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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included in this report. Certain amounts
reported for prior years have been reclassified to conform to the 1999
presentation. The discussion contains certain forward-looking statements
regarding the future performance of the Company. All forward-looking information
is inherently uncertain and actual results may differ substantially from the
assumptions, estimates, or expectations reflected or contained in the
forward-looking information.
The financial condition and results of operations of MASSBANK Corp. (the
"Company") essentially reflect the operations of its subsidiary, MASSBANK (the
"Bank").
The Company's consolidated net income depends largely upon net interest
income, which is the difference between interest income from loans and
investments ("interest-earning assets") and interest expense on deposits and
borrowed funds ("interest-bearing liabilities"). Net interest income is
significantly affected by general economic conditions, policies established by
regulatory authorities and competition.
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.
FINANCIAL CONDITION
The Company's total assets decreased $21.9 million, or 2.3%, to $924.7 million
at December 31, 1999. The decline in total assets reflects a decrease in total
investments of $45.6 million partially offset by an increase in total loans and
other assets of $20.4 million and $3.3 million, respectively.
The Bank's total loan portfolio at December 31, 1999, prior to the
allowance for loan losses, amounted to $325.4 million compared with $305.0
million at December 31, 1998, an increase of $20.4 million or 6.7%. This
increase resulted primarily from an increase in residential mortgage loans and
commercial loans. MASSBANK benefited from the favorable mortgage interest rate
environment during the first half of 1999; however, an increase in interest
rates during the last half of the year significantly reduced the demand for
mortgage refinancings. Total loan originations reached $82.4 million in 1999,
compared with $105.2 million in 1998. This includes a $15.0 million commercial
loan to a single borrower with AAA credit.
Total investments consisting of investment securities and other
short-term investments, including term federal funds sold and interest-bearing
bank deposits, decreased $45.6 million from $624.1 million at December 31, 1998
to $578.5 million at year-end 1999. The decrease is mainly attributable to a
decrease in short-term investments, term federal funds sold and trading
securities of $36.8 million, $25.0 million and $24.8 million, respectively.
These were partially offset by an increase in longer term investments. The
primary components of the Bank's investment securities portfolio, U.S. Treasury
securities, U.S. Government agency securities, and mortgage-backed securities
increased by $22.6 million, $7.0 million and $9.8 million, respectively, during
1999. Other investments increased by $1.6 million in 1999.
The decrease in total investments also reflects a decrease in net
unrealized gains on the Bank's securities available for sale from $19.8 million
at December 31, 1998 to $3.7 million at December 31, 1999. The decrease in
market value of the Bank's investment securities available for sale portfolio is
primarily due to an upward movement in market interest rates and the resulting
downward movement in debt securities prices by year-end 1999.
The change in the market value of the Bank's available for sale
securities also had the effect of decreasing stockholders' equity by $9.7
million in 1999. The net unrealized gains on securities available for sale, net
of tax effect, reported as part of stockholders' equity totaled $2.0 million at
year-end 1999, down from $11.7 million at December 31, 1998. Also contributing
to the decrease in stockholders' equity was the payment of $3.8 million in
dividends to stockholders and the cost of additional shares of treasury stock
repurchased during the year in the amount of $7.6 million. These were partially
offset by the Company's record net income of $11.3 million in 1999 and the
issuance of common stock under the Company's stock option plan. Total
stockholders' equity was $101.5 million at December 31, 1999 representing a book
value per share of $30.65 compared to $110.5 million at year-end 1998
representing a book value $31.58 per share.
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. Total deposits decreased $6.0 million during
1999 to $818.0 million at December 31, 1999, from $824.0 million at year-end
1998. This modest decrease was due in part to the strong performance of certain
sectors of the equity securities market which made it more difficult to attract
new deposits and some deposit outflow resulting from customer concerns about the
Year 2000 ("Y2K").
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ASSET QUALITY
Asset quality continued to improve during 1999. Nonaccrual loans, generally
those loans which are 90 days or more delinquent, decreased to $0.8 million at
December 31, 1999, from $1.0 million at December 31, 1998. The bank's provision
for loan losses, which amounted to $193 thousand in 1998, decreased by $53
thousand to $140 thousand in 1999. Loan charge-offs, net of recoveries, amounted
to $35 thousand in 1999, down from $77 thousand in 1998, which continued the
trend of recent years.
The Bank continued to add to its allowance for loan losses in 1999 due
to the continued growth of its loan portfolio. The bank's allowance for loan
losses at December 31, 1999 totaled approximately $2.6 million, representing
321% of nonaccrual loans and 0.79% 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. Real estate acquired through foreclosure
totaled only $62 thousand at year-end 1999.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 1999 AND 1998
MASSBANK Corp. reported consolidated net income of $11.3 million or $3.35 in
basic earnings per share in 1999 compared to net income of $10.9 million or
$3.09 in basic earnings per share in 1998. This was the seventh consecutive year
of record net income for the Company. Diluted earnings per share for 1999
increased 9.4% to $3.25 from $2.97 in 1998.
In 1999, the Company's return on average assets rose to a new high of
1.20% from 1.17% in the prior year. Return on average realized equity also
increased, from 11.08% in 1998 to 11.35% in 1999.
Increases in both net income and earnings per share in 1999 compared to
1998 primarily reflect an increase in securities gains of $1.1 million, a
decrease in the provision for loan losses of $53 thousand and the Company's
lower effective income tax rate. These improvements were partially offset by a
decrease of $512 thousand in net interest income, a decrease of $168 thousand in
non-interest income (exclusive of securities gains) and an increase in
non-interest expense of $51 thousand. Additionally, the earnings per share
increase in 1999 was positively affected by the reduced number of average common
shares outstanding as a result of the Company's purchase of 210,967 shares of
its common stock, during 1999, pursuant to its stock repurchase program.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis totaled $25.1
million for 1999 and $25.7 million for 1998. This decrease was principally
attributable to a decline in net interest margin, partially offset by the
positive effect of average earning asset growth. The net interest margin for
1999 was 2.72%, a decline from 2.81% reported in 1998. The Company's average
earning assets increased $9.8 million to $922.7 million in 1999, from $912.9
million in 1998.
The tables on pages 23 and 24 set forth, among other things, the extent
to which changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have effected interest
income and expense during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes due to (1) changes in volume and (2) changes in interest
rates.
INTEREST AND DIVIDEND INCOME
Interest and dividend income on a fully taxable equivalent basis totaled $58.3
million for the year ended December 31, 1999, compared to $60.0 million for the
year ended December 31, 1998. The yield on average earning assets was 6.32% in
1999, down from 6.56% in the prior year. The average total earning assets of the
Company increased to $922.7 million in 1999, up $9.8 million from $912.9 million
in 1998.
As shown in the rate/volume analysis table on page 24, the decline in
yield on average earning assets resulted in a decrease in interest and dividend
income in 1999 of $2.6 million from 1998. Conversely, the total effect of higher
average earning assets on interest and dividend income in 1999 was a $942
thousand increase over 1998, resulting in a net decrease in total interest and
dividend income of $1.6 million from 1998.
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INTEREST EXPENSE
Total interest expense decreased $1.1 million or 3.3% to $33.2 million for the
year ended December 31, 1999 from $34.3 million for the year ended December 31,
1998. This decrease is due to a decline in the Company's average cost of funds
from 4.23% in 1998 to 4.02% in 1999, partially offset by the higher interest
expense resulting from an increase in the Company's average total deposits, from
$811.6 million in 1998 to $826.7 million in 1999.
The Company's lower cost of funds in 1999 was the result of changes in
market interest rates and certain pricing strategies which the bank implemented
during the year.
As shown in the rate/volume analysis table on page 24, the effect on
total interest expense from changes in interest-bearing deposit rates was a $1.6
million decrease from 1998. Conversely, the total effect of higher average total
deposits on interest expense in 1999 was a $516 thousand increase over 1998,
resulting in a net decrease in total interest expense of $1.1 million from 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents a charge against current earnings and
an addition to the allowance for loan losses. The provision for loan losses in
1999 was $140 thousand compared to $193 thousand in 1998. In determining the
amount to provide for loan losses, the key factor is the adequacy of the
allowance for loan losses. In making its decision, management considers a number
of factors, including the risk characteristics of the loan portfolio, underlying
collateral, current and anticipated economic conditions, and trends in loan
delinquencies and charge-offs. At December 31, 1999, the allowance for loan
losses was $2.6 million representing 321% of nonaccrual loans. The Banks
nonaccrual loans totaled $0.8 million at December 31, 1999 down from $1.0
million a year earlier. Net charge-offs also declined to $35 thousand in 1999
from $77 thousand in the prior year. Management believes that the allowance for
loan losses as of year-end 1999 is adequate to cover the risks inherent in the
loan portfolio under current conditions.
NON-INTEREST INCOME
Non-interest income consists of gains or losses on securities, deposit account
service fees and other non-interest income.
Non-interest income increased to $5.6 million for the year ended
December 31, 1999, from $4.6 million for the year ended December 31, 1998. This
improvement is due to an increase in securities gains in 1999 compared to 1998.
Net securities gains totaled $4.0 million in 1999 compared to $2.9
million in the prior year. This increase is primarily attributable to the
favorable performance of the Company's equity securities portfolio which has
produced strong returns over the past five years. Management believes the equity
markets will return to levels which represent more closely the historical norms
than has recently been the case, and does not anticipate the trend of recent
years gains to continue.
All other non-interest income combined decreased $168 thousand to $1.5
million in 1999 from $1.7 million in the prior year, due to a decrease in
deposit account service fees and other non-interest income of $87 thousand and
$81 thousand, respectively.
NON-INTEREST EXPENSE
Non-interest expense totaled $12.6 million for 1999, compared with $12.5 million
in 1998. Expenses increased by only $51 thousand in 1999, due to the Company's
cost containment efforts and the reasons summarized below:
Salaries and employee benefits expenses increased by only $10 thousand
to $7.4 million in 1999 compared to 1998. Annual merit increases and the
slightly higher costs of employee benefits were partly offset by staff
reductions and a decrease of $96 thousand in the Company's Employee Stock
Ownership Plan ("ESOP") expense. The ESOP expense is tied closely to the average
market price of the Company's common stock which declined during 1999. Also
contributing to the slight increase in salaries and employee benefits expenses
was a decrease of $41 thousand in loan origination related salary expenses being
deferred (and amortized over the life of the loans) due to a decrease in
residential lending activity in 1999 compared to 1998.
Occupancy and equipment expense increased by 4.2% or $87 thousand to
$2.1 million in 1999. This increase reflects higher depreciation expense due to
the building and leasehold improvements completed in 1998 and 1999, and an
increase in real estate tax expense in 1999, due partly to the larger dollar
amount of real estate tax abatements received in 1998 compared to 1999.
All other non-interest expenses combined consisting of data processing,
professional services, advertising and marketing, amortization of intangibles,
deposit insurance, contributions and other expenses remained relatively flat,
decreasing $46 thousand in 1999 compared to 1998.
The bank's efficiency ratio, which measures how much it costs to
generate one dollar of revenue, continued its steady improvement of the past
several years, reaching 40.9% in 1999.
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INCOME TAX EXPENSE
The Company recorded income tax expense of $6.5 million in 1999, an increase of
$65 thousand when compared to the prior year. The increase in income tax expense
is due primarily to higher pretax earnings partially offset by a slight
reduction in the Company's effective income tax rate. The effective income tax
rate for the year ended December 31, 1999 was 36.66%, down from 37.26% in the
prior year. The decrease in the Company's effective income tax rate in 1999 is
due, in part, to the scheduled reduction in the Bank's statutory state excise
tax rate from 10.91% in 1998 to 10.50% in 1999; and to the increased investment
income generated by the Bank's two security corporation subsidiaries which are
taxed at a lower rate than the Bank for state income tax purposes.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 1998 AND 1997
MASSBANK Corp. recorded net income for the year ended December 31, 1998 of $10.9
million or $3.09 in basic earnings per share compared to $10.2 million or $2.88
in basic earnings per share for the year ended December 31, 1997. This was the
sixth consecutive year of record net income for the Company. Diluted earnings
per share for 1998 increased to $2.97 from $2.77 in the prior year.
In 1998, MASSBANK's return on average assets rose to 1.17% from 1.12% in
the prior year. Return on average realized equity was 11.08% in 1998, down
slightly from 11.11% in 1997. The Company's favorable earnings performance in
1998 is mainly attributable to higher securities gains and lower non-interest
expenses and provision for loan losses, partially offset by a decrease in net
interest income and non-interest income (exclusive of securities gains).
NET INTEREST INCOME
The Company's net interest income on a fully taxable equivalent ("FTE") basis
was $25.7 million in 1998, a decrease of $0.5 million from the prior year. The
decrease is the result of a lower net interest margin, due mainly to the
flattening of the yield curve which was seen in 1998, partially offset by the
positive effect of average earning asset growth. The Company's net interest
margin was 2.81% in 1998, down from its prior year net interest margin of 2.93%.
The Company's average earning assets increased $18.3 million or 2.0% to $912.9
million in 1998, from $894.6 million in 1997.
The tables on pages 23 and 24 set forth, among other things, the extent
to which changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have effected interest
income and expense during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes due to (1) changes in volume and (2) changes in interest
rates.
INTEREST AND DIVIDEND INCOME
Interest and dividend income on a fully taxable equivalent basis was $60.0
million for the year ended December 31, 1998, compared to $60.9 million for the
year ended December 31, 1997. The average total earning assets of the Company
increased to $912.9 million in 1998, up $18.3 million from $894.6 million in
1997. As reflected in the table on page 23, the Company saw a decline in yield
in all categories of earning assets this past year. This resulted in an overall
decline in yield on total average earning assets of 25 basis points in 1998. The
yield on average earning assets for the year ended December 31, 1998 was 6.56%
compared to 6.81% in the prior year.
As exhibited in the rate/volume analysis table on page 24, the total
effect of lower market interest rates on interest income in 1998 was a $1.9
million decline from 1997. Conversely, the total effect of higher average
earning assets on interest income in 1998 was a $1.0 million increase over 1997,
resulting in a net decrease in total interest and dividend income of $899
thousand from 1997.
INTEREST EXPENSE
Total interest expense decreased 1.0% to $34.3 million for the year ended
December 31, 1998 from $34.7 million for the year ended December 31, 1997. This
decrease is due to a decrease in the Company's average cost of funds from 4.30%
in 1997 to 4.23% in 1998, partially offset by the higher interest expense
resulting from an increase in the Company's average total deposits, from $807.3
million in 1997 to $811.6 million in 1998.
The principal reason for the Company's lower cost of funds was lower
market interest rates in 1998.
As exhibited in the rate/volume analysis table on page 24, the effect on
total interest expense from changes in interest-bearing deposit rates from a
year ago was a $522 thousand decrease from 1997. Conversely, the total effect of
higher average deposits on interest expense in 1998 was a $161 thousand increase
over 1997, resulting in a net decrease in total interest expense of $361
thousand from 1997.
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PROVISION FOR LOAN LOSSES
The provision for loan losses in 1998 was $193 thousand compared to $260
thousand in 1997. In determining the amount to provide for loan losses, the key
factor is the adequacy of the allowance for loan losses. In making its decision,
management considers a number of factors, including the risk characteristics of
the loan portfolio, underlying collateral, current and anticipated economic
conditions, and trends in loan delinquencies and charge-offs. At December 31,
1998, the allowance for loan losses was approximately $2.5 million representing
244.0% of nonaccrual loans. The Bank's nonaccrual loans totaled $1.0 million at
December 31, 1998 compared to $1.8 million a year earlier. Net charge-offs
totaled $77 thousand in 1998 compared to $268 thousand in 1997. Management
believes that the allowance for loan losses is adequate to cover the risks
inherent in the loan portfolio under current conditions.
NON-INTEREST INCOME
Non-interest income consists of gains or losses on securities, deposit account
service fees, and other non-interest income.
Non-interest income increased to $4.6 million for the year ended
December 31, 1998, from $3.8 million for the year ended December 31, 1997. This
improvement is due to an increase in securities gains in 1998.
Net gains on securities totaled $2.9 million in 1998 compared to $1.9
million in the prior year. The bank's equity securities portfolio continued to
contribute significant returns in 1998 through a combination of gains on the
sale of securities in the amount of $2.6 million and unrealized gains. The
pretax unrealized gains in the bank's equity securities portfolio amounted to
$10.5 million at year-end 1998, up from $8.2 million at December 31, 1997. All
other non-interest income combined decreased $162 thousand to $1.7 million from
$1.9 million in the prior year.
NON-INTEREST EXPENSE
One measure often used in the banking industry to assess the level of
non-interest expense is the efficiency ratio. The efficiency ratio measures how
much it cost to generate one dollar of revenue. MASSBANK's efficiency ratio
continued its steady improvement of the past several years, reaching 41.4% in
1998.
MASSBANK's non-interest expenses (i.e., operating expenses) decreased by
$910 thousand to $12.5 million in 1998, from $13.4 million a year ago. This
decrease is due largely to non-recurring expenses incurred in 1997, summarized
below, and to a decrease in compensation expenses which are tied to the
Company's stock performance.
Salaries and employee benefits decreased by $317 thousand or 4.1%, to
$7.4 million in 1998, from $7.7 million in 1997. The decrease reflects a
reduction of $311 thousand in Deferred Compensation Plan expenses which are tied
to the Company's stock performance. The price of MASSBANK Corp. stock decreased
by $8.50 or 17.8% in 1998, from $47.62 at December 31, 1997 to $39.12 at
December 31, 1998. Conversely, in 1997 the Company saw the price of its common
stock increase by $19.03 or 66.6%. This significantly increased Deferred
Compensation Plan expenses in 1997. Normal salary increases and higher employee
benefit costs, in 1998, were partly offset by staff reductions and more loan
origination related salary expenses (which are amortized over the life of the
loans) being deferred due to increased residential lending activity in 1998.
Occupancy and equipment expense decreased by $37 thousand to $2.1
million in 1998. This decrease reflects a reduction in utilities expenses and a
drop in real estate tax expenses due to real estate tax abatements received in
1998.
Data processing expenses increased by $72 thousand to $510 thousand in
1998, from $438 thousand in the previous year. 1997 expenses, however, reflect a
reduction of $150 thousand due to a one-time credit the bank negotiated as part
of its initial contract with a new service bureau. This temporary reduction in
data processing expense was used, in part, to defray nonrecurring expenses the
bank incurred in converting to the new service bureau.
Professional services expenses increased by $54 thousand to $461
thousand in 1998, from $407 thousand in 1997. This increase was due mostly to
higher legal fees.
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NON-INTEREST EXPENSE (continued)
In 1998, the Company did not incur any merger and acquisition related
expenses. As a result, 1998 expenses when compared to the prior year, show a
decrease of $156 thousand due to the nonrecurring merger and acquisition related
expenses incurred in 1997 in connection with the bank's acquisition of the
Glendale Co-operative Bank ("Glendale").
Advertising and marketing expenses declined slightly in 1998 to $171
thousand, from $187 thousand in the prior year.
The amortization of intangibles expense increased by $51 thousand to
$302 thousand in 1998, from $251 thousand in 1997. The increase reflects the
additional amortization of goodwill recorded in 1998 in connection with the
Glendale acquisition. In 1997, the goodwill was only amortized for a partial
year since the acquisition was completed in July of that year.
Deposit insurance expense totaled $116 thousand in 1998, unchanged from
the prior year.
The bank's contributions expense decreased by $650 thousand to $14
thousand in 1998, from $664 thousand in the prior year. This decrease is due to
a significant contribution made in the prior year. The bank, in 1997,
contributed appreciated securities valued at $622 thousand to establish and
endow a tax exempt private foundation. The establishment of the MASSBANK
Charitable Foundation benefits the bank by reducing its contributions expense in
1998 and future years, since many of the contributions previously made by the
bank are now made by the Foundation.
Other expenses increased by $89 thousand to $1.5 million in 1998, from
$1.4 million in 1997 due to increases in several other non-interest expense
categories.
INCOME TAX EXPENSE
The Company recorded income tax expense of $6.5 million in 1998 compared to $6.0
million in 1997. The increase in income tax expense is due primarily to higher
pretax earnings and a slight increase in the Company's effective income tax
rate. The effective income tax rate for the year ended December 31, 1998 was
37.3%, up from 37.1% in the prior year. The increase in the Company's effective
income tax rate in 1998 was due to a non-recurring income tax benefit in the
amount of $260 thousand the Company recorded in 1997 as a result of having
donated appreciated securities to establish and endow a tax exempt private
foundation. This reduced the effective income tax rate for 1997. In 1998, there
were two factors which reduced the effective income tax rate for the year. The
Company, in 1998, received a state tax refund, net of federal tax, of
approximately $44 thousand due to the settlement of a state tax issue from prior
years. It also changed its year-end for tax filing purposes from October 31 to
December 31. This change, because of the bank tax reform legislation signed into
law in 1995 which lowered the bank tax rate from 12.54% to 10.50% over five
years, accelerated the scheduled reduction in the Bank's state excise tax rate
by one full year from 11.32% to 10.91%. For years beginning after 1998, the rate
is 10.50%.
LIQUIDITY AND CAPITAL RESOURCES
The Bank must maintain a sufficient level of cash and assets which can readily
be converted into cash in order to meet cash outflows from normal depositor
requirements and loan demands. The Bank's primary sources of funds are deposits,
loan amortization and prepayments, sales or maturities of investment securities
and income on earning assets. In addition to loan payments and maturing
investment securities, which are relatively predictable sources of funds, the
Bank maintains a high percentage of its assets invested in overnight federal
funds sold, which can be immediately converted into cash, and United States
Treasury and Government agency securities, which can be sold or pledged to raise
funds. At December 31, 1999, the Bank had $86.2 million or 9.3% of total assets
and $158.6 million or 17.1% of total assets invested, respectively, in overnight
federal funds sold and United States obligations.
The Bank is a Federal Deposit Insurance Corporation insured institution
subject to the FDIC regulatory capital requirements. The FDIC regulations
require all FDIC insured institutions to maintain minimum levels of Tier I
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
I capital to total average 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
I capital to risk-weighted assets ratio of 4.00% and
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LIQUIDITY AND CAPITAL RESOURCES (continued)
are generally expected to meet a minimum total qualifying capital to
risk-weighted assets ratio of 8.00%. The risk-based capital guidelines take into
consideration risk factors, as defined by the regulators, associated with
various categories of assets, both on and off the balance sheet. Under the
guidelines, capital strength is measured in two tiers which are used in
conjunction with risk adjusted assets to determine the risk-based capital
ratios. Tier II capital components include supplemental capital components such
as qualifying allowance for loan losses, qualifying subordinated debt and up to
45 percent of the pretax 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 December 31, 1999, the Bank had a leverage
Tier I capital to average assets ratio of 10.48%, a Tier I capital to
risk-weighted assets ratio of 30.93% and a total capital to risk-weighted assets
ratio of 32.98%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to average assets of 10.54%, Tier I capital to risk-weighted
assets of 31.10% and total capital to risk-weighted assets of 33.15% at December
31, 1999.
YEAR 2000 ISSUE
The Company's effort to address the Year 2000 (Y2K) issue began in 1997 and
culminated in a business as usual 1999 year-end and a smooth transition into the
Year 2000. The Company did not experience any disruptions in its operating
activities resulting from the date rollover to Year 2000. Additionally,
management does not expect any Y2K issue to have a material adverse effect on
the Company's operations or financial results.
Since 1997, the Company has incurred total Y2K project related
expenditures, excluding personnel costs, of approximately $295 thousand. Most of
these expenditures were to replace or upgrade computer systems that were not
believed to be Year 2000 compliant. Expenditures for 1999 totaled $242 thousand.
Approximately $78 thousand of the current year's expenditures were expensed as
incurred, while the cost of new hardware and software of approximately $164
thousand was capitalized and will be amortized over the hardware and software's
useful life in accordance with the Company's standard accounting practices.
ASSET AND LIABILITY MANAGEMENT
The goal of asset/liability management is to ensure that liquidity, capital and
market risk are prudently managed. Asset/liability management is governed by
policies reviewed and approved annually by the Bank's Board of Directors (the
"Board"). The Board establishes policy limits for long-term interest rate risk
assumption and delegates responsibility for monitoring and measuring the
Company's exposure to interest rate risk to the Asset/Liability Committee
("ALCO"). The ALCO which is comprised of members of the Company's Board of
Directors, members of senior management and the bank's comptroller, generally
meets three times a year to review the economic environment and the volume, mix
and maturity of the Company's assets and liabilities.
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INTEREST RATE RISK
The primary goal of interest-rate risk management is to control the Company's
exposure to interest rate risk both within limits approved by the Board and
within narrower guidelines approved by ALCO. These limits and guidelines reflect
the Company's tolerance for interest rate risk over both short-term and
long-term time horizons. The Company monitors its interest rate exposures using
a variety of financial tools. It also produces a GAP analysis quarterly,
reflecting the known or assumed maturity, repricing and other cash flow
characteristics of the Company's interest-earning assets and interest-bearing
liabilities.
Interest rate risk materializes in two forms, market value risk and
reinvestment risk.
Financial instruments calling for future cash flows show market value
increases or decreases when rates change. Management monitors the potential
change in market value of the Company's debt securities assuming an immediate
(parallel) shift in interest rates of up to 200 basis points up or down. Results
are calculated using industry standard modeling analytics and securities data
from The Bloomberg. The Company uses the results to review the potential changes
in market value resulting from immediate rate shifts and to manage the effect of
market value changes on the Company's capital position.
Reinvestment risk occurs when an asset and the liability funding the
asset do not reprice and/or mature at the same time. The difference or mismatch
with respect to repricing frequency and/or maturity is a risk to net interest
income.
Complicating management's efforts to control the Company's exposure to
interest rate risk is the fundamental uncertainty of the maturity, repricing
and/or runoff characteristics of a significant portion of the Company's assets
and liabilities. This uncertainty often reflects optional features embedded in
these financial instruments. The most important optional features are embedded
in the Company's deposits, loans and mortgage-backed securities.
For example, many of the Company's interest-bearing deposit products
(e.g., savings, money market deposit accounts and NOW accounts) have no
contractual maturity. Customers have the right to withdraw funds from these
deposit accounts freely. Deposit balances may therefore run off unexpectedly due
to changes in competitive or market conditions. In addition, when market
interest rates rise, customers with time certificates of deposit ("CDs") often
pay a penalty to redeem their CDs and reinvest at higher rates. Given the
uncertainties surrounding deposit runoff and repricing, the interest rate
sensitivity of the Company's liabilities cannot be determined precisely.
Similarly, customers have the right to prepay loans, particularly
residential mortgage loans, usually without penalty. As a result, the Company's
mortgage based assets (i.e., mortgage loans and mortgage-backed securities) are
subject to prepayment risk. This risk tends to increase when interest rates fall
due to the benefits of refinancing. Since the future prepayment behavior of the
Company's customers is uncertain, the interest rate sensitivity of mortgage
based assets cannot be determined exactly.
Management monitors and adjusts the difference between the Company's
interest-earning assets and interest-bearing liabilities repricing within
various time frames ("GAP position").
GAP analysis provides a static view of the maturity and repricing
characteristics of the Company's balance sheet positions. The interest rate GAP
is prepared by scheduling all interest-earning assets and interest-bearing
liabilities according to scheduled or anticipated repricing or maturity. The GAP
analysis identifies the difference between an institution's assets and
liabilities that will react to a change in market rates. GAP analysis theory
postulates that if the GAP is positive and rates increase, the institution's net
interest spread will increase as more assets than liabilities react to the rate
change. If the GAP is negative, more liabilities than assets will react to a
change in market rates. If rates rise, the institution's net interest spread
will fall as more liabilities react to market rates than assets.
In contrast, however, the Company's one-year GAP position in recent
years has been negative and its net interest spread has moved in the same
direction as the change in market rates rather than in the opposite direction as
GAP analysis theory postulates. One of the more significant reasons for this is
the fact that a GAP presentation does not reflect the degrees to which interest
earning assets and deposit costs respond to changes in market interest rates.
The rates on all financial instruments do not always move by the same amount as
the general change in market rates. In addition, the Company has elected, in
recent years, either not to raise rates or to raise rates by a modest amount on
its savings and transaction-oriented accounts in response to an increase in
market rates. It should be noted that for the above two reasons, among others,
the Company's net interest spread has moved in the same direction as market
interest rates in the past and may in the near future despite having a negative
cumulative one-year GAP position.
20
9
INTEREST RATE RISK (continued)
The Company's policy is to limit its one-year GAP position to 15.0% of
total assets. The Company has historically managed its interest rate GAP
primarily by lengthening or shortening the maturity structure of its securities
portfolio, by continually modifying the composition of its securities portfolio
and by selectively pricing and marketing its various deposit products.
The following table summarizes the Company's GAP position at December
31, 1999. As of this date, the Company's one-year cumulative GAP position was
negative $27.5 million, or approximately 3.0% of total assets. The cumulative
GAP-asset ratio measures the direction and extent of imbalance between an
institution's assets and liabilities repricing through the end of a particular
period.
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY PERIODS
3 MONTHS 3 TO 6 6 MONTHS 1 TO 5 OVER
(IN THOUSANDS) OR LESS MONTHS TO 1 YEAR YEARS 5 YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans $ 44,553 $ 10,399 $ 23,617 $ 131,641 $ 115,155 $ 325,363
Short-term investments:
Federal funds sold 86,211 -- -- -- -- 86,211
Investment in money market funds 24,717 -- -- -- -- 24,717
Interest-bearing deposits in banks 1,815 570 107 1,349 -- 3,841
Securities held to maturity -- -- -- 230 -- 230
Securities available for sale 49,561 21,207 54,527 229,416 102,791 457,502
Trading securities 6,042 -- -- -- -- 6,042
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 212,899 $ 32,176 $ 78,251 $ 362,636 $ 217,946 $ 903,908
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits $ 199,888 $ 85,219 $ 65,708 $ 91,804 $ 352,399 $ 795,018
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 199,888 $ 85,219 $ 65,708 $ 91,804 $ 352,399 $ 795,018
- ---------------------------------------------------------------------------------------------------------------------------------
GAP for period $ 13,011 $ (53,043) $ 12,543 $ 270,832 $(134,453) $ 108,890
Cumulative GAP - December 31, 1999 $ 13,011 $ (40,032) $ (27,489) $ 243,343 $ 108,890
Cumulative GAP as a percent of total assets 1.4% (4.3%) (3.0%) 26.3% 11.8%
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP - December 31, 1998 $ 19,810 $ (21,045) $ (21,579) $ 257,318 $ 127,451
- ---------------------------------------------------------------------------------------------------------------------------------
21
10
INTEREST RATE RISK (continued)
The following table shows the Company's financial instruments that are sensitive
to changes in interest rates, categorized by expected maturity, and the
instruments' fair values as of December 31, 1999.
EXPECTED MATURITY DATE
AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2000 2001 2002 2003
- --------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE ASSETS:
Fixed rate securities $ 101,305 $ 75,627 $ 67,566 $ 54,412
Average interest rate(1) 6.44% 6.75% 6.75% 6.84%
Variable rate securities(2) 28,565 -- -- --
Average interest rate(1) 3.15% -- -- --
Fixed rate loans 35,177 29,722 26,506 25,727
Average interest rate 6.88% 6.86% 6.89% 6.88%
Variable rate loans 21,322 5,597 5,130 4,500
Average interest rate 6.93% 7.49% 7.50% 7.54%
Other fixed rate assets 677 1,145 204 --
Average interest rate 6.11% 5.09% 6.08% --
Other variable rate assets(3) 112,743 -- -- --
Average interest rate 4.27% -- -- --
- --------------------------------------------------------------------------------------------------------------
Total interest sensitive assets $ 299,789 $ 112,091 $ 99,406 $ 84,639
- --------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE LIABILITIES:
Savings and money market
deposit accounts $ 11,415 $ 6,313 $ 6,218 $ 6,129
Average interest rate 3.28% 3.25% 3.25% 3.26%
Fixed rate certificates of deposit 230,133 58,496 11,333 1,146
Average interest rate 4.92% 5.19% 5.25% 5.09%
Variable rate certificates of deposit 35,997 26,031 27,931 106
Average interest rate 6.48% 6.53% 5.25% 6.70%
NOW accounts -- -- -- --
Average interest rate -- -- -- --
Escrow deposits of borrowers 1,477 -- -- --
Average interest rate 0.25% -- -- --
Deposit acquisition premium,
net of amortization (230) (230) (27) --
- --------------------------------------------------------------------------------------------------------------
Total interest sensitive liabilities $ 278,792 $ 90,610 $ 45,455 $ 7,381
- --------------------------------------------------------------------------------------------------------------
EXPECTED MATURITY DATE
AT DECEMBER 31, 1999
FAIR VALUE
- --------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 THEREAFTER TOTAL AT 12/31/99
- ---------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE ASSETS:
Fixed rate securities $ 29,170 $ 105,662 $ 433,742 $ 433,742
Average interest rate(1) 7.15% 7.20% 6.83%
Variable rate securities(2) -- 1,467 30,032 30,032
Average interest rate(1) -- 6.61% 3.32%
Fixed rate loans 22,282 110,820 250,234 246,373
Average interest rate 6.90% 6.80% 6.85%
Variable rate loans 4,067 34,515 75,131 74,772
Average interest rate 7.55% 7.80% 7.48%
Other fixed rate assets -- -- 2,026 2,026
Average interest rate -- -- 5.53%
Other variable rate assets(3) -- -- 112,743 112,743
Average interest rate -- -- 4.27%
- ---------------------------------------------------------------------------------------------------------
Total interest sensitive assets $ 55,519 $ 252,464 $ 903,908 $ 899,688
- ---------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE LIABILITIES:
Savings and money market
deposit accounts $ 6,048 $ 316,967 $ 353,090 $ 353,090
Average interest rate 3.26% 3.44% 3.42%
Fixed rate certificates of deposit 872 443 302,423 302,065
Average interest rate 4.87% 5.12% 4.98%
Variable rate certificates of deposit 28 -- 90,093 90,093
Average interest rate 6.70% -- 6.56%
NOW accounts -- 48,422 48,422 48,422
Average interest rate -- 0.98% 0.98%
Escrow deposits of borrowers -- -- 1,477 1,477
Average interest rate -- -- 0.25%
Deposit acquisition premium,
net of amortization -- -- (487) --
- ---------------------------------------------------------------------------------------------------------
Total interest sensitive liabilities $ 6,948 $ 365,832 $ 795,018 $ 795,147
- ---------------------------------------------------------------------------------------------------------
(1) Securities rates presented are on a tax equivalent basis.
(2) Includes equity securities.
(3) Consists of overnight Federal funds sold, money market funds and
interest-bearing deposits in banks.
The Company uses certain assumptions to estimate fair values and
expected maturities. For interest-sensitive assets, expected maturities are
based upon contractual maturity, and projected repayments and prepayments of
principal. For interest-sensitive deposit liabilities, maturities are based on
contractual maturity and estimated deposit runoff based on the Bank's own
historical experience. The actual maturity of the Company's financial
instruments could vary significantly from what has been presented in the above
table if actual experience differs from the assumptions used.
OTHER MARKET RISKS
The Company's investment securities portfolio includes equity securities with a
market value of approximately $21.5 million at December 31, 1999. The net
unrealized gains on these securities totaled $8.6 million at year-end 1999.
Movements in equity prices may effect the amount of securities gains or losses
which the Company realizes from the sale of these securities and thus may have
an impact on earnings.
22
11
AVERAGE BALANCE SHEETS
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE(4) EXPENSE RATE(4) BALANCE(4) EXPENSE RATE(4) BALANCE(4) EXPENSE RATE(4)
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning assets:
Federal funds sold $128,124 $ 6,294 4.91% $137,123 $ 7,316 5.34% $106,890 $ 5,840 5.46%
Short-term investments(2) 22,600 1,105 4.89 26,792 1,440 5.37 26,369 1,459 5.53
Investment securities 164,117 8,931 5.44 145,863 8,473 5.81 166,949 10,554 6.32
Mortgage-backed securities 275,361 18,735 6.80 299,368 20,496 6.85 321,521 22,368 6.96
Trading securities 10,760 495 4.60 16,460 819 4.98 12,741 735 5.77
Mortgage loans(1) 292,172 20,516 7.02 264,898 19,413 7.33 235,587 17,704 7.51
Other loans(1) 29,516 2,256 7.64 22,375 2,021 9.03 24,584 2,224 9.05
- --------------------------------------------------- ------------------------ -------------------
Total earning assets 922,650 58,332 6.32% 912,879 59,978 6.56% 894,641 60,884 6.81%
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for
loan losses (2,498) (2,375) (2,245)
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 920,152 910,504 892,396
Other assets 19,923 19,512 18,956
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $940,075 $930,016 $911,352
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Demand and NOW $ 74,933 504 0.67% $ 70,159 554 0.79% $ 65,895 536 0.81%
Savings 353,851 12,060 3.41 349,637 11,959 3.42 355,395 12,240 3.44
Time certificates of
deposit 397,935 20,640 5.19 391,816 21,807 5.57 386,062 21,905 5.67
- --------------------------------------------------- ------------------------ -------------------
Total deposits 826,719 33,204 4.02% 811,612 34,320 4.23% 807,352 34,681 4.30%
- -----------------------------------------------------------------------------------------------------------------------------
Other liabilities 7,209 9,776 7,296
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 833,928 821,388 814,648
- -----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY: 106,147 108,628 96,704
Total liabilities and
stockholders' equity $940,075 $930,016 $911,352
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income (tax-
equivalent basis) 25,128 25,658 26,203
Less adjustment of tax-
exempt interest income (126) (144) (151)
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 25,002 $ 25,514 $26,052
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.30% 2.33% 2.51%
- -----------------------------------------------------------------------------------------------------------------------------
Net interest margin(3) 2.72% 2.81% 2.93%
- -----------------------------------------------------------------------------------------------------------------------------
(1) Loans on nonaccrual status are included in the average balance.
(2) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
(3) Net interest income (tax equivalent basis) before provision for loan losses
divided by average interest-earning assets.
(4) Includes the effects of SFAS No. 115.
23
12
RATE/VOLUME ANALYSIS
The following table presents, for the years indicated, the changes in interest
and dividend income and the changes in interest expense attributable to changes
in interest rates and changes in the volume of earning assets and
interest-bearing liabilities. A change attributable to both volume and rate has
been allocated proportionately to the change due to volume and the change due to
rate.
- -----------------------------------------------------------------------------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
(IN THOUSANDS) INCREASE (DECREASE) INCREASE (DECREASE)
YEARS ENDED DECEMBER 31, DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Federal funds sold $ (463) $ (559) $(1,022) $ 1,616 $ (140) $ 1,476
Short-term investments (212) (123) (335) 23 (42) (19)
Investment securities 1,000 (524) 476 (1,248) (826) (2,074)
Trading securities (266) (58) (324) 194 (110) 84
Mortgage-backed securities (1,634) (127) (1,761) (1,521) (351) (1,872)
Mortgage loans 1,939 (836) 1,103 2,157 (448) 1,709
Other loans 578 (343) 235 (200) (3) (203)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 942 (2,570) (1,628) 1,021 (1,920) (899)
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Demand and NOW 36 (86) (50) 34 (16) 18
Savings 144 (43) 101 (197) (84) (281)
Time certificates of deposit 336 (1,503) (1,167) 324 (422) (98)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 516 (1,632) (1,116) 161 (522) (361)
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 426 $ (938) $ (512) $ 860 $(1,398) $ (538)
- -----------------------------------------------------------------------------------------------------------------------------
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.
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes comprehensive
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in its balance sheet and measure
those instruments at fair market value. Under this Statement, an entity that
elects to apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. The Company intends to adopt
SFAS No. 133 as of January 1, 2001. The Statements are not expected to have a
material effect on the Company's consolidated financial statements.
24
13
INDEPENDENT AUDITORS' REPORT
[KPMG LOGO]
The Board of Directors and Stockholders
MASSBANK Corp.:
We have audited the accompanying consolidated balance sheets
of MASSBANK Corp. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
MASSBANK Corp. and subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
KPMG LLP
January 11, 2000
25
14
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 10,476 $ 7,038
Short-term investments (Note 2) 110,928 147,776
- ------------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 121,404 154,814
- ------------------------------------------------------------------------------------------------------------------------------------
Term federal funds sold -- 25,000
Interest-bearing deposits in banks 3,841 2,033
Securities held to maturity, at amortized cost
(market value of $230 in 1999 and $354 in 1998) (Note 3) 230 354
Securities available for sale, at market value
(amortized cost of $453,844 in 1999 and $398,343 in 1998) (Note 3) 457,502 418,126
Trading securities, at market value (Note 4) 6,042 30,793
Loans (Notes 5, 7 and 11):
Mortgage loans 288,580 283,654
Other loans 36,785 21,335
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 325,365 304,989
Less: allowance for loan losses (Note 6) (2,555) (2,450)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 322,810 302,539
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment (Note 9) 4,127 4,320
Real estate acquired through foreclosure (Note 7) 62 86
Accrued interest receivable 5,045 5,058
Goodwill 1,288 1,387
Accrued income tax asset, net 292 --
Other assets 2,073 2,115
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 924,716 $ 946,625
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Notes 10 and 11):
Demand and NOW $ 72,938 $ 76,173
Savings 353,090 348,049
Time certificates of deposit 392,516 400,524
Deposit acquisition premium, net of amortization (487) (715)
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 818,057 824,031
Escrow deposits of borrowers 1,477 1,438
Employee stock ownership plan liability (Note 15) 468 625
Accrued income taxes payable -- 723
Deferred income taxes payable (Note 12) 199 6,761
Other liabilities 3,036 2,558
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 823,237 836,136
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 8 and 9) -- --
Stockholders' equity (Notes 12, 14, 15 and 16):
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, 7,407,432 and 7,384,332 shares issued, respectively 7,407 7,384
Additional paid-in capital 60,591 60,003
Retained earnings 85,873 78,308
- ------------------------------------------------------------------------------------------------------------------------------------
153,871 145,695
Treasury stock at cost, 4,096,189 and 3,885,222 shares, respectively (53,890) (46,272)
Accumulated other comprehensive income (Note 1) 1,966 11,691
Common stock acquired by ESOP (Note 15) (468) (625)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 101,479 110,489
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 924,716 $ 946,625
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
26
15
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Mortgage loans $20,516 $19,413 $17,704
Other loans 2,256 2,021 2,224
Securities available for sale:
Mortgage-backed securities 18,735 20,496 22,368
Other securities 8,790 8,310 10,385
Trading securities 495 819 735
Federal funds sold 6,294 7,316 5,840
Other investments 1,120 1,459 1,477
- --------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 58,206 59,834 60,733
- --------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
NOW 504 554 536
Savings 12,060 11,959 12,240
Time certificates of deposit 20,640 21,807 21,905
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 33,204 34,320 34,681
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 25,002 25,514 26,052
PROVISION FOR LOAN LOSSES (Note 6) 140 193 260
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 24,862 25,321 25,792
- --------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Deposit account service fees 724 811 924
Gains on securities, net 4,033 2,893 1,939
Other 805 886 935
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest income 5,562 4,590 3,798
- --------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 7,436 7,426 7,743
Occupancy and equipment 2,146 2,059 2,096
Data processing 486 510 438
Professional services 481 461 407
Merger and acquisition related expense -- -- 156
Advertising and marketing 198 171 187
Amortization of intangibles 327 302 251
Deposit insurance 114 116 116
Contributions 21 14 664
Other 1,357 1,456 1,367
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 12,566 12,515 13,425
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 17,858 17,396 16,165
INCOME TAX EXPENSE (Note 12) 6,547 6,482 5,998
- --------------------------------------------------------------------------------------------------------------------------
Net income $11,311 $10,914 $10,167
- --------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,374,623 3,528,817 3,524,657
Diluted 3,478,944 3,676,642 3,663,310
EARNINGS PER SHARE (in dollars):
Basic $ 3.35 $ 3.09 $ 2.88
Diluted 3.25 2.97 2.77
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
27
16
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,311 $ 10,914 $ 10,167
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 993 928 853
Loan interest capitalized (58) (88) --
Amortization of ESOP shares committed to be released 163 243 184
Charitable contribution of appreciated securities -- -- 622
Decrease in accrued interest receivable 13 337 464
Increase (decrease) in other liabilities 478 (734) 56
(Decrease) increase in current income taxes payable (1,015) (517) 435
Accretion of discounts on securities, net of
amortization of premiums (961) (1,152) (1,178)
Net trading securities activity 25,174 (8,671) (16,480)
Gains on securities available for sale (3,954) (2,798) (1,831)
Gains on trading securities (79) (95) (108)
(Decrease) increase in deferred mortgage loan origination fees,
net of amortization (3) 231 168
Deferred income tax (benefit) expense (161) 146 (372)
(Increase) decrease in other assets (327) 85 553
Loans originated for sale -- (129) (770)
Loans sold -- 129 770
Provision for loan losses 140 193 260
Provisions for losses and writedowns on real estate acquired
through foreclosure -- -- (21)
Gains on sales of real estate acquired through foreclosure -- (5) (34)
Gains on sales of premises and equipment (2) -- (1)
Increase (decrease) in escrow deposits of borrowers 39 (64) 231
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 31,751 (1,047) (6,032)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and cash equivalents for acquisitions -- -- (2,874)
Purchases of term federal funds -- (35,000) (30,000)
Proceeds from maturities of term federal funds 25,000 30,000 20,000
Increase in interest-bearing bank deposits (3,117) (766) (1,649)
Proceeds from maturities of interest-bearing bank deposits 1,309 816 1,240
Proceeds from sales of investment securities available for sale 72,582 26,580 42,741
Proceeds from maturities of investment securities held to maturity
and available for sale 65,800 43,650 59,000
Purchases of investment securities available for sale (169,020) (59,291) (63,696)
Purchases of investment securities held to maturity -- -- (230)
Purchases of mortgage-backed securities (88,397) (10,043) (63,661)
Principal repayments of mortgage-backed securities 68,430 70,203 42,246
Principal repayments of securities held to maturity 44 18 18
Principal repayments of securities available for sale 124 4 85
Loans originated (82,415) (105,103) (57,787)
Loan principal payments received 62,254 71,687 48,560
Loans purchased (345) -- (201)
Purchases of premises and equipment (376) (508) (491)
Proceeds from sale of premises and equipment 2 -- 9
Proceeds from sale of real estate acquired through foreclosure 86 316 964
Net advances on real estate acquired through foreclosure (4) (20) (30)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (48,043) 32,543 (5,756)
- --------------------------------------------------------------------------------------------------------------------------
(Continued)
28
17
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) Years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (6,202) 13,978 (8,523)
Payments to acquire treasury stock (7,618) (4,703) (1,665)
Issuance of common stock under stock option plan 351 741 466
Tax benefit resulting from stock options exercised 97 329 260
Cash dividends paid on common stock (3,759) (3,605) (3,124)
Tax benefit resulting from dividends paid on unallocated shares
held by the ESOP 13 15 15
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (17,118) 6,755 (12,571)
- --------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (33,410) 38,251 (24,359)
Cash and cash equivalents at beginning of year 154,814 116,563 140,922
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $121,404 $154,814 $116,563
- --------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the year for interest $33,204 $34,319 $34,671
Cash paid during the year for taxes, net of refunds 7,617 6,185 5,237
Purchases of securities executed but not settled at beginning of
year which settled during the year 129 32 --
Sales of securities executed but not settled at beginning
of year which settled during the year 583 -- --
Non-cash transactions:
SFAS 115:
(Decrease) increase in stockholders' equity (9,725) 2,620 5,070
(Decrease) increase in deferred tax liabilities (6,401) 1,688 3,510
Securities reclassified from available for sale to trading -- 1,111 --
Transfers from loans to real estate acquired through foreclosure 58 377 376
Transfers from loans to other assets -- 56 --
Transfers from premises and equipment to other assets -- 9 --
Purchases of securities executed but not settled as of year-end 117 129 32
Sales of securities executed but not settled as of year-end 202 583 --
Cost of donated securities -- -- 2
- --------------------------------------------------------------------------------------------------------------------------
In connection with the acquisition of Glendale Co-operative Bank in July,
1997, assets acquired and liabilities assumed were as follows:
Assets acquired -- -- $ 31,561
Goodwill -- -- 1,530
Liabilities assumed -- -- 30,217
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
29
18
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------
(In thousands except share data) Years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------------------
Accumulated Common
Additional other stock
Common paid-in Retained Treasury comprehensive acquired
stock capital earnings stock income by ESOP Total
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $5,476 $57,858 $65,756 $(39,904) $4,001 $ (937) $ 92,250
Net Income -- -- 10,167 -- -- -- 10,167
Other comprehensive income,
net of tax: Unrealized
gains on securities, net of
reclassification adjustment
(Note 1) -- -- -- -- 5,070 -- 5,070
Comprehensive income -- -- -- -- -- -- 15,237
Cash dividends declared
($0.885 per share) -- -- (3,124) -- -- -- (3,124)
Tax benefit resulting from
dividends paid on unallocated
shares held by the ESOP -- -- 15 -- -- -- 15
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 184 -- -- -- -- 184
Purchase of treasury stock -- -- -- (1,665) -- -- (1,665)
Exercise of stock options and
related tax benefits 31 695 -- -- -- -- 726
Transfer resulting from
four-for-three stock split 1,830 -- (1,830) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 7,337 58,737 70,984 (41,569) 9,071 (781) 103,779
Net Income -- -- 10,914 -- -- -- 10,914
Other comprehensive income,
net of tax: Unrealized gains on
securities, net of
reclassification adjustment
(Note 1) -- -- -- -- 2,620 -- 2,620
Comprehensive income -- -- -- -- -- -- 13,534
Cash dividends declared
($1.02 per share) -- -- (3,605) -- -- -- (3,605)
Tax benefit resulting from
dividends paid on unallocated
shares held by the ESOP -- -- 15 -- -- -- 15
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 243 -- -- -- -- 243
Purchase of treasury stock -- -- -- (4,703) -- -- (4,703)
Exercise of stock options and
related tax benefits 47 1,023 -- -- -- -- 1,070
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 7,384 60,003 78,308 (46,272) 11,691 (625) 110,489
Net Income -- -- 11,311 -- -- -- 11,311
Other comprehensive loss,
net of tax:
Unrealized (losses) on
securities, net of
reclassification adjustment
(Note 1) -- -- -- -- (9,725) -- (9,725)
Comprehensive income -- -- -- -- -- -- 1,586
Cash dividends declared
($1.11 per share) -- -- (3,759) -- -- -- (3,759)
Tax benefit resulting from
dividends paid on unallocated
shares held by the ESOP -- -- 13 -- -- -- 13
Net decrease in liability to ESOP -- -- -- -- -- 157 157
Amortization of ESOP shares
committed to be released -- 163 -- -- -- -- 163
Purchase of treasury stock -- -- -- (7,618) -- -- (7,618)
Exercise of stock options and
related tax benefits 23 425 -- -- -- -- 448
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $7,407 $60,591 $85,873 $(53,890) $1,966 $(468) $101,479
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
30
19
Massbank Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies
Massbank Corp. (the "Company") is a Delaware chartered holding company whose
principal subsidiary is Massbank (the "Bank"). The Bank operates fifteen full
service banking offices in Reading, Melrose, Stoneham, Wilmington, Medford,
Chelmsford, Tewksbury, Westford, Dracut, Lowell and Everett providing a
variety of deposit, lending and trust services. As a Massachusetts chartered
savings bank whose deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") and the Depositors Insurance Fund ("DIF"), the
activities of the Bank are subject to regulation, supervision and examination
by federal and state regulatory authorities, including, but not limited to
the FDIC, the Massachusetts Commissioner of Banks and the DIF. In addition,
as a bank holding company, the Company is subject to supervision, examination
and regulation by the Board of Governors of the Federal Reserve System.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary Massbank and its subsidiaries: Readibank
Properties, Inc., Readibank Investment Corporation and Melbank Investment
Corporation. The accounts of Massbank's subsidiary, Readibank Equipment
Corporation, which was sold in October, 1997 are also included through the
sale date.
The Company has one reportable operating segment. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the balance sheet date and income and expenses
for the period. Material estimates that are particularly susceptible to
change in the near term relate to the determination of the allowance for loan
losses.
Certain amounts in the prior years' consolidated financial statements
were reclassified to permit comparison with the current fiscal year.
Investments in Debt and Equity Securities
Under its investment policy, management determines the appropriate
classification of securities at the time of purchase. Those debt 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. The Company records investment securities available for
sale at aggregate market value with the net unrealized holding gains or
losses reported, net of tax effect, as a separate component of stockholders'
equity until realized. As of December 31, 1999, stockholders' equity included
approximately $2.0 million, representing the net unrealized gains on
securities available for sale, less applicable income taxes. Investments
classified as trading securities are stated at market value with unrealized
gains and losses included in earnings.
Income on debt securities 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.
Loans
Loans are reported at the principal amount outstanding, net of unearned fees.
Loan origination fees and related direct incremental loan origination costs
are offset and the resulting net amount is deferred and amortized over the
life of the loan using the level-yield method.
The Bank generally does not accrue interest on loans which are 90
days or more past due. When a loan is placed on nonaccrual status, all
interest previously accrued but not collected is reversed from income and all
amortization of deferred loan fees is discontinued. Interest received on
nonaccrual loans is either applied against principal or reported as income
according to management's judgment as to the collectibility of principal.
Interest accruals are resumed on such loans only when they are brought
current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both
principal and interest.
Impairment on loans for which it is probable that the creditor will
be unable to collect all amounts due according to the contractual terms of
the loan agreement are measured on a discounted cash flow method, or at the
loan's observable market price, or at the fair value of the collateral if the
loan is collateral dependent. However, impairment must be measured based on
the fair value of the collateral if it is determined that foreclosure is
probable. Impaired loans consist of all nonaccrual commercial loans.
31
20
1. Summary of Significant Accounting Policies (continued)
Allowance for Loan Losses
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 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 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.
Premises and Equipment
Land is carried at cost. Premises, equipment and leasehold improvements are
stated at cost, less accumulated depreciation and amortization computed
primarily by use of the straight-line method over the estimated useful lives
of the related assets or terms of the related leases.
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 or losses upon disposition are reflected in
earnings as realized.
Goodwill
The excess of purchase price over the fair value of net assets of acquired
companies is classified and reported as goodwill. Goodwill is being amortized
using the straight-line method, over 15 years.
Deposit Acquisition Premium
The deposit acquisition premium arising from acquisitions is reported net of
accumulated amortization. Such premium is being amortized on a straight-line
basis over 10 years.
Pension Plan
The Bank accounts for pension benefits on the net periodic pension cost
method for financial reporting purposes. This method recognizes the
compensation cost of an employee's pension benefit over that employee's
approximate service period. Pension costs are funded in the year of accrual
using the aggregate cost method.
Employees' Stock Ownership Plan ("ESOP")
The Company recognizes compensation cost equal to the fair value of the ESOP
shares committed to be released. Dividends on unallocated ESOP shares are
reported as a reduction of accrued interest on the ESOP loan. The Company
reports loans from outside lenders to its ESOP as a liability on its balance
sheet and reports interest cost on the debt. For earnings per share (EPS)
computations, ESOP shares that have been committed to be released are
considered outstanding. ESOP shares that have not been committed to be
released are not considered outstanding.
Stock-Based Compensation
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The
Statement establishes financial accounting and reporting standards for
stock-based compensation plans. SFAS No. 123 encourages, but does not
require, a fair value based method of accounting for stock-based compensation
plans. The Statement allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method prescribed by
Accounting Principles Board ("APB") Opinion No. 25. For those entities
electing to use the intrinsic value based method, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share computed as if the
fair value based method had been applied. The Company continues to account
for stock-based compensation costs under APB Opinion No. 25.
32
21
1. Summary of Significant Accounting Policies (continued)
Earnings Per Common Share
Basic EPS excludes the dilutive effect of common stock equivalents.
Diluted EPS is computed pursuant to APB Opinion No. 15 for all entities
with complex capital structures.
For earnings per share computations, ESOP shares that have been
committed to be released are considered outstanding. ESOP shares that have
not been committed to be released are not considered outstanding.
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.
As a regulated financial institution, the Bank is required to
maintain certain reserve requirements of vault cash and/or deposits with
the Federal Reserve Bank of Boston. At December 31, 1999 vault cash and/or
deposits with the Federal Reserve Bank of Boston included in "Cash and Due
from Banks," rose to $7.4 million, temporarily exceeding reserve
requirements. The increase was due to the extra vault cash maintained by
the Bank at the end of 1999 as part of its year 2000 preparedness efforts.
Income Taxes
The Bank recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis
of the Bank's assets and liabilities at enacted tax rates expected to be
in effect when the amounts related to such temporary differences are
realized or settled. The Bank's deferred tax asset is reviewed and
adjustments to such asset are recognized as deferred income tax expense or
benefit based upon management's judgment relating to the realizability of
such asset. Based on the Bank's historical and current pretax earnings,
management believes it is more likely than not that the Bank will realize
its existing gross deferred tax asset.
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 year ended December 31, 1999 and the year ended December 31, 1998 is
as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands) Years ended December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Tax Net- Tax Net-
Before-Tax (Expense) of-Tax Before-Tax (Expense) of-Tax
Amount or Benefit Amount Amount or Benefit Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period $(12,171) $4,716 $(7,455) $7,106 $(2,864) $ 4,242
Less: reclassification adjustment
for gains realized in
net income (3,954) 1,684 (2,270) (2,798) 1,176 (1,622)
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (16,125) 6,400 (9,725) 4,308 (1,688) 2,620
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $(16,125) $6,400 $(9,725) $ 4,308 $(1,688) $ 2,620
- -----------------------------------------------------------------------------------------------------------------------------------
33
22
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold (overnight) $ 86,211 $123,207
Money market funds 24,717 24,569
- -----------------------------------------------------------------------------------------------------------------------------------
Total short-term investments $110,928 $147,776
- -----------------------------------------------------------------------------------------------------------------------------------
The investments above are stated at cost which approximates market value.
3. INVESTMENT SECURITIES
The amortized cost and market value of investment securities follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(IN THOUSANDS) AT DECEMBER 31, 1999 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Other bonds and obligations $ 230 $ -- $ -- $ 230
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 230 -- -- 230
- -----------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations 138,518 122 (1,025) 137,615
U.S. Government agency obligations 16,143 -- (128) 16,015
- -----------------------------------------------------------------------------------------------------------------------------------
Total 154,661 122 (1,153) 153,630
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage Association 38,061 251 (490) 37,822
Federal Home Loan Mortgage Corporation 239,607 311 (4,028) 235,890
Federal National Mortgage Association 3,951 74 (45) 3,980
Collateralized mortgage obligations 4,649 16 (22) 4,643
- -----------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 286,268 652 (4,585) 282,335
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 440,929 774 (5,738) 435,965
- -----------------------------------------------------------------------------------------------------------------------------------
Equity securities 12,915 8,985 (363) 21,537
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 453,844 $9,759 $(6,101) $457,502
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 3,658
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale, net 457,502
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities, net $457,732
- -----------------------------------------------------------------------------------------------------------------------------------
34
23
3. INVESTMENT SECURITIES (continued)
The amortized cost and market value of investment securities follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(IN THOUSANDS) AT DECEMBER 31, 1998 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Other bonds and obligations $ 354 $ -- $ -- $ 354
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 354 -- -- 354
- -----------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations 112,627 2,354 -- 114,981
U.S. Government agency obligations 8,966 26 -- 8,992
- -----------------------------------------------------------------------------------------------------------------------------------
Total 121,593 2,380 -- 123,973
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage Association 48,347 1,517 -- 49,864
Federal Home Loan Mortgage Corporation 205,949 5,116 (6) 211,059
Federal National Mortgage Association 4,984 181 -- 5,165
Collateralized mortgage obligations 6,193 60 (3) 6,250
Other 223 12 -- 235
- -----------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 265,696 6,886 (9) 272,573
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 387,289 9,266 (9) 396,546
- -----------------------------------------------------------------------------------------------------------------------------------
Equity securities 11,054 10,579 (53) 21,580
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 398,343 $19,845 $(62) $418,126
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 19,783
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale, net 418,126
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities, net $418,480
- -----------------------------------------------------------------------------------------------------------------------------------
During the years ended December 31, 1999, 1998 and 1997, the Company realized
gains and losses on sales of securities available for sale as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998 1997
Realized Realized Realized
- -----------------------------------------------------------------------------------------------------------------------------------
Gains Losses Gains Losses Gains Losses
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 2 $ (576) $ 180 $ -- $ 38 $ (35)
Mortgage-backed securities -- -- -- -- -- (301)
Marketable equity securities 5,099 (571) 3,577 (959) 2,201 (96)
Other equity securities -- -- -- -- 25 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) $5,101 $(1,147) $3,757 $(959) $2,264 $(432)
- -----------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of debt securities available for sale during 1999, 1998 and
1997 were $48.4 million, $13.1 million and $34.1 million, respectively. Proceeds
from sales of equity securities available for sale during 1999, 1998 and 1997,
were $24.1 million, $13.7 million and $8.6 million, respectively.
There were no sales of investment securities held-to-maturity during 1999,
1998 and 1997.
35
24
3. INVESTMENT SECURITIES (continued)
The amortized cost and market value of debt securities held to maturity
and debt securities available for sale by contractual maturity are
as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity:
Other bonds and obligations:
Maturing after 1 year but within 5 years $ 230 $ 230 $ 230 $ 230
Maturing after 5 years but within 10 years -- -- 82 82
Maturing after 10 years but within 15 years -- -- 42 42
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt securities held to maturity 230 230 354 354
===================================================================================================================================
Investment securities available for sale:
U.S. Treasury obligations:
Maturing within 1 year 52,845 52,825 50,876 51,260
Maturing after 1 year but within 5 years 82,707 81,919 58,790 60,557
Maturing after 5 years but within 10 years 2,966 2,871 2,961 3,164
- -----------------------------------------------------------------------------------------------------------------------------------
Total 138,518 137,615 112,627 114,981
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government agency obligations:
Maturing within 1 year 6,992 6,971 2,000 2,006
Maturing after 1 year but within 5 years 9,000 8,899 6,771 6,788
Maturing after 15 years 151 145 195 198
- -----------------------------------------------------------------------------------------------------------------------------------
Total 16,143 16,015 8,966 8,992
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Maturing within 1 year 523 518 371 367
Maturing after 1 year but within 5 years 3,869 3,922 6,014 6,155
Maturing after 5 years but within 10 years 56,571 56,227 35,087 36,073
Maturing after 10 years but within 15 years 221,202 217,629 219,579 225,298
Maturing after 15 years 4,103 4,039 4,645 4,680
- -----------------------------------------------------------------------------------------------------------------------------------
Total 286,268 282,335 265,696 272,573
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale 440,929 435,965 387,289 396,546
===================================================================================================================================
Net unrealized gains on debt securities
available for sale (4,964) -- 9,257 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale,
net carrying value $435,965 $435,965 $396,546 $396,546
===================================================================================================================================
Maturities of mortgage-backed securities are based on contractual
maturities. Actual maturities will differ from contractual maturities due
to scheduled amortization and prepayments.
36
25
4. TRADING SECURITIES
The amortized cost and market values of trading securities are as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
- --------------------------------------------------------------------------------
U.S. Treasury obligations $4,960 $4,956 $29,690 $29,707
Investments in mutual funds 1,112 1,086 1,112 1,086
- --------------------------------------------------------------------------------
Total trading securities $6,072 $6,042 $30,802 $30,793
================================================================================
During the years ended December 31, 1999, 1998 and 1997, the Company
realized gains and losses on sales of trading securities as follows:
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
REALIZED REALIZED REALIZED
GAINS LOSSES GAINS LOSSES GAINS LOSSES
- ----------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 4 $(11) $ 48 $ -- $22 $ --
Investments in mutual funds -- -- 11 (35) -- (33)
Marketable equity securities 132 (25) 55 (20) 46 --
- ----------------------------------------------------------------------------------------------------------
Total realized gains (losses) $136 $(36) $114 $(55) $68 $(33)
==========================================================================================================
Proceeds from sales of trading securities during 1999, 1998 and 1997 were
$13.8 million, $50.2 million and $16.3 million, respectively. Unrealized
gains or (losses) included in income in 1999, 1998 and 1997 were $(21)
thousand, $36 thousand and $73 thousand, respectively.
5. LOANS
The Bank's lending activities are conducted principally in the local
communities in which it operates banking offices, and to a lesser extent,
in selected areas of Massachusetts and southern New Hampshire.
The Bank offers single family and multi-family residential mortgage
loans and a variety of consumer loans. The Bank also offers mortgage loans
secured by commercial or investment property such as apartment buildings
and commercial or corporate facilities; loans for the construction of
residential homes, multi-family properties and for land development; and
business loans for other commercial purposes. Most loans granted by the
Bank are either collateralized by real estate or guaranteed by federal or
local governmental authorities. The ability of single family residential
and consumer borrowers to honor their repayment commitments is generally
dependent on the level of overall economic activity within the borrowers'
geographic areas. The ability of commercial real estate and commercial loan
borrowers to honor their repayment commitments is generally dependent on
the economic health of the real estate sector in the borrowers' geographic
areas and the overall economy.
37
26
5. LOANS (continued)
The composition of the Bank's loan portfolio is summarized as follows:
- ----------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- ----------------------------------------------------------------------------------
MORTGAGE LOANS:
Residential:
Conventional:
Fixed rate $ 247,512 $ 237,979
Variable rate 38,917 42,702
FHA and VA 740 1,181
Commercial 2,471 2,257
Construction 232 730
- ----------------------------------------------------------------------------------
Total mortgage loans 289,872 284,849
Add: premium on loans 159 259
Less: deferred mortgage loan origination fees (1,451) (1,454)
- ----------------------------------------------------------------------------------
Mortgage loans, net 288,580 283,654
- ----------------------------------------------------------------------------------
OTHER LOANS:
Consumer:
Installment 1,418 1,547
Guaranteed education 7,037 7,967
Other secured 1,318 1,366
Home equity lines of credit 11,737 10,159
Unsecured 225 235
- ----------------------------------------------------------------------------------
Total consumer loans 21,735 21,274
Commercial 15,050 61
- ----------------------------------------------------------------------------------
Total other loans 36,785 21,335
- ----------------------------------------------------------------------------------
Total loans $ 325,365 $ 304,989
==================================================================================
In the ordinary course of business, the Bank makes loans to its directors,
officers and their associates and affiliated companies ("related parties")
at substantially the same terms as those prevailing at the time of
origination for comparable transactions with unrelated borrowers. An
analysis of total related party loans for the year ended December 31, 1999
follows:
- ---------------------------------------------------------------------------------
(IN THOUSANDS)
- ---------------------------------------------------------------------------------
Balance at December 31, 1998 $562
Additions 168
Repayments (117)
- ---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $613
=================================================================================
38
27
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
- ---------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
Balance at beginning of year $ 2,450 $ 2,334 $ 2,237
Glendale Co-operative Bank acquisition -- -- 105
Provision for loan losses 140 193 260
Recoveries of loans previously charged-off 41 26 59
- ---------------------------------------------------------------------------------------
Total 2,631 2,553 2,661
- ---------------------------------------------------------------------------------------
LESS CHARGE-OFFS:
Mortgage loans (62) (81) (221)
Other loans (14) (22) (106)
- ---------------------------------------------------------------------------------------
Balance at end of year $ 2,555 $ 2,450 $ 2,334
=======================================================================================
The following table shows the allocation of the allowance for loan losses
by category of loans at December 31, 1999, 1998 and 1997.
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF LOANS OF LOANS OF LOANS
AMOUNT TO TOTAL AMOUNT TO TOTAL AMOUNT TO TOTAL
- ----------------------------------------------------------------------------------------------------
MORTGAGE LOANS:
Residential $1,535 88% $1,786 92% $1,544 90%
Commercial 7 1 2 1 12 1
Consumer loans 215 7 153 7 160 9
Commercial loans 301 4 25 -- -- --
Unallocated 497 -- 484 -- 618 --
- ----------------------------------------------------------------------------------------------------
Total $2,555 100% $2,450 100% $2,334 100%
====================================================================================================
7. NON-PERFORMING ASSETS
The following schedule summarizes non-performing assets at the dates shown:
- ---------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
Total nonaccrual loans $ 795 $ 1,004 $ 1,771
Total real estate acquired through foreclosure 62 86 --
- ---------------------------------------------------------------------------------------
Total non-performing assets $ 857 $ 1,090 $ 1,771
=======================================================================================
Percent of non-performing loans to total loans 0.24% 0.33% 0.65%
Percent of non-performing assets to total assets 0.09% 0.12% 0.19%
The reduction in interest income associated with nonaccrual loans is as
follows:
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Interest income that would have been recorded under original terms $64 $84 $163
Interest income actually recorded 51 61 97
- -------------------------------------------------------------------------------------------------
Reduction in interest income $13 $23 $ 66
=================================================================================================
During 1999, 1998 and 1997 the Company had no impaired loans.
39
28
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and involve, to
varying degrees, elements of credit risk in excess of the amount recognized
in the consolidated balance sheet. The contract or notional amounts reflect
the extent of involvement the Bank has in particular classes of these
instruments. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument is
represented by the contractual or notional amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
- ----------------------------------------------------------------------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to originate residential mortgage loans $ 2,829 $ 7,941
Unadvanced portions of construction loans 65 281
Unused credit lines, including unused portions of equity lines of credit 31,693 29,163
==========================================================================================================
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee by the customer. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit-worthiness on a case-by-case
basis. The amount of collateral obtained, if any, is based on management's
credit evaluation of the borrower.
9. PREMISES AND EQUIPMENT
A summary of premises and equipment and their estimated useful lives used
for depreciation purposes is as follows:
- --------------------------------------------------------------------------------------------
ESTIMATED
USEFUL LIFE
(IN THOUSANDS) AT DECEMBER 31, 1999 1998 (IN YEARS)
- --------------------------------------------------------------------------------------------
Premises:
Land $ 1,227 $ 1,227 --
Buildings 3,637 3,637 25--45
Building and leasehold improvements 2,030 1,937 1-20
Equipment 3,889 3,606 1-30
- --------------------------------------------------------------------------------------------
10,783 10,407
Less: accumulated depreciation and amortization 6,656 6,087
- --------------------------------------------------------------------------------------------
Total premises and equipment, net $ 4,127 $ 4,320
============================================================================================
The Bank is obligated under a number of noncancelable operating leases for
various banking offices. These operating leases expire at various dates
through 2006 with options for renewal. Rental expenses for the years ended
December 31, 1999, 1998 and 1997 amounted to $521 thousand, $518 thousand
and $522 thousand, respectively.
The minimum rental commitments, with initial or remaining terms of one
year or more exclusive of operating costs and real estate taxes to be paid
by the Bank under these leases, as of December 31, 1999, are as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS
- --------------------------------------------------------------------------------
2000 $264
2001 258
2002 166
2003 109
2004 39
Later years 59
- --------------------------------------------------------------------------------
Total $895
================================================================================
40
29
10. DEPOSITS
Deposits are summarized as follows:
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE
- ---------------------------------------------------------------------------------------------------------
Demand and NOW:
NOW accounts $ 48,422 0.98% $ 52,324 1.16%
Demand accounts 24,516 -- 23,849 --
- ---------------------------------------------------------------------------------------------------------
Total demand and NOW 72,938 0.65 76,173 0.80
- ---------------------------------------------------------------------------------------------------------
Savings:
Regular savings and special notice accounts 333,535 3.45 326,192 3.46
Money market accounts 19,555 2.97 21,857 2.99
- ---------------------------------------------------------------------------------------------------------
Total savings 353,090 3.42 348,049 3.43
- ---------------------------------------------------------------------------------------------------------
Time certificates:
Fixed rate certificates 302,423 4.98 318,491 5.23
Variable rate certificates 90,093 6.56 82,033 5.88
- ---------------------------------------------------------------------------------------------------------
Total time certificates 392,516 5.35 400,524 5.36
- ---------------------------------------------------------------------------------------------------------
Deposit acquisition premium, net of amortization (487) -- (715) --
- ---------------------------------------------------------------------------------------------------------
Total deposits $ 818,057 4.10% $ 824,031 4.13%
=========================================================================================================
The maturity distribution and related rate structure of the Bank's time
certificates at December 31, 1999 follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------
AVERAGE
AMOUNT INTEREST RATE
- --------------------------------------------------------------------------------
Due within 3 months $101,126 5.06%
Due within 3 - 6 months 88,156 5.08
Due within 6 - 12 months 76,848 5.27
Due within 1 - 2 years 84,527 5.60
Due within 2 - 3 years 39,264 6.28
Due within 3 - 5 years 2,152 5.10
Thereafter 443 5.12
- --------------------------------------------------------------------------------
Total $392,516 5.35%
================================================================================
At December 31, the Bank had individual time certificates of deposit of
$100 thousand or more maturing as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
Due within 3 months $19,152 $24,283
Due within 3 - 6 months 12,615 13,338
Due within 6 - 12 months 16,393 15,511
Due within 1 - 2 years 15,309 16,997
Due within 2 - 3 years 9,760 6,759
Due within 3 - 5 years 223 100
Thereafter 270 --
- --------------------------------------------------------------------------------
Total $73,722 $76,988
================================================================================
41
30
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Bank disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth
below for the Bank's financial instruments.
CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND ACCRUED INTEREST
RECEIVABLE
The carrying amounts for these financial instruments approximate fair value
because of the short-term nature of these financial instruments.
INTEREST-BEARING DEPOSITS IN BANKS AND TERM FEDERAL FUNDS SOLD
The carrying amounts of the interest-bearing deposits in banks and term
federal funds sold reported in the balance sheet at December 31, 1999 and
1998 approximate fair value.
SECURITIES
The fair value of investment securities is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers.
Statement 107 specifies that fair values should be calculated based on
the value of one unit without regard to any premium or discount that may
result from concentrations of ownership of a financial instrument, possible
tax ramifications, or estimated transaction costs.
The carrying amount and estimated fair values of the Company's
investment securities are as follows:
- -----------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------
CARRYING CALCULATED CARRYING CALCULATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -----------------------------------------------------------------------------------------
Securities held to maturity $ 230 $ 230 $ 354 $ 354
Securities available for sale 457,502 457,502 418,126 418,126
Trading securities 6,042 6,042 30,793 30,793
- -----------------------------------------------------------------------------------------
Total securities $463,774 $463,774 $449,273 $449,273
=========================================================================================
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential mortgage,
commercial real estate, consumer and commercial.
The fair values of residential and commercial real estate, and certain
consumer loans are calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the Bank's historical experience with repayments for
each loan classification, modified, as required, by an estimate of the
effect of current economic and lending conditions. For variable rate
commercial loans and certain variable rate consumer loans, including home
equity lines of credit, carrying value approximates fair value. Assumptions
regarding credit risk, cash flows, and discount rates are judgmentally
determined using available market information.
The following table presents information for loans:
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------
CARRYING CALCULATED CARRYING CALCULATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -----------------------------------------------------------------------------------------------
Real estate:
Residential:
Variable $ 38,844 $ 38,259 $ 42,617 $ 43,142
Fixed 247,273 243,483 238,787 245,858
Commercial:
Variable 2,463 2,454 2,243 2,267
Fixed -- -- 7 7
Consumer 21,735 21,899 21,274 21,503
Commercial 15,050 15,050 61 61
- -----------------------------------------------------------------------------------------------
Total loans 325,365 321,145 304,989 312,838
Less: allowance for loan losses (2,555) -- (2,450) --
- -----------------------------------------------------------------------------------------------
Net loans $ 322,810 $321,145 $ 302,539 $312,838
===============================================================================================
42
31
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
DEPOSITS
Under Statement 107, the fair value of deposits with no stated maturity,
such as demand deposits, NOW accounts, regular savings and special notice
accounts, and money market accounts, is equal to the amount payable on
demand as of December 31, 1999 and 1998. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits
of similar remaining maturities.
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------
Demand accounts $ 24,516 $ 24,516 $ 23,849 $ 23,849
NOW accounts 48,422 48,422 52,324 52,324
Regular savings and special notice accounts 333,535 333,535 326,192 326,192
Money market accounts 19,555 19,555 21,857 21,857
Time certificates 392,516 392,158 400,524 402,040
Deposit acquisition premium, net of amortization (487) -- (715) --
- ----------------------------------------------------------------------------------------------------------------
Total deposits 818,057 818,186 824,031 826,262
Escrow deposits of borrowers 1,477 1,477 1,438 1,438
- ----------------------------------------------------------------------------------------------------------------
Total $ 819,534 $819,663 $ 825,469 $827,700
The fair value estimates and the carrying amounts above do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates.
The Bank estimates the fair value of the cost to terminate commitments
to advance funds on construction loans and for residential mortgage loans
in the pipeline at December 31, 1999 and 1998 to be immaterial. Unused
credit lines, including unused portions of equity lines of credit, are at
floating interest rates and therefore there is no fair value adjustment.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. Because no active market exists for a
portion of the Bank's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Bank has a trust
department that contributes fee income annually. The trust department is
not considered a financial instrument, and its value has not been
incorporated into the fair value estimates. Other significant assets and
liabilities that are not considered financial assets or liabilities include
deferred tax liabilities, premises and equipment and goodwill. In addition,
the tax ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates.
43
32
12. INCOME TAXES
Income tax expense (benefit) was allocated as follows:
- ---------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
Current income tax expense:
Federal $ 6,134 $ 5,565 $ 5,096
State 574 771 1,034
- ---------------------------------------------------------------------------------------
Total current tax expense 6,708 6,336 6,130
- ---------------------------------------------------------------------------------------
Deferred income tax expense (benefit):
Federal (121) 110 (102)
State (40) 40 (26)
Change in valuation reserve -- (4) (4)
- ---------------------------------------------------------------------------------------
Total deferred tax expense (benefit) (161) 146 (132)
- ---------------------------------------------------------------------------------------
Total income tax expense $ 6,547 $ 6,482 $ 5,998
=======================================================================================
Income tax expense attributable to income from operations for the years
ended December 31, differed from the amounts computed by applying the
federal income tax rate of 35 percent as a result of the following:
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Computed "expected" income tax expense at statutory rate $ 6,250 $ 6,089 $ 5,658
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit 347 527 656
Dividends received deduction (79) (87) (95)
Other 29 (43) (217)
Change in valuation reserve -- (4) (4)
- -------------------------------------------------------------------------------------------------------
Income tax expense $ 6,547 $ 6,482 $ 5,998
- -------------------------------------------------------------------------------------------------------
Effective income tax rate 36.66% 37.26% 37.10%
=======================================================================================================
44
33
12. INCOME TAXES (continued)
At December 31, 1999 and 1998, the Bank had gross deferred tax assets and
gross deferred tax liabilities as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Loan losses $ 609 $ 431
Deferred loan fees, net 8 100
Deferred compensation and pension cost 502 463
Depreciation 14 33
Purchase accounting 415 419
Other 41 6
- --------------------------------------------------------------------------------
Gross deferred tax asset 1,589 1,452
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Valuation of securities 1,691 8,092
Other unrealized securities gains 93 102
Other 4 19
- --------------------------------------------------------------------------------
Gross deferred tax liability 1,788 8,213
- --------------------------------------------------------------------------------
Net deferred tax liability $ 199 $6,761
================================================================================
Based on the Company's historical and current pretax earnings,
management believes it is more likely than not that the Company will
realize the gross deferred tax asset existing at December 31, 1999. The
primary sources of recovery of the gross federal deferred tax asset are
federal income taxes paid in 1999, 1998 and 1997 that are available for
carryback and the expectation that the existing net deductible temporary
differences will reverse during periods in which the Company generates net
taxable income. Since there is no carryback provision for state income tax
purposes, management believes the existing net deductible temporary
differences which give rise to the gross deferred state income tax asset
will reverse during periods in which the Company generates net taxable
income. There can be no assurance, however, that the Company will generate
any earnings or any specific level of continuing earnings.
As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method. However, the tax
effect of the pre-1988 bad debt reserve amount of approximately $7.3
million remains subject to recapture in the event that the Bank pays
dividends in excess of its reserves and profits.
13. EARNINGS PER SHARE
The following is a calculation of earnings per share for the years
indicated:
- ----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 11,311 $ 11,311 $ 10,914 $ 10,914 $ 10,167 $ 10,167
Average shares outstanding 3,408,280 3,408,280 3,571,298 3,571,298 3,575,962 3,575,962
Dilutive stock options -- 104,321 -- 147,825 -- 138,653
Unallocated Employee Stock
Ownership Plan ("ESOP") shares
not committed to be released (33,657) (33,657) (42,481) (42,481) (51,305) (51,305)
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 3,374,623 3,478,944 3,528,817 3,676,642 3,524,657 3,663,310
Earnings per share (in dollars) $ 3.35 $ 3.25 $ 3.09 $ 2.97 $ 2.88 $ 2.97
==================================================================================================================================
45
34
14. STOCKHOLDERS' EQUITY
The Company may not declare or pay cash dividends on its shares of common
stock if the effect thereof would cause its stockholders' equity to be
reduced below or to otherwise violate legal or regulatory requirements.
Substantially all of the Company's retained earnings are unrestricted at
December 31, 1999.
The Bank is a Federal Deposit Insurance Corporation insured
institution subject to the FDIC regulatory capital requirements. The FDIC
regulations require all FDIC insured institutions to maintain minimum
levels of Tier I 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 I capital to total average 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 new risk-based capital
standards, FDIC insured institutions must maintain a Tier I 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 new risk-based capital guidelines take into consideration risk factors,
as defined by the regulators, associated with various categories of assets,
both on and off the balance sheet. Under the guidelines, capital strength
is measured in two tiers which are used in conjunction with risk adjusted
assets to determine the risk-based capital ratios. Tier II capital
components include supplemental capital components such as qualifying
allowance for loan losses, qualifying subordinated debt and up to 45
percent of the pretax 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 Company and its principal subsidiary
"MASSBANK" set forth below currently exceed the minimum ratios for "well
capitalized" banks as defined by federal regulators.
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR CAPITAL TO BE WELL
AT DECEMBER 31, 1999 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1)
- --------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------------------------------------
TIER I CAPITAL (TO AVERAGE ASSETS):
MASSBANK Corp. (consolidated) $ 97,738 10.54% $ 27,811 3.00% N/A --
MASSBANK (the "Bank") 97,177 10.48 27,811 3.00 $ 46,352 5.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 97,738 31.10 12,569 4.00 N/A --
MASSBANK (the "Bank") 97,177 30.93 12,567 4.00 18,850 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 104,173 33.15 25,138 8.00 N/A --
MASSBANK (the "Bank") 103,612 32.98 25,133 8.00 31,417 10.00
=============================================================================================================
(1) This column presents the minimum amounts and ratios that a financial
institution must have to be categorized as adequately capitalized.
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR CAPITAL TO BE WELL
AT DECEMBER 31, 1998 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1)
- --------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------------------------------------
TIER I CAPITAL (TO AVERAGE ASSETS):
MASSBANK Corp. (consolidated) $ 96,696 10.61% $ 27,349 3.00% N/A --
MASSBANK (the "Bank") 94,305 10.34 27,349 3.00 $ 45,583 5.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 96,696 32.40 11,936 4.00 N/A --
MASSBANK (the "Bank") 94,305 31.59 11,939 4.00 17,909 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 103,883 34.81 23,872 8.00 N/A --
MASSBANK (the "Bank") 101,492 34.00 23,878 8.00 29,848 10.00
=============================================================================================================
(1) This column presents the minimum amounts and ratios that a financial
institution must have to be categorized as adequately capitalized.
46
35
15. EMPLOYEE BENEFITS
PENSION PLAN
The Bank sponsors a noncontributory defined benefit pension plan that
covers all employees who meet specified age and length of service
requirements, which is administered by the Savings Banks Employees
Retirement Association ("SBERA"). The plan provides for benefits to be paid
to eligible employees at retirement based primarily upon their years of
service with the Bank and compensation levels near retirement.
Contributions to the plan reflect benefits attributed to employees' service
to date, as well as services expected to be earned in the future. Pension
plan assets consist principally of government and agency securities, equity
securities (primarily common stocks) and short-term investments.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements for the plan
years ended October 31, 1999, 1998, and 1997, the plan's latest valuation
dates:
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Actuarial present value of vested benefits $ 4,690 $ 4,442 $ 4,028
Total accumulated benefit obligation 4,724 4,481 4,063
Change in benefit obligation:
Projected benefit obligation at beginning of year $ 5,788 $ 4,990 $ 4,287
Service cost 440 443 367
Interest cost 375 362 321
Actuarial loss (gain) (463) 283 221
Benefits paid (234) (290) (206)
- -------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year $ 5,906 $ 5,788 $ 4,990
- -------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 6,243 $ 5,810 $ 5,090
Actual return on plan assets 1,166 469 926
Employer contribution -- 254 --
Benefits paid (234) (290) (206)
- -------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 7,175 $ 6,243 $ 5,810
- -------------------------------------------------------------------------------------------------------
Excess of plan assets over projected benefit obligation $ 1,269 $ 455 $ 820
=======================================================================================================
Certain changes in the items shown are not recognized as they occur, but
are amortized systematically over subsequent periods. Unrecognized amounts
to be amortized and the amounts included in the consolidated balance sheets
are shown below:
Unrecognized net actuarial gain $1,535 $ 487 $ 886
Transition asset 169 190 211
Accrued benefit cost (435) (222) (277)
- -------------------------------------------------------------------------------------------------------
Excess of plan assets over projected benefit obligation $1,269 $ 455 $ 820
=======================================================================================================
Assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows:
Discount rate 7.75% 6.75% 7.25%
Rate of compensation increase 4.50% 4.50% 4.50%
Assumptions used to develop the
net periodic benefit cost data were:
Discount rate 6.75% 7.25% 7.50%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.00% 4.50% 4.50%
Components of net periodic benefit cost:
Service cost $ 440 $ 443 $ 367
Interest cost 375 362 322
Expected return on plan assets (499) (465) (407)
Transition obligation (21) (21) (21)
Recognized net actuarial (gain) loss (82) (119) (84)
- -------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 213 $ 200 $ 177
=======================================================================================================
47
36
15. EMPLOYEE BENEFITS (continued)
PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLANS
The Bank's Profit Sharing and Incentive Compensation Bonus Plans provide
for payments to employees under certain circumstances based upon a year-end
measurement of the Company's net income and attainment of individual goals
and objectives by certain key officers. Payments of $426 thousand, $399
thousand and $417 thousand were awarded under the plan in 1999, 1998 and
1997, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Bank has an Employees' Stock Ownership Plan ("ESOP") for the benefit of
each employee who has completed at least 1,000 hours of service with the
Company in the previous twelve months. Under the plan, the ESOP has
borrowed funds from a third party bank to invest in the Company's common
stock. As this obligation will be liquidated primarily through future
contributions to the ESOP by the Bank, the obligation is reflected as a
liability of the Company and a reduction of stockholders' equity on the
consolidated balance sheet. As of December 31, 1999 and 1998, such
outstanding liabilities totaled $468 thousand and $625 thousand,
respectively.
Shares of the Company's common stock purchased with the loan proceeds
are held in a suspense account. As the loan is repaid, a proportionate
number of shares are released for allocation to plan participants. The
shares are allocated to plan participants annually, on a pro rata basis,
based on compensation.
The ESOP acquired unallocated shares in 1986 when the plan was first
established and more recently in 1993. At December 31, 1999, the ESOP held
26,400 unallocated shares and 129,763 shares which have been allocated to
participants. The fair value of the unallocated shares at December 31, 1999
was approximately $779 thousand.
Dividends on unallocated shares are used to offset a portion of the
interest paid on the ESOP loan. Dividends on allocated shares held by the
ESOP are allocated to plan participants proportionately based on the number
of shares in the participant's allocated account.
Total compensation and interest expense applicable to the ESOP
amounted to $366 thousand, $462 thousand and $398 thousand for the years
ended December 31, 1999, 1998 and 1997, respectively.
EMPLOYEE AGREEMENTS
The Bank has entered into employment agreements with certain executive
officers which provide that the officer will receive a minimum amount of
annual compensation from the Bank for a specified period. The agreements
also provide for the continued payment of compensation to the officer for a
specified period after termination under certain circumstances, including
if the officer's termination follows a "change of control," generally
defined to mean a person or group attaining ownership of 25% or more of the
shares of the Company.
EXECUTIVE SUPPLEMENTAL RETIREMENT AGREEMENTS
The Bank maintains executive supplemental retirement agreements for certain
executive officers. These agreements provide retirement benefits designed
to supplement benefits available through the Bank's retirement plan for
employees. Total expenses for benefits payable under the agreements
amounted to $139 thousand, $105 thousand and $132 thousand in 1999, 1998
and 1997, respectively.
STOCK OPTION PLAN
Effective May 28, 1986, the Board of Directors of the Bank adopted a stock
option plan for the benefit of its officers and other employees. In
January, 1991, the plan was amended to authorize the grant of options to
non-employee Directors of the Company. All but 5 of the 690,000 shares
reserved for issuance under the plan were issued. On April 19, 1994,
shareholders approved and the Bank adopted the Company's 1994 Stock
Incentive Plan. The total number of shares of common stock that can be
issued under this plan is 360,000 shares. Both incentive stock options and
non-qualified stock options may be granted under the plans. As of December
31, 1999, there were 152,010.7 non-qualified stock options and 211,306.6
incentive stock options granted and outstanding to purchase shares under
the plans. The maximum option term is ten years. Further stock options may
be granted pursuant to the 1994 Stock Incentive Plan and will generally
have an exercise price equal to, or in excess of, the fair market value of
a share of common stock of the Company on the date the option is granted.
48
37
15. EMPLOYEE BENEFITS (continued)
A summary of the status of the Company's fixed stock option plan as of
December 31, 1999, 1998 and 1997, and changes during the years ended on
those dates is presented below:
- ---------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
FIXED OPTIONS OPTION PRICE OPTION PRICE OPTION PRICE
- ---------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 347,917.3 $ 20.62 360,200 $ 17.65 347,166.7 $ 15.46
Granted 40,000 37.50 35,250 44.25 48,333.3 30.09
Exercised (23,100) 15.17 (47,532) 15.59 (35,300) 13.19
Forfeited (1,500) 40.88 (0.7) 30.09 -- --
- ---------------------------------------------------------------------------------------------------------------
Outstanding at end of year 363,317.3 $ 22.74 347,917.3 $ 20.62 360,200 $ 17.65
- ---------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 363,317.3 347,917.3 360,200
===============================================================================================================
The following table summarizes information about fixed stock options
outstanding and exercisable at December 31, 1999:
- --------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1999 OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------------------------------------------
$6.88 to $10.75 50,350 1.6 YEARS $ 8.75 50,350 $ 8.75
16.00 to $17.34 154,134 3.7 YEARS 16.62 154,134 16.62
18.28 to $19.88 3,666.7 5.5 YEARS 19.44 3,666.7 19.44
23.25 to $30.09 81,416.6 6.6 YEARS 26.92 81,416.6 26.92
37.50 to $44.25 73,750 8.6 YEARS 40.66 73,750 40.66
- --------------------------------------------------------------------------------------------------------------------
$6.88 to $44.25 363,317.3 5.1 YEARS $22.74 363,317.3 $22.74
====================================================================================================================
As discussed in Note 1, the Company has adopted SFAS No. 123 but continues
to account for its stock option plan using the intrinsic value based method
prescribed by APB Opinion No. 25. Accordingly, no compensation cost for
this plan has been recognized in the Consolidated Statements of Income for
1999.
In determining the pro forma disclosures required by SFAS No. 123, the
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following table presents pro forma
net income and earnings per share assuming the stock option plan was
accounted for using the fair value method prescribed by SFAS No. 123, the
weighted average assumptions used and the grant date fair value of options
granted in 1999, 1998 and 1997:
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Net income As reported $ 11,311 $ 10,914 $ 10,167
Pro forma 11,095 10,743 9,916
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share As reported $ 3.35 $ 3.09 $ 2.88
Pro forma 3.29 3.04 2.81
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share As reported $ 3.25 $ 2.97 $ 2.77
Pro forma 3.19 2.92 2.70
- ---------------------------------------------------------------------------------------------------------
Weighted average fair value $ 9.01 $ 8.23 $ 8.84
Expected life 7.3 YEARS 7.3 years 7.4 years
Risk-free interest rate 4.80% 5.53% 6.47%
Expected volatility 23.0% 23.0% 22.0%
Expected dividend yield 2.9% 2.7% 2.3%
=========================================================================================================
49
38
16. SHAREHOLDER RIGHTS AGREEMENT
In January, 1990, the Board of Directors adopted a Shareholders Rights
Plan. Under the Plan, the Rights automatically become part of and trade
with the Company's shares of common stock. Although the Rights are not
exercisable initially, they become exercisable upon the occurrence of one
of three triggering events as specified in the Plan. In the event they
become exercisable, each holder of a Right would then be entitled to buy a
unit consisting of one one-hundredth of a share of the Company's preferred
stock at an exercise price of $70. The provisions of the Rights Plan,
including the time periods set forth therein, generally may be extended or
amended by the Board of Directors. The Rights will expire January 16, 2000,
but they may be redeemed at the option of the Board of Directors for $0.01
per Right until ten days after a person becomes a 15% shareholder of
MASSBANK Corp. or until certain other triggering events have occurred.
Since the Company's Shareholder Rights Plan expires on January 16,
2000 management intends to adopt a new Shareholder Rights Plan on January
18, 2000 to replace the existing Plan.
17. PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed financial statements for MASSBANK Corp.
(the "Parent Company") only:
BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 2 $ 1
Interest-bearing deposits in banks 706 2,324
Investment in subsidiaries 101,386 108,724
Due from subsidiaries 104 45
Other assets 70 53
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 102,268 $ 111,147
========================================================================================================================
LIABILITIES:
Employee stock ownership plan liability (Note 15) $ 468 $ 625
Other liabilities 321 33
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 789 658
========================================================================================================================
STOCKHOLDERS' EQUITY (Notes 12, 14, 15 and 16):
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, 7,407,432 and 7,384,332 shares issued, respectively 7,407 7,384
Additional paid-in capital 60,591 60,003
Retained earnings 85,873 78,308
- ------------------------------------------------------------------------------------------------------------------------
153,871 145,695
Treasury stock at cost, 4,096,189 and 3,885,222 shares, respectively (53,890) (46,272)
Accumulated other comprehensive income (Note 1) 1,966 11,691
Common stock acquired by ESOP (Note 15) (468) (625)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 101,479 110,489
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 102,268 $ 111,147
========================================================================================================================
50
39
17. PARENT COMPANY FINANCIAL STATEMENTS (continued)
STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
INCOME:
Dividends received from subsidiaries $ 9,200 $ 6,400 $ 6,400
Interest and dividend income 23 96 56
- ----------------------------------------------------------------------------------------------------
Total interest and dividend income 9,223 6,496 6,456
NON-INTEREST EXPENSE 92 99 118
- ----------------------------------------------------------------------------------------------------
Income before income taxes 9,131 6,397 6,338
INCOME TAX BENEFIT 53 28 40
- ----------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 9,184 6,425 6,378
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 2,127 4,489 3,789
- ----------------------------------------------------------------------------------------------------
Net income $11,311 $10,914 $10,167
====================================================================================================
The Parent Company only Statements of Changes in Stockholders' Equity are
identical to the consolidated statements and therefore are not presented
here.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,311 $ 10,914 $ 10,167
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (2,127) (4,489) (3,789)
(Decrease) increase in accrued income taxes payable (17) 25 (59)
Deferred income tax benefit -- (1) (4)
Increase in other liabilities 288 4 13
Increase in amount due from subsidiaries (59) (45) --
Decrease in amount due to subsidiaries -- -- (3)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,396 6,408 6,325
- --------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments to acquire treasury stock (7,618) (4,703) (1,665)
Issuance of common stock under stock option plan 351 741 467
Tax benefit resulting from stock options exercised -- 66 --
Dividends paid on common stock (3,759) (3,605) (3,124)
Tax benefit resulting from dividends paid on unallocated
shares held by the ESOP 13 15 15
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (11,013) (7,486) (4,307)
- --------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,617) (1,078) 2,018
Cash and cash equivalents at beginning of year 2,325 3,403 1,385
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 708 $ 2,325 $ 3,403
==============================================================================================================
During the years ended December 31, 1999, 1998 and 1997, the Company made
cash payments for income taxes of $16 thousand, $24 thousand and $16
thousand, respectively, and no payments for interest.
In addition, the Company made cash payments to the state of Delaware
for franchise taxes in the amount of $38 thousand, $29 thousand and $42
thousand during the years ended December 31, 1999, 1998 and 1997,
respectively.
51
40
18. TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $11,311 $10,914 $10,167 $9,427 $8,759 $8,185 $6,695 $4,677 $2,250
Basic earnings per share 3.35 3.09 2.88 2.65 2.43 2.19 1.71 1.22 0.59
Cash dividends declared per share 1.11 1.02 0.88 1/2 0.69 0.54 3/4 0.45 0.34 0.26 1/2 0.22 3/4
Book value per share, at year end 30.65 31.58 29.06 25.75 24.84 20.09 20.46 18.37 17.54
Return on average assets 1.20% 1.17% 1.12% 1.08% 1.04% 0.96% 0.79% 0.61% 0.60%
Return on average realized equity(1) 11.35% 11.08% 11.11% 11.01% 10.81% 10.62% 8.98% 6.79% 3.39%
====================================================================================================================================
- -----------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1990
- -----------------------------------------------
Net income $ 725
Basic earnings per share 0.16
Cash dividends declared per share 0.22
Book value per share, at year end 16.20
Return on average assets 0.23%
Return on average realized equity(1) 1.03%
===============================================
(1) Excludes average net unrealized gains or losses on securities
available for sale.
19. QUARTERLY DATA (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------------------
Interest and dividend income $14,758 $14,730 $14,345 $14,373 $14,721 $14,995 $15,025 $15,093
Interest expense 8,365 8,391 8,215 8,233 8,534 8,703 8,562 8,521
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 6,393 6,339 6,130 6,140 6,187 6,292 6,463 6,572
Provision for loan losses 15 15 60 50 88 15 45 45
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,378 6,324 6,070 6,090 6,099 6,277 6,418 6,527
Non-interest income 1,154 1,089 1,578 1,741 1,447 796 1,101 1,246
Non-interest expense 3,210 3,066 3,122 3,168 3,269 2,871 3,119 3,256
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,322 4,347 4,526 4,663 4,277 4,202 4,400 4,517
Income tax expense 1,573 1,564 1,660 1,750 1,598 1,507 1,694 1,683
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 2,749 $ 2,783 $ 2,866 $ 2,913 $ 2,679 $ 2,695 $ 2,706 $ 2,834
- -----------------------------------------------------------------------------------------------------------------------
Earnings per share (in dollars):(1)
Basic $ 0.83 $ 0.83 $ 0.85 $ 0.84 $ 0.77 $ 0.76 $ 0.76 $ 0.80
Diluted 0.81 0.80 0.82 0.82 0.74 0.73 0.73 0.77
- -----------------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding:(1)
Basic 3,318 3,352 3,380 3,451 3,487 3,548 3,546 3,535
Diluted 3,389 3,466 3,496 3,567 3,610 3,692 3,709 3,697
=======================================================================================================================
(1) Computation of earnings per share is further described in Note 1.
52
41
MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA
YEARS ENDED DECEMBER 31, 1999 AND 1998
MASSBANK Corp.'s common stock is currently traded on the Nasdaq Stock
Market under the symbol "MASB." At December 31, 1999 there were 3,311,243
shares outstanding and 871 shareholders of record. Shareholders of record
do not reflect the number of persons or entities who hold their stock in
nominee or "street" name.
The following table includes the quarterly ranges of high and low
sales prices for the common stock, as reported by Nasdaq, and dividends
declared per share for the periods indicated.
- ---------------------------------------------------------------------------------------------------
PRICE PER SHARE CASH
------------------------------------------- DIVIDENDS
HIGH LOW DECLARED
- ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------
Fourth Quarter 35 1/4 29 1/2 $0.285
Third Quarter 38 35 11/16 0.285
Second Quarter 38 1/4 36 3/4 0.27
First Quarter 39 1/2 37 0.27
- ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------
Fourth Quarter 40 1/2 29 1/2 $ 0.27
Third Quarter 50 3/4 38 3/4 0.25
Second Quarter 54 1/4 47 1/2 0.25
First Quarter 51 1/4 43 3/4 0.25
- ---------------------------------------------------------------------------------------------------
53
42
MASSBANK BRANCH OFFICES d/b/a
MASSBANK of Reading*
123 Haven Street
Reading, MA 01867
(781) 942-8188
(978) 446-9200
MASSBANK of Chelmsford
296 Chelmsford Street
Eastgate Plaza
Chelmsford, MA 01824
(978) 256-3751
17 North Road
Chelmsford, MA 01824
(978) 256-3733
MASSBANK of Dracut
45 Broadway Road
Dracut, MA 01826
(978) 441-0040
MASSBANK of Everett
738 Broadway
Everett, MA 02149
(617) 387-5115
MASSBANK of Lowell
50 Central Street
Lowell, MA 01852
(978) 446-9200
755 Lakeview Avenue
Lowell, MA 01850
(978) 446-9216
MASSBANK of Medford
4110 Mystic Valley Parkway
Wellington Circle Plaza
Medford, MA 02155
(781) 395-4899
MASSBANK of Melrose
476 Main Street
Melrose, MA 02176
(781) 662-0100
27 Melrose Street
Towers Plaza
Melrose, MA 02176
(781) 662-0165
MASSBANK of Stoneham
240 Main Street
Stoneham, MA 02180
(781) 662-0177
MASSBANK of Tewksbury
1800 Main Street
Tewksbury, MA 01876
(978) 851-0300
MASSBANK of Westford
203 Littleton Road
Westford, MA 01886
(978) 692-3467
MASSBANK of Wilmington
370 Main Street
Wilmington, MA 01887
(978) 658-4000
219 Lowell Street
Lucci's Plaza
Wilmington, MA 01887
(978) 658-5775
*Main Office
54
43
CORPORATE INFORMATION
MASSBANK Corp.
123 Haven Street
Reading, MA 01867
(781) 662-0100
(978) 446-9200
FAX (781) 942-1022
Savings and Mortgage
24-Hour-Rate Lines
(781) 662-0154
(978) 446-9285
Notice of Shareholders' Meeting
The Annual Meeting of the
Shareholders of MASSBANK Corp.
will be held at 10:00 A.M.
on Tuesday, April 18, 2000 at the
Sheraton Ferncroft Resort
50 Ferncroft Road
Danvers, MA 01923
Trademark
MASSBANK and its logo are
registered trademarks of
the Company
Form 10-K
Shareholders may obtain without
charge a copy of the Company's
1999 Form 10-K. Written requests
should be addressed to:
Shareholder Services
MASSBANK Corp.
159 Haven Street
Reading, MA 01867
Dividend Reinvestment and
Stock Purchase Plan
Shareholders may obtain a brochure
containing a detailed description of
the plan by writing to:
Shareholder Services
MASSBANK Corp.
159 Haven Street
Reading, MA 01867
Transfer Agent
EquiServe
Boston EquiServe Division
Shareholder Services
P.O. Box 644
Boston, MA 02102-0644
Independent Auditors
KPMG LLP
99 High Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Reports on Effectiveness
of Internal Control Structure
Over Financial Reporting
Shareholders may obtain without
charge a copy of Management's
and the Independent Auditors'
1999 Reports on the Effectiveness
of the Company's Internal Control
Structure Over Financial Reporting.
Written requests should be addressed to:
Shareholder Services
MASSBANK Corp.
159 Haven Street
Reading, MA 01867
55
44
OFFICERS AND DIRECTORS
MASSBANK CORP.
OFFICERS
Gerard H. Brandi
Chairman, President and
Chief Executive Officer
Reginald E. Cormier
Senior Vice President, Treasurer and
Chief Financial Officer
Robert S. Cummings
Secretary
Donna H. West
Assistant Secretary
BOARD OF DIRECTORS
Samuel Altschuler
Retired, Sanmina Corp.
*Mathias B. Bedell
Retired, Bedell Brothers Insurance
Agency, Inc.
*Gerard H. Brandi
Chairman, President and
Chief Executive Officer,
MASSBANK Corp.
Allan S. Bufferd
Treasurer,
Massachusetts Institute of Technology
+Peter W. Carr
Retired, Guilford Transportation
Industries
+Alexander S. Costello
Editorial Page Editor,
Lowell Sun Publishing Co., Inc.
*Robert S. Cummings
Senior Counsel,
Nixon Peabody LLP
Leonard Lapidus
Banking and Bank Regulation
Consultant
*Stephen E. Marshall
President, C.H. Cleaves Insurance
Agency, Inc.
Nancy L. Pettinelli
Executive Director,
Visiting Nurse Association
+*Herbert G. Schurian
Certified Public Accountant
*Dr. Donald B. Stackhouse
Dentist
*Member, Executive Committee
+Member, Audit Committee
OFFICERS AND DIRECTORS
MASSBANK
OFFICERS
Gerard H. Brandi
Chairman, President and
Chief Executive Officer
Donald R. Washburn
Senior Vice President, Lending
Donna H. West
Senior Vice President,
Community Banking
Reginald E. Cormier
Senior Vice President, Treasurer
and Chief Financial Officer
David F. Carroll
Vice President, Operations
Richard J. Flannigan
Vice President and
President
Thomas J. Queeney
Vice President and
Senior Trust Officer
Janet L. Daniels
Director of Audit and
Compliance
Aunali Dohadwala
Director of Information
Technology
Gerard F. Frechette
Director of Human Resources
Marilyn H. Abbott
Assistant Treasurer
Andrea S. Bradford
Assistant Vice President
Gregory W. Bowe
Assistant Vice President
Ernest G. Campbell, Jr.
Collections and Security Officer
Marianne J. Carpenter
Assistant Treasurer
Charles F. Coupe
Information Officer
Keri L. DeRosa
Mortgage Origination Officer
Karen L. Flammia
Assistant Vice President
Melissa J. Flanagan
Assistant Treasurer
Rachael E. Garneau
Assistant Treasurer
Brian W. Hurley
Assistant Vice President
Kenneth A. Masson
Assistant Vice President
Elkin Z. Montoya
Mortgage Origination Officer
Karen L. O'Rourke
Assistant Treasurer
Mindy S. Peloquin
Assistant Treasurer
Renald A. Robillard
Assistant Treasurer
Lisa A. Sawyer
Assistant Treasurer
Alice B. Sweeney
Assistant Comptroller
Richard A. Tatarczuk
Assistant Vice President
and Comptroller
Francis J. Walsh
Operations Officer
Margaret E. White
Assistant Treasurer
Patricia A. Witts
Assistant Treasurer
Michael J. Woods
Assistant Vice President
BOARD OF DIRECTORS AND EXECUTIVE COMMITTEE
Mathias B. Bedell
Gerard H. Brandi, Chairman
Robert S. Cummings, Clerk
Stephen E. Marshall
Herbert G. Schurian
Dr. Donald B. Stackhouse
Donna H. West
56