17 Deposits and Other Sources of Funds General. Deposits have been the Bank's primary source of funds for making investments and loans. In addition to deposits, the Bank's other major sources of funds are derived from amortization and prepayment of loans and mortgage-backed securities, from sales or maturities of securities, and from operations. Deposit flows can vary significantly and are influenced by prevailing interest rates, money market conditions, economic conditions and competition. The Bank can respond to changing market conditions and competition through the pricing of its deposit accounts. Management can attempt to control the level of its deposits to a significant degree through its pricing policies. Another important factor in attracting deposits is convenience. In addition to the Bank's fifteen conveniently located banking offices, customers can access accounts through the Bank's ATM network. The Bank is a member of the Transaxion ("TX"), New York Cash Exchange ("NYCE") and CIRRUS System, Inc. ("CIRRUS") networks which allow access to ATMs in over 100,000 locations worldwide. Deposits. A substantial amount of the Bank's deposits are derived from customers who live or work within the Bank's market area. The Bank does not solicit deposits through any outside agents. The Bank's deposits consist of regular, silver and smart savings accounts, special notice accounts, NOW and Super NOW accounts, business checking accounts, money market deposit accounts, IRA and Keogh accounts, and term deposit accounts. The performance of the stock market in 1999, continued to draw savings from bank deposit accounts making it more difficult to grow bank deposits. As a result, the Bank's deposits decreased by $6.0 million during the twelve months ended December 31, 1999, from $824.0 million at year-end 1998 to $818.0 million at the end of 1999. Borrowed Funds. From time to time the Bank has obtained funds through repurchase agreements with its customers and federal funds purchased. The Bank also has the ability, although it has never exercised it, to borrow from the Federal Reserve Bank and The Depositors Insurance Fund, Inc. The Company did not have any borrowed funds in 1999 or 1998. 17 18 DEPOSITS The following table shows the composition of the deposits as of the dates indicated: (In thousands) at December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Percent Percent Percent of of of Amount Deposits Amount Deposits Amount Deposits Demand and NOW NOW $ 48,422 5.92% $ 52,324 6.35% $ 47,944 5.92% Demand accounts (non interest-bearing) 24,516 3.00 23,849 2.89 18,915 2.34 ------- ---- ------- ---- ------ ----- Total demand and NOW 72,938 8.92 76,173 9.24 66,859 8.26 Savings: Regular savings and special notice accounts 333,535 40.77 326,192 39.59 329,348 40.67 Money market accounts 19,555 2.39 21,857 2.65 23,527 2.90 ------- ------- ----- ------- ----- Total savings 353,090 43.16 348,049 42.24 352,875 43.57 Time Certificates of deposit: Fixed rate certificates 302,423 36.97 318,491 38.65 316,368 39.06 Variable rate certificates 90,093 11.01 82,033 9.96 74,666 9.22 ------ ------ ---- ------ ---- Total time certificates of deposit 392,516 47.98 400,524 48.61 391,034 48.28 Deposit acquisition premium, net of amortization (487) (.06) (715) (.09) (918) (0.11) ---- ---- ---- ---- ----- Total deposits $818,057 100.00% $824,031 100.00% $809,850 100.00% In the following table the average amount of deposits and average rate is shown for each of the years as indicated. (In thousands) Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate NOW accounts $ 49,559 1.01% $ 48,006 1.15% $ 46,580 1.14% Demand (non interest-bearing) accounts 24,189 -- 21,011 -- 18,156 -- Escrow deposits of borrowers 1,185 0.19 1,142 0.18 1,159 0.28 Money market accounts 20,519 2.96 22,299 3.07 24,186 3.07 Regular savings and special notice accounts 333,332 3.44 327,338 3.44 331,209 3.47 Time certificates of deposit 397,935 5.19 391,816 5.57 386,062 5.67 ------- ------- ------- 826,719 4.02 811,612 4.23% 807,352 4.30% 18 19 Investment Management and Trust Services The Bank's Trust and Investment Services Division offers a variety of investment, trust and estate planning services and also serves as Trustee, Executor, and Executor's Agent for bank customers. As of December 31, 1999 the Trust Division had approximately $33.9 million (market value) of assets in custody and under management. Competition The Bank faces substantial competition both in originating loans and in attracting deposits. Competition in originating loans comes primarily from other thrift institutions, commercial banks, credit unions and mortgage banking companies. The Bank competes for loans principally on the basis of interest rates and loan fees, the types of loans originated and the quality of services provided to borrowers. In attracting deposits, the Bank's primary competitors are other thrift institutions, commercial banks, mutual funds and credit unions located in its market area. The Bank's attraction and retention of deposits depend on its ability to provide investment opportunities that satisfy the requirements of customers with respect to rate of return, liquidity, risk and other factors. The Bank attracts a significant amount of deposits through its branch offices primarily from the communities in which those branch offices are located. The Bank competes for these deposits by offering competitive rates, convenient branch and ATM locations and convenient business hours. 19 20 Supervision and Regulation of the Company and its Subsidiaries The Company and the Bank are in a heavily regulated industry. As a Delaware business corporation, the Company is subject to all of the federal and state laws and regulations that apply to corporations generally, including the federal and state securities laws and the Delaware Business Corporation Law. In addition, as a company that owns and controls a bank, the Company is regulated as a bank holding company, is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System (the "FRB") under the federal Bank Holding Company Act (the "BHC Act"), and is subject to statutes, regulations and policies administered by the FRB relating to, among other things, mergers, acquisitions and changes in controlling ownership, non-bank activities and subsidiaries, capital adequacy, the receipt and payment of dividends, and the provision of financial and managerial support to its subsidiary bank. In addition, the Company is subject to certain state law restrictions administered by the Massachusetts Division of Banks (the "Division"), relating to, among other things, the acquisition of additional banking institutions and the conduct of nonbank activities. As a Massachusetts-chartered savings bank whose deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") (and, with respect to any deposits in excess of FDIC limits, by the private, industry-sponsored Depositors Insurance Fund of Massachusetts), the Bank is subject to regulation, supervision and examination by federal and state regulatory authorities, including the FDIC and the Division. This framework of federal and state banking supervision and regulation is administered primarily for the benefit of borrowers, depositors and the respective deposit insurance funds and not for the benefit of the Bank, the Company or its stockholders. The Bank is subject to extensive federal and state statutes, regulations, policies and standards regarding virtually all aspects of its operations, including capital adequacy, reserves, liquidity, payment of dividends, transactions with affiliates, loans to officers, directors, principal shareholders and their related interests, mergers, acquisitions and changes in controlling ownership, establishment, relocation and closure of branch banking offices, community reinvestment, equal credit opportunity, credit reporting, real estate settlement procedures, funds availability, disclosure to consumers, financial accounting, reporting and recordkeeping, and Year 2000 preparedness. In the event the Bank failed to maintain adequate capital or otherwise failed to operate in accordance with applicable federal and Massachusetts statutes, regulations or policies, the FDIC and the Division have authority to place the Bank in receivership or conservatorship or impose other sanctions, including but not limited to restrictions on dividend or other payments by the Bank to the Company, termination of the Bank's deposit insurance, restrictions on the Bank's growth, issuance of orders to cease and desist from or to take specified actions, assessment of money penalties, and removal of officers or directors. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") establishes five categories of banking institutions -- in descending order of capital adequacy: "well-capitalized," "adequately capitalized," "undercapitalized," significantly undercapitalized," and "critically undercapitalized" -- and imposes certain restrictions and requires federal bank regulatory agencies to take "prompt corrective action" with respect to banks that are in one of the three "undercapitalized" categories. As of December 31, 1999, the Bank was "well capitalized" as defined under FDICIA. For a discussion of the Bank's capital adequacy, see Note 14 to the Company's Consolidated Financial Statements, on page 46. 20 21 Supervision and Regulation of the Company and its Subsidiaries (continued) FDICIA establishes a system of risk-based deposit insurance assessments that takes a bank's capital level and supervisory risk characteristics into account in calculating the amount of its federal deposit insurance assessment. In addition, FDICIA places certain restrictions on the equity investments and other "principal" activities of all state-chartered banks, including the Bank. FDICIA further requires the FDIC and other federal bank regulatory agencies to establish regulatory "safety and soundness" standards to govern various aspects of bank operations including internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, executive compensation, asset quality, earnings and stock valuation, as the agencies consider appropriate. The FDIC may require a bank that is not in compliance with safety and soundness standards promulgated under FDICIA to submit and implement a written plan to achieve compliance within a specified time period and may impose sanctions on a bank that fails to submit and implement an acceptable plan when required. At December 31, 1998, the Bank's operations were in substantial compliance with all applicable safety and soundness standards promulgated under FDICA. On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate Banking Act") was signed into law by President Clinton. In 1996, Massachusetts enacted legislation "opting in" to interstate branch banking and imposing certain limitations and requirements as permitted by the Interstate Banking Act. The Interstate Banking Act and the 1996 Massachusetts legislation permit interstate branching, mergers and bank acquisitions by Massachusetts bank holding companies and banks and permit out-of-state bank holding companies and banks to expand their banking operations into Massachusetts by merger, acquisition or de novo branching subject to certain regulatory approval requirements and other limitations. As to the Gramm-Leach-Bliley Act, the legislation, which became law on November 12, 1999, repeals provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a bank and any company or person "primarily engaged" in specified securities activities. Moreover, the general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system, such as the Company, to engage in a full range of financial activities through a new entity known as a financial holding company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Bank ("FRB"), in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In sum, the Gramm- Leach-Bliley Act is intended to permit bank holding companies that qualify and elect to be treated as a financial holding company to engage in a significantly broader range of financial activities than the activities described above that are not so treated. Generally, although significant implementation, regulations have yet to be published, the Gramm-Leach-Bliley Act: 21 22 Supervision and Regulation of the Company and its Subsidiaries (continued) * repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; * provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; * broadens the activities that may be conducted by national banks (and derivatively state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries; * provides an enhanced framework for protecting the privacy of consumer information; * adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system; * modifies the laws governing the implementation of the Community Reinvestment Act of 1977; and * addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order to elect to become a financial holding company and engage in the new activities, a bank holding company, such as the Company, must meet certain tests and file an election form with the FRB which generally is acted on within thirty days. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized (as discussed below under "The Bank") and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities each of the bank holding company's banks must have been rated "satisfactory" or better in its most recent federal Community Reinvestment Act evaluation. Furthermore, a bank holding company that elects to be treated as a financial holding company may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. At this time, the Company has not determined whether it will become a financial holding company. From time to time the U.S. Congress and the Massachusetts Legislature adopt legislation and the Federal and State bank regulatory agencies issue regulations and policies that may significantly affect the operations of the Bank and the Company. No assurance can be given as to whether or when such additional legislation, regulations or policies may be adopted or as to the effect any such legislation, regulations or policies may have on the Company or the Bank. 22 23 Employees MASSBANK Corp. utilizes the support staff of the Bank from time to time without the payment of any fees. No separate compensation is being paid to the executive officers of MASSBANK Corp., all of whom are executive officers of the Bank and receive compensation as such. As of December 31, 1999, the Bank had 143 full-time employees, including 29 officers, and 62 part-time employees. None of the Bank's employees is represented by a collective bargaining group, and management believes that its employee relations are good. The Bank provides its employees with formal training in product knowledge, sales techniques, fair lending, and motivation. In addition, each supervisor at the Bank receives management training before assuming his or her supervisory duties and periodically thereafter. The Bank maintains a comprehensive employee benefit program for qualified employees that includes a qualified pension plan, an Employee Stock Ownership Plan (ESOP), health and dental insurance, life and long-term disability insurance and tuition assistance. Subsidiaries The Bank has three wholly-owned subsidiaries: Readibank Investment Corporation, Melbank Investment Corporation, and Readibank Properties, Inc. Readibank Investment Corporation and Melbank Investment Corporation were established for the purpose of managing portions of the Bank's investment portfolio. Assets of Readibank Investment Corporation and Melbank Investment Corporation totaled $133.9 million and $134.1 million, respectively, at December 31, 1999. Readibank Properties, Inc. incorporated primarily for the purpose of real estate development, had total assets of $630 thousand at December 31, 1999. Executive Officers of the Registrant The executive officers of the Company and the Bank and the age of each officer as of March 4, 2000 are as follows: Name Age Office Gerard H. Brandi 51 Chairman of the Board of Directors, President and Chief Executive Officer of the Company and the Bank David F. Carroll 52 Vice President of the Bank Reginald E. Cormier 52 Senior Vice President, Treasurer and Chief Financial Officer of the Company and the Bank Thomas J. Queeney 37 Vice President and Senior Trust Officer of the Bank Donald R. Washburn 56 Senior Vice President of the Bank Donna H. West 54 Senior Vice President of the Bank and Assistant Secretary of the Company 23 24 Gerard H. Brandi. Mr. Brandi has served in various capacities with MASSBANK since he joined the Bank in 1975 as Vice President of the Lending Division. He served as Senior Vice President from 1978 to 1981, Executive Vice President and Senior Lending Officer from 1981 to 1983, and Executive Vice President and Treasurer from 1983 to 1986. Mr. Brandi was named President of the Company and the Bank in 1986, Chief Executive Officer in 1992 and Chairman in 1993. David F. Carroll. Mr. Carroll has been employed by the Bank since 1983 and has been Vice President of Operations since 1984. He served as Vice President of the Lending Division for a year before becoming Vice President of Operations. Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in September, 1987 and served in this capacity until his promotion to Vice President, Treasurer and Chief Financial Officer in January, 1995. In December 1999, he was promoted to Senior Vice President, Treasurer and Chief Financial Officer. Thomas J. Queeney. Mr. Queeney joined the Bank in 1986 as a Management Trainee in Loan Origination. He became an Assistant Manager in 1987 and was promoted to Assistant Treasurer in 1988. He then served as a Marketing and Investor Relations Representative until his promotion to Loan Servicing Manager in 1990. In 1992, he was promoted to Loan Officer and Commercial Lending Manager. He was promoted to Assistant Vice President, Lending in 1997, where he served until his promotion to AVP/Trust Administrator in July of 1998. In January of 1999, he was promoted to Vice President and Senior Trust Officer. Donald R. Washburn. Mr. Washburn joined the Bank in 1973 as a Loan Officer. He became an Assistant Vice President in January, 1977 and a Vice President in the Lending Division in June, 1980. Mr. Washburn served as Vice President of the Operations Division from February, 1983 to January, 1984, as Vice President of the Community Banking Division from January, 1984 to January, 1986 and as Vice President of the Lending Division from January, 1986 until his promotion to Senior Vice President of the Lending Division in June, 1994. Donna H. West. Mrs. West has been employed by the Bank since 1979 and has served as Vice President of the Community Banking Division since October, 1987. Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West became a Branch Manager in 1981, an Assistant Treasurer and Branch Manager in 1982, an Assistant Treasurer and Regional Branch Administrator in 1984 and an Assistant Vice President and Regional Branch Administrator in 1986. She served in this capacity until her October, 1987 promotion to Vice President of the Community Banking Division. In June, 1994, Mrs. West was promoted to Senior Vice President of the Community Banking Division. 24 25 Item 2. Properties The main office of MASSBANK Corp. and MASSBANK is located at 123 Haven Street, Reading, Massachusetts. Additionally, the Bank has fourteen branches and three operations facilities. The Bank owns its main office, two operations facilities and seven of its branches. All of the remaining branches and other facilities are leased under various leases. At December 31, 1999, management believes that the Bank's existing facilities are adequate for the conduct of its business. The following table sets forth certain information relating to the Bank's existing facilities. Owned Lease Renewal or Expiration Option Location Leased Date Through MAIN OFFICE: 123 Haven Street, Reading, MA Owned ---- ---- BRANCH 296 Chelmsford Street, Chelmsford, MA Leased (2) ---- OFFICES: 17 North Road, Chelmsford, MA Leased (2) (1) 45 Broadway Road, Dracut, MA Leased 2002 ---- 738 Broadway, Everett, MA Owned ---- ---- 50 Central Street, Lowell, MA Owned ---- ---- 755 Lakeview Avenue, Lowell, MA Owned ---- ---- 4110 Mystic Valley Pkwy, Medford, MA Leased 2001 ---- 476 Main Street, Melrose, MA Owned ---- ---- 27 Melrose Street, Towers Plaza, Melrose, MA Leased 2004 2014 240 Main Street, Stoneham, MA Leased 2003 ---- 1800 Main Street, Tewksbury, MA Owned ---- ---- 203 Littleton Road, Westford, MA Owned ---- ---- 370 Main Street, Wilmington, MA Owned ---- ---- 219 Lowell Street, Lucci's Plaza, Wilmington, MA Leased 2006 ---- OPERATIONS FACILITIES: 159 Haven Street, Reading, MA Owned ---- ---- 169 Haven Street, Reading, MA Owned ---- ---- 11 North Road, Chelmsford, MA Leased (2) (1) (1) The Bank has an option to purchase in the year 2000. (2) The Bank is a tenant at will. Item 3. 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 December 31, 1999, 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 4. Submission of Matters to a Vote of Security Holders None. 25 26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information contained under the caption "MASSBANK Corp. and Subsidiaries Stockholder Data" in the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. Item 6. Selected Financial Data The information contained under the caption "MASSBANK Corp. and Subsidiaries - Selected Consolidated Financial Data" in the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. This selected consolidated financial data should be read in conjunction with the consolidated statements and related notes thereto appearing in the Registrant's 1999 Annual Report to Stockholders which are incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information contained under the captions "Asset and Liability Management", "Interest Rate Risk" and "Other Market Risks" included in Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's consolidated financial statements and notes thereto, together with the report of KPMG LLP, contained in the Registrant's 1999 Annual Report to Stockholders are incorporated herein by reference. The unaudited quarterly financial data set forth on page 52 of such Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure None 26 27 PART III Item 10. Directors and Executive Officers of the Registrant The information appearing under the caption "Election of Directors" and "Compliance with Section 16(A) of the Exchange Act" in the Registrant's definitive proxy statement relating to its 2000 Annual Meeting of Stockholders is incorporated herein by reference. Information required by this item concerning the Executive Officers of the Registrant is contained in Part I of this Form 10-K. Item 11. Executive Compensation The information appearing under the caption "Executive Compensation" in the Registrant's definitive proxy statement relating to its 2000 Annual Meeting of Stockholders is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information appearing under the captions "Election of Directors" and "Principal Stockholders" in the Registrant's definitive proxy statement relating to its 2000 Annual Meeting of Stockholders is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information contained in Note 5 of the Consolidated Financial Statements under the caption "Loans" in the Registrant's 1999 Annual Report to Stockholders is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The following financial statements and financial statement schedules are contained herein or are incorporated herein by reference: (a)1. Financial Statements Reference to 1999 Annual Report to Stockholders (Pages) Independent Auditors' Report 25 Consolidated balance sheets at December 31, 1999 and 1998 26 Consolidated statements of income for the three years ended December 31, 1999 27 Consolidated statements of cash flows for the three years ended December 31, 1999 28-29 Consolidated statements of changes in stockholders' equity for the three years ended December 31, 1999 30 Notes to consolidated financial statements 31-52 2. Financial Statement Schedules All schedules are omitted as the required information is either not applicable or is included in the consolidated financial statements or related notes. 27 28 3. Exhibits Exhibit No. Description of Exhibit 3.1 Restated Certificate of Incorporation of the Registrant - incorporated by reference to Exhibit 3.1 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 3.2 By-Laws of the Registrant - incorporated by reference to Exhibit 3 of the Registrant's Form 10-Q for the quarter ended September 30, 1991. 4.1 Shareholder Rights Agreement dated as of January 18, 2000, between the Company and The First National Bank of Boston, as Rights Agent - incorporated herein by reference to the Exhibit to the Company's Current Report on Form 8-K dated as of January 20, 2000. 10.1 MASSBANK Corp. 1986 Stock Option Plan, as amended - incorporated by reference to Exhibit 28.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-11949). 10.1.2 Amendment to MASSBANK Corp. 1986 Stock Option Plan dated April 19, 1991 - incorporated by reference to Exhibit 10.1.2 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.1.3 MASSBANK Corp. 1994 Stock Incentive Plan - incorporated by reference to Exhibit 10.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-82110). 10.1.4 Amendment to MASSBANK Corp. 1994 Stock Incentive Plan dated April 21, 1998 - incorporated by reference to Exhibit 10.1.4 to the Registrant's annual report on Form 10-K for the year ended December 31, 1997. 10.2 MASSBANK for Savings Employees' Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 10.2.1 Amendments to the MASSBANK for Savings Employee's Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2.1 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.2.2 Amendments to the MASSBANK for Savings Employee's Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2.2 to the Registrant's annual report on Form 10-K for the year ended December 31, 1997. 10.3 Form of Employment Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.3 of the Registrant's annual report on Form 10-K for the year ended December 31, 1986 and Exhibit 10.3.1 of the Registrant's annual report on Form 10-K for the year ended December 31, 1989. 28 29 Exhibit No. Description of Exhibit 10.3.2 Amendment to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.2 of the Registrant's annual report on Form 10-K for the year ended December 31, 1990. 10.3.3 Second amendment dated as of February 1, 1993 to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.3. to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.7 Form of Employment Agreement with David F. Carroll dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.7 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.8 Form of Employment Agreement with Reginald E. Cormier dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.8 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.9 Form of Employment Agreement with Donald R. Washburn dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.9 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.10 Form of Employment Agreement with Donna H. West dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.10 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.11 Executive Severance Agreement with Gerard H. Brandi dated as of January 18, 1994 - incorporated by reference to exhibit 10.3.11 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.12 Executive Severance Agreement with David F. Carroll dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.12 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.13 Executive Severance Agreement with Reginald E. Cormier dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.13 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 29 30 Exhibit No. Description of Exhibit 10.3.14 Executive Severance Agreement with Donald R. Washburn dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.14 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.15 Executive Severance Agreement with Donna H. West dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.15 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.4 Form of Executive Supplemental Retirement Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.4 of Registrant's annual report on Form 10-K for the year ended December 31, 1986. 10.4.1 Amendments to the Executive Supplemental Retirement Agreement with Gerard H. Brandi are incorporated by reference to Exhibit 10.4.1 of the Registrant's annual report on Form 10-K for the year ended December 31, 1996. 12 Statement re: Computation of Ratios - Not applicable as MASSBANK Corp. does not have any debt securities registered under Section 12 of the Securities Exchange Act of 1934. 13 1999 Annual Report to Stockholders - except for those portions of the 1999 Annual Report to Stockholders which are expressly incorporated by reference in this report, such 1999 Annual Report to Stockholders is furnished for the information of the SEC and is not to be deemed "filed" with the SEC. 22 Subsidiaries of the Registrant - A list of subsidiaries of the Registrant is attached hereto as Exhibit 22 to this Annual Report. 23 Independent Accountants' Consent. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this Form 10-K. (c) Exhibits to this Form 10-K are attached or incorporated by reference as stated in the Index to Exhibits. (d) Not applicable. 27 Financial Data Schedule 30 31 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MASSBANK CORP. /s/Gerard H. Brandi ------------------- Gerard H. Brandi Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/Gerard H. Brandi Chairman, President, - ---------------------- Chief Executive Officer and Gerard H. Brandi Director March 8, 2000 ------------- /s/Reginald E. Cormier Senior Vice President, Treasurer - ---------------------- and Chief Financial Officer Reginald E. Cormier (Principal Financial and Accounting Officer) March 8, 2000 ------------- /s/Samuel Altschuler Director March 14, 2000 - ---------------------- ------------- Samuel Altschuler /s/Mathias B. Bedell Director March 8, 2000 - ---------------------- ------------- Mathias B. Bedell /s/Allan S. Bufferd Director March 10, 2000 - ---------------------- -------------- Allan S. Bufferd Director - ---------------------- Peter W. Carr /s/Alexander S. Costello Director March 13, 2000 - ---------------------- -------------- Alexander S. Costello 31 32 /s/Robert S. Cummings Director March 8, 2000 - ---------------------- ------------- Robert S. Cummings /s/Leonard Lapidus Director March 10, 2000 - ---------------------- -------------- Leonard Lapidus /s/Stephen E. Marshall Director March 8, 2000 - ---------------------- ------------- Stephen E. Marshall /s/Nancy L. Pettinelli Director March 13, 2000 - ---------------------- -------------- Nancy L. Pettinelli /s/Herbert G. Schurian Director March 10, 2000 - ---------------------- -------------- Herbert G. Schurian /s/Donald B. Stackhouse Director March 8, 2000 - ---------------------- ------------- Donald B. Stackhouse 32