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Exhibit 13
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 2000
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 increased $14.0 million to $938.7 million as of
December 31, 2000, as a result of an increase in total investments of $28.6
million partially offset by a decrease in the bank's loan portfolio, net of
allowance for loan losses, of $15.3 million. Other assets reflect an increase of
$0.7million as of December 31, 2000 from year-end 1999.
The Company's total investments consisting of investment securities and
other short-term investments, including term federal funds sold and
interest-bearing bank deposits increased $28.6 million from $578.5 million at
December 31, 1999 to $607.1 million at year-end 2000. The increase is
attributable to an increase in term federal funds sold, trading securities and
short-term investments of $30.0 million, $13.8 million and $1.9 million,
respectively. These were partially offset by a decrease in longer-term
investments. One of the primary components of the Bank's investment securities
portfolio, U.S. Treasury and Government agency securities decreased by $18.0
million in 2000. This decrease was partially offset by an increase of $4.9
million in mortgage-backed securities. Other investments decreased by $4.0
million in 2000.
During the second half of 2000 the interest rate curve was either flat
or inverted. As a result of long-term rates being either the same as or lower
than short-term rates during this period, the Company's investments shifted
toward short-term investments, ending the year 2000 with an increase in
short-term investments compared to year-end 1999.
The increase in the Company's total investments was also positively
affected by an increase in the market value of its securities available for sale
portfolio. The net unrealized gains on the Company's securities available for
sale portfolio increased $6.3 million to $10.0 million at December 31, 2000 from
$3.7 million at December 31, 1999. The increase in market value of the
securities portfolio is directly related to the upward movement in bond prices.
The loan portfolio at December 31, 2000, net of allowance for loan
losses, amounted to $307.5 million compared to $322.8 million at December 31,
1999, a decrease of $15.3 million or 4.7%. This decrease resulted primarily from
a decrease in fixed rate residential mortgage loans. The rising interest rates
in the first half of 2000 significantly reduced the demand for mortgage
refinancings. As a result, total loan originations decreased to $33.0 million in
2000, from $82.4 million the prior year. Loan origination totals for 1999
include a $15.0 million commercial loan to a single borrower with AAA rated
credit.
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 increased a modest $5.6 million
during 2000 to $823.6 million at December 31, 2000, from $818.0 at year-end
1999.
Total stockholders' equity increased $6.7 million to $108.2 million at
December 31, 2000, representing a book value of $34.25 per share, from $101.5
million representing a book value of $30.65 per share at December 31, 1999. This
represents an increase in book value per share of $3.60 or 11.7% over the prior
year. Contributing to the increase in total stockholders' equity was the
Company's net income of $11.1 million in 2000, an increase in net unrealized
gains, net of tax, on the Company's securities available for sale of $4.0
million and the issuance of common stock under the Company's stock option plan.
These were partially offset by the payment of $3.8 million in dividends to
stockholders and the cost of shares of treasury stock repurchased during the
year in the amount of $5.8 million. The Company's book value per share was
positively affected by the Company's purchase of 191,100 shares of its common
stock, at less than current book value, during 2000 pursuant to its stock
repurchase program.
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ASSET QUALITY
Asset quality remains strong. Nonaccrual loans, generally those loans which are
90 days or more delinquent, decreased to $0.6 million at December 31, 2000, from
$0.9 million at December 31, 1999. The bank's provision for loan losses, which
amounted to $140 thousand in 1999, decreased by $80 thousand to $60 thousand in
2000. Loan charge-offs, net of recoveries, amounted to $21 thousand in 2000,
down from $35 thousand in 1999, which continued the trend of recent years.
The Bank added a modest $39 thousand to its allowance for loan losses
in 2000 due to a low level of net loan charge-offs and the high quality of its
loan portfolio. The bank's allowance for loan losses at December 31, 2000
totaled approximately $2.6 million, representing 459% of nonaccrual loans and
0.84% of total loans. The bank believes that its allowance for loan losses is
adequate to cover the risks inherent in the loan portfolio under current
conditions. The Bank had no real estate acquired through foreclosure at year-end
2000.
RESULTS OF OPERATIONS
Comparison of the years 2000 and 1999
Massbank Corp. reported consolidated net income of $11.1 million or $3.37 in
diluted earnings per share in 2000 compared to net income of $11.3 million or
$3.25 in diluted earnings per share in 1999. This is the ninth consecutive year
of record diluted earnings per share for the Company. Basic earnings per share
for 2000 increased to $3.45 from $3.35 in the prior year. Return on average
assets and return on average realized equity were 1.20% and 10.95%,
respectively, in 2000, compared to 1.20% and 11.35%, respectively, in 1999.
The Company reported operating net income of $11.3 million or $3.43 in
diluted operating earnings per share ($3.51 in basic operating earnings per
share) for the year ended December 31, 2000. This compares to operating net
income of $11.3 million or $3.25 in diluted operating earnings per share ($3.35
in basic operating earnings per share) earned in 1999. The Company's operating
net income for the year ended December 31, 2000 excludes $363,000 of net
litigation expenses (pre-tax) or $211,000 (after tax) incurred in connection
with Massbank's prosecution of a trademark case. The Company was successful in
protecting its trademarks against infringement by another financial institution
and was granted some compensation for legal fees in the final judgement.
The decrease in net income in 2000 compared to 1999 primarily reflects
a decrease in securities gains of $508 thousand, a decrease in net interest
income of $119 thousand and a decrease in non-interest income (exclusive of
securities gains) of $66 thousand. These were partially offset by a decrease in
the provision for loan losses of $80 thousand, a decrease in non-interest
expense of $53 thousand and the Company's lower effective income tax rate.
Additionally, the earnings per share increase in 2000 was positively effected by
the reduced number of average common shares outstanding as a result of the
Company's purchase of 191,100 shares of its common stock during 2000 pursuant to
its stock repurchase program.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent basis totaled $25.0 million
for 2000 and $25.1 million for 1999. This decrease was principally attributable
to a decrease in average earning assets, partially offset by an improvement in
net interest margin. Average earning assets decreased $17.0 million to $905.7
million in 2000, from $922.7 million in 1999. The Company's net interest margin
for 2000 was 2.76%, an improvement from 2.72% reported in 1999.
The tables on pages 22 and 23 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 $60.4
million for the year ended December 31, 2000, compared to $58.3 million for the
year ended December 31, 1999. The yield on average earning assets increased to
6.67% in 2000, from 6.32% in the prior year. The average total earning assets of
the Company decreased $17.0 million in 2000.
As shown in the rate/volume analysis table on page 23, the improvement
in yield on average earning assets resulted in an increase in interest and
dividend income in 2000 of $3.1 million over 1999. Conversely, the total effect
of lower average earning assets on interest and dividend income in 2000 was a
$1.0 million decrease from 1999, resulting in a net increase in total interest
and dividend income of $2.1 million over 1999.
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INTEREST EXPENSE
Total interest expense increased $2.2 million or 6.6% to $35.4 million for the
year ended December 31, 2000 from $33.2 million for the year ended December 31,
1999. This increase is due to an increase in the Company's average cost of funds
from 4.02% in 1999 to 4.32% in 2000, partially offset by the decrease in
interest expense resulting from a decrease in the Company's average total
deposits, from $826.7 million in 1999 to $818.6 million in 2000.
The Company's higher cost of funds in 2000 was the result of rising
market interest rates in 2000.
As shown in the rate/volume analysis table on page 23, the effect on
total interest expense from changes in interest- bearing deposit rates was a
$2.5 million increase over 1999. Conversely, the total effect of lower average
total deposits on interest expense in 2000 was a $0.3 million decrease from
1999, resulting in a net increase in total interest expense of $2.2 million over
1999.
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
2000 was $60 thousand compared to $140 thousand in 1999. In determining the
amount to provide for loan losses, the key factor is the adequacy of the
allowance for loan losses. Management uses a methodology to systematically
measure the amount of estimated loan loss exposure inherent in the portfolio for
purposes of establishing a sufficient allowance for loan losses. The methodology
includes three elements: an analysis of individual loans deemed to be impaired
in accordance with the terms of SFAS 114, general loss allocations for various
loan types based on loss experience factors and an unallocated allowance which
is maintained based on management's assessment of many factors including the
risk characteristics of the portfolio, concentrations of credit, current and
anticipated economic conditions that may effect the borrower's ability to pay,
and trends in loan delinquencies and charge-offs. At December 31, 2000, the
allowance for loan losses was $2.6 million representing 459% of nonaccrual
loans. The Bank's nonaccrual loans totaled $565 thousand at December 31, 2000
down from $857 thousand a year earlier. Net charge-offs also declined to $21
thousand in 2000 from $35 thousand in the prior year. Management believes that
the allowance for loan losses as of year-end 2000 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 decreased $0.6 million to $5.0 million for the year
ended December 31, 2000, from $5.6 million for the year ended December 31, 1999.
This decrease is primarily due to a decrease in securities gains in 2000
compared to 1999.
Net securities gains totaled $3.5 million in 2000 compared to $4.0
million in the prior year. The securities gains are primarily attributable to
the favorable performance of the Company's equity securities portfolio which has
produced strong returns in recent years. Management does not expect this trend
to continue. Management believes that the equity markets, which have corrected
in recent months, will provide returns in the future that represent more closely
the historical norms.
All other non-interest income combined decreased $66 thousand to less
than $1.5 million in 2000, from over $1.5 million in the prior year. This
decrease is due to a decrease in deposit account service fees and miscellaneous
other non-interest income of $36 thousand and $30 thousand, respectively.
NON-INTEREST EXPENSE
Non-interest expense totaled $12.5 million for 2000, a decrease of $53 thousand
compared with $12.6 million in 1999. The Company's total non-interest expense in
2000 includes net litigation expenses of $363 thousand that the bank incurred in
connection with its trademark case. Excluding these litigation expenses,
non-interest expense would have decreased $416 thousand or 3.3% to $12.2 million
in 2000, from $12.6 million in the prior year.
The decrease of $53 thousand in non-interest expense for the year ended
December 31, 2000 is primarily due to a decrease in salaries and employee
benefit expenses. Salaries and employee benefits, the largest component of
non-interest expense, decreased $436,000 or 5.9% to $7.0 million in 2000 from
$7.4 million in 1999. Part of this improvement resulted from the fact that the
bank operated with fewer people in 2000 due in part to the tight labor market in
Massachusetts. Offsetting this decrease was an increase of over 100% in
professional services expenses, from $481 thousand in 1999 to $959 thousand in
2000, due largely to the aforementioned litigation expenses that the bank
incurred in protecting its trademarks against infringement by another financial
institution.
Excluding the aforementioned litigation expenses, the Company's
efficiency ratio, which measures how much it costs to generate one dollar of
revenue, showed modest improvement in 2000, reaching 40.5% from the previous
year's milestone of 40.9%.
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INCOME TAX EXPENSE
The Company recorded income tax expense of $6.2 million in 2000, a decrease of
$360 thousand when compared to the prior year. The decrease in income tax
expense is due primarily to lower pretax earnings and a reduction in the
Company's effective income tax rate. The effective income tax rate for the year
ended December 31, 2000 was 35.77%, down from 36.66% in the prior year. The
decrease in the Company's effective income tax rate in 2000 is due, in part, 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 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 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 22 and 23 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 23, 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.
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 23, 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.
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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 purposes.
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, 2000, the Bank had $112.7 million or 12.0% of total
assets and $155.4 million or 16.6% 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 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, 2000, the Bank had a leverage
Tier I capital to average assets ratio of 10.89%, a Tier I capital to
risk-weighted assets ratio of 34.14% and a total capital to risk-weighted assets
ratio of 35.86%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to average assets of 10.94%, Tier I capital to risk-weighted
assets of 34.30% and total capital to risk-weighted assets of 36.02% at December
31, 2000.
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 Risk Management and
Asset/Liability Committee (the"Committee"). The Committe 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 the Risk Management and Asset/Liability
Committee. 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 while
positive as of year end 2000 has been negative in recent years 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 future.
19
8
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, 2000. As of this date, the Company's one-year cumulative GAP position was
positive $33.4 million, or approximately 3.6% 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 $ 46,229 $ 12,464 $ 27,163 $ 134,978 $ 89,313 $ 310,147
Short-term investments:
Federal funds sold 112,711 -- -- -- -- 112,711
Investment in money market funds 131 -- -- -- -- 131
Term federal funds sold 20,000 10,000 -- -- -- 30,000
Interest-bearing deposits in banks 3 -- 1,205 470 -- 1,678
Securities held to maturity -- 230 -- -- -- 230
Securities available for sale 57,898 49,968 51,383 190,452 92,851 442,552
Trading securities 19,794 -- -- -- -- 19,794
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 256,766 $ 72,662 $ 79,751 $ 325,900 $ 182,164 $ 917,243
- ---------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits(1) (2) $ 206,789 $ 83,763 $ 85,222 $ 54,867 $ 365,809 $ 796,450
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 206,789 $ 83,763 $ 85,222 $ 54,867 $ 365,809 $ 796,450
- ---------------------------------------------------------------------------------------------------------------------------
GAP for period $ 49,977 $ (11,101) $ (5,471) $ 271,033 $(183,645) $ 120,793
Cumulative GAP - December 31, 2000 $ 49,977 $ 38,876 $ 33,405 $ 304,438 $ 120,793
Cumulative GAP as a percent of total assets 5.3% 4.1% 3.6% 32.4% 12.9%
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative GAP - December 31, 1999 $ 13,011 $ (40,032) $ (27,489) $ 243,343 $ 108,890
===========================================================================================================================
(1) Excludes non-interest bearing demand accounts of $28,562.
(2) Includes escrow deposits of borrowers of $1,387.
20
9
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, 2000.
- -----------------------------------------------------------------------------------------------------------------------------------
EXPECTED MATURITY DATE
AT DECEMBER 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Fair Value
(In thousands) 2001 2002 2003 2004 2005 Thereafter Total at 12/31/00
- -----------------------------------------------------------------------------------------------------------------------------------
Interest sensitive assets:
Fixed rate securities $138,466 $ 78,280 $49,892 $33,520 $28,760 $ 92,851 $421,769 $421,769
Average interest rate(1) 6.24% 6.41% 6.42% 6.43% 6.42% 6.45% 6.37%
Variable rate securities(2) 39,543 -- -- -- -- 1,264 40,807 40,807
Average interest rate(1) 4.05% -- -- -- -- 6.01% 4.11%
Fixed rate loans 40,236 32,847 29,541 24,759 20,503 85,751 233,637 232,786
Average interest rate 6.90% 6.87% 6.89% 6.89% 6.86% 6.86% 6.88%
Variable rate loans 23,567 7,470 6,083 4,979 4,238 30,173 76,510 77,045
Average interest rate 7.18% 7.64% 7.69% 7.72% 7.77% 8.66% 7.92%
Other fixed rate assets(4) 31,093 582 -- -- -- -- 31,675 31,675
Average interest rate 6.54% 6.02% -- -- -- -- 6.53%
Other variable rate assets(3) 112,845 -- -- -- -- -- 112,845 112,845
Average interest rate 6.44% -- -- -- -- -- 6.44%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive assets $385,750 $119,179 $85,516 $63,258 $53,501 $210,039 $917,243 $916,927
===================================================================================================================================
Interest sensitive liabilities:
Savings and money market
deposit accounts $ 2,970 $ 2,693 $ 2,452 $ 2,242 $ 2,058 $322,533 $334,948 $334,948
Average interest rate 3.16% 3.18% 3.19% 3.21% 3.23% 3.43% 3.42%
Fixed rate certificates of deposit 257,072 45,134 5,230 1,209 106 494 309,245 309,935
Average interest rate 5.78% 5.88% 5.81% 5.25% 5.44% 5.34% 5.79%
Variable rate certificates of deposit 33,925 38,476 18,952 8,383 -- -- 99,736 99,736
Average interest rate 7.40% 7.41% 7.66% 6.80% -- -- 7.40%
NOW accounts -- -- -- -- -- 51,390 51,390 51,390
Average interest rate -- -- -- -- -- 0.96% 0.96%
Escrow deposits of borrowers 1,387 -- -- -- -- -- 1,387 1,387
Average interest rate 0.25% -- -- -- -- -- 0.25%
Deposit acquisition premium,
net of amortization (230) (26) -- -- -- -- (256) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive liabilities $295,124 $ 86,277 $26,634 $11,834 $ 2,164 $374,417 $796,450 $797,396
===================================================================================================================================
(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.
(4) Consists of term Federal funds sold 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 $19.8 million at December 31, 2000. The net
unrealized gains on these securities totaled $5.4 million at year-end 2000.
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.
21
10
AVERAGE BALANCE SHEETS
=================================================================================================================================
(In thousands) YEARS ENDED DECEMBER 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
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 $135,728 $ 8,595 6.33% $128,124 $ 6,294 4.91% $137,123 $ 7,316 5.34%
Short-term investments(2) 7,646 441 5.77 22,600 1,105 4.89 26,792 1,440 5.37
Investment securities 166,264 9,332 5.61 164,117 8,931 5.44 145,863 8,473 5.81
Mortgage-backed securities 273,464 19,015 6.95 275,361 18,735 6.80 299,368 20,496 6.85
Trading securities 5,020 310 6.18 10,760 495 4.60 16,460 819 4.98
Mortgage loans(1) 280,732 19,670 7.01 292,172 20,516 7.02 264,898 19,413 7.33
Other loans(1) 36,838 3,035 8.24 29,516 2,256 7.64 22,375 2,021 9.03
- -------------------------------------------------- ------------------- -------------------
Total earning assets 905,692 60,398 6.67% 922,650 58,332 6.32% 912,879 59,978 6.56%
=================================================================================================================================
Allowance for
loan losses (2,571) (2,498) (2,375)
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 903,121 920,152 910,504
Other assets 20,450 19,923 19,512
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $923,571 $940,075 $ 930,016
=================================================================================================================================
LIABILITIES:
Deposits:
Demand and NOW $ 75,956 488 0.64% $ 74,933 504 0.67% $ 70,159 554 0.79%
Savings 343,079 11,711 3.41 353,851 12,060 3.41 349,637 11,959 3.42
Time certificates of deposit 399,554 23,198 5.81 397,935 20,640 5.19 391,816 21,807 5.57
- -------------------------------------------------- ------------------- -------------------
Total deposits 818,589 35,397 4.32% 826,719 33,204 4.02% 811,612 34,320 4.23%
- ---------------------------------------------------------------------------------------------------------------------------------
Other liabilities 3,310 7,209 9,776
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 821,899 833,928 821,388
=================================================================================================================================
STOCKHOLDERS' EQUITY: 101,672 106,147 108,628
Total liabilities and
stockholders' equity $923,571 $940,075 $930,016
=================================================================================================================================
Net interest income (tax-
equivalent basis) 25,001 25,128 25,658
Less adjustment of tax-
exempt interest income 118 126 144
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $24,883 $25,002 $25,514
- ---------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.35% 2.30% 2.33%
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin(3) 2.76% 2.72% 2.81%
=================================================================================================================================
(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.
22
11
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.
- ----------------------------------------------------------------------------------------------------------
2000 COMPARED TO 1999 1999 COMPARED TO 1998
(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 $ 392 $ 1,909 $ 2,301 $ (463) $ (559) $(1,022)
Short-term investments (834) 170 (664) (212) (123) (335)
Investment securities 116 293 409 1,000 (524) 476
Trading securities (319) 134 (185) (266) (58) (324)
Mortgage-backed securities (130) 410 280 (1,634) (127) (1,761)
Mortgage loans (801) (45) (846) 1,939 (836) 1,103
Other loans 593 186 779 578 (343) 235
- ----------------------------------------------------------------------------------------------------------
Total interest and dividend income (983) 3,057 2,074 942 (2,570) (1,628)
- ----------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Demand and NOW 7 (23) (16) 36 (86) (50)
Savings (368) 19 (349) 144 (43) 101
Time certificates of deposit 84 2,474 2,558 336 (1,503) (1,167)
- ----------------------------------------------------------------------------------------------------------
Total interest expense (277) 2,470 2,193 516 (1,632) (1,116)
- ----------------------------------------------------------------------------------------------------------
Net interest income $ (706) $ 587 $ (119) $ 426 $ (938) $ (512)
==========================================================================================================
23
12
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," as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." These Statements
establish comprehensive accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
They require that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair market
value. Under these Statements, an entity that elects to apply hedge accounting
is required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. The Company
adopted these Statements on January 1, 2001. The adoption of these Statements
did not have a material effect on the Company's consolidated financial
statements.
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, 2000 and 1999, 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,
2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
Boston, Massachusetts /s/ KPMG LLP
January 9, 2001
25
14
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 2000 1999
- -----------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 9,179 $ 10,476
Short-term investments (Note 2) 112,842 110,928
- -----------------------------------------------------------------------------------------------
Total cash and cash equivalents 122,021 121,404
- -----------------------------------------------------------------------------------------------
Term federal funds sold 30,000 --
Interest-bearing deposits in banks 1,678 3,841
Securities held to maturity, at amortized cost
(market value of $230 in 2000 and in 1999) (Note 3) 230 230
Securities available for sale, at market value
(amortized cost of $432,567 in 2000 and $453,844 in 1999) (Note 3) 442,552 457,502
Trading securities, at market value (Note 4) 19,794 6,042
Loans (Notes 5, 7 and 11):
Mortgage loans 272,951 288,580
Other loans 37,196 36,785
- -----------------------------------------------------------------------------------------------
Total loans 310,147 325,365
Allowance for loan losses (Note 6) (2,594) (2,555)
- -----------------------------------------------------------------------------------------------
Net loans 307,553 322,810
- -----------------------------------------------------------------------------------------------
Premises and equipment (Note 9) 3,932 4,127
Real estate acquired through foreclosure (Note 7) -- 62
Accrued interest receivable 5,755 5,045
Goodwill 1,189 1,288
Current income tax asset, net 284 292
Other assets 3,714 2,073
- -----------------------------------------------------------------------------------------------
Total assets $ 938,702 $ 924,716
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Notes 10 and 11):
Demand and NOW $ 79,952 $ 72,938
Savings 334,948 353,090
Time certificates of deposit 408,981 392,516
Deposit acquisition premium, net of amortization (256) (487)
- -----------------------------------------------------------------------------------------------
Total deposits 823,625 818,057
Escrow deposits of borrowers 1,387 1,477
Employee stock ownership plan liability (Note 15) 312 468
Deferred income taxes (Note 12) 2,418 199
Other liabilities 2,717 3,036
- -----------------------------------------------------------------------------------------------
Total liabilities 830,459 823,237
- -----------------------------------------------------------------------------------------------
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, 7,447,982 and 7,407,432 shares issued, respectively 7,448 7,407
Additional paid-in capital 61,674 60,591
Retained earnings 93,165 85,873
- -----------------------------------------------------------------------------------------------
162,287 153,871
Treasury stock at cost, 4,300,489 and 4,096,189 shares, respectively (59,704) (53,890)
Accumulated other comprehensive income (Note 1) 5,972 1,966
Common stock acquired by ESOP (Note 15) (312) (468)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 108,243 101,479
- -----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 938,702 $ 924,716
===============================================================================================
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, 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Interest and dividend income:
Mortgage loans $ 19,670 $ 20,516 $ 19,413
Other loans 3,035 2,256 2,021
Securities available for sale:
Mortgage-backed securities 19,015 18,735 20,496
Other securities 9,203 8,790 8,310
Trading securities 310 495 819
Federal funds sold 8,595 6,294 7,316
Other investments 452 1,120 1,459
- ------------------------------------------------------------------------------------------------
Total interest and dividend income 60,280 58,206 59,834
- ------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
NOW 488 504 554
Savings 11,711 12,060 11,959
Time certificates of deposit 23,198 20,640 21,807
- ------------------------------------------------------------------------------------------------
Total interest expense 35,397 33,204 34,320
- ------------------------------------------------------------------------------------------------
Net interest income 24,883 25,002 25,514
Provision for loan losses (Note 6) 60 140 193
- ------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 24,823 24,862 25,321
- ------------------------------------------------------------------------------------------------
Non-interest income:
Deposit account service fees 688 724 811
Gains on securities, net 3,525 4,033 2,893
Other 775 805 886
- ------------------------------------------------------------------------------------------------
Total non-interest income 4,988 5,562 4,590
- ------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 7,000 7,436 7,426
Occupancy and equipment 2,079 2,146 2,059
Data processing 473 486 510
Professional services 959 481 461
Advertising and marketing 198 198 171
Amortization of intangibles 330 327 302
Deposit insurance 185 114 116
Contributions 28 21 14
Other 1,261 1,357 1,456
- ------------------------------------------------------------------------------------------------
Total non-interest expense 12,513 12,566 12,515
- ------------------------------------------------------------------------------------------------
Income before income taxes 17,298 17,858 17,396
Income tax expense (Note 12) 6,187 6,547 6,482
- ------------------------------------------------------------------------------------------------
Net income $ 11,111 $ 11,311 $ 10,914
================================================================================================
Weighted average common shares outstanding:
Basic 3,220,390 3,374,623 3,528,817
Diluted 3,293,968 3,478,944 3,676,642
Earnings per share (in dollars):
Basic $ 3.45 $ 3.35 $ 3.09
Diluted 3.37 3.25 2.97
================================================================================================
See accompanying notes to consolidated financial statements.
27
16
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 11,111 $ 11,311 $ 10,914
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization 866 993 928
Loan interest capitalized (46) (58) (88)
Amortization of ESOP shares committed to be released 93 163 243
(Increase) decrease in accrued interest receivable (710) 13 337
(Decrease) increase in other liabilities (319) 478 (734)
Decrease in current income taxes payable -- (723) (517)
Decrease (increase) in current income tax asset, net 8 (292) --
Accretion of discounts on securities, net of
amortization of premiums (847) (961) (1,152)
Net trading securities activity (13,228) 25,174 (8,671)
Gains on securities available for sale (3,049) (3,954) (2,798)
Gains on trading securities (476) (79) (95)
(Decrease) increase in deferred mortgage loan origination fees,
net of amortization (167) (3) 231
Deferred income tax (benefit) expense (103) (161) 146
(Increase) decrease in other assets (1,213) (327) 85
Loans originated for sale -- -- (129)
Loans sold -- -- 129
Provision for loan losses 60 140 193
Gains on sales of real estate acquired through foreclosure (8) -- (5)
Gains on sales of premises and equipment -- (2) --
(Decrease) increase in escrow deposits of borrowers (90) 39 (64)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (8,118) 31,751 (1,047)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of term federal funds (50,000) -- (35,000)
Proceeds from maturities of term federal funds 20,000 25,000 30,000
Net decrease (increase) in interest-bearing bank deposits 2,163 (1,808) 50
Proceeds from sales of investment securities available for sale 55,063 72,582 26,580
Proceeds from maturities of investment securities held to maturity
and available for sale 56,000 65,800 43,650
Purchases of investment securities available for sale (89,621) (169,020) (59,291)
Purchases of mortgage-backed securities (43,750) (88,397) (10,043)
Principal repayments of mortgage-backed securities 47,002 68,430 70,203
Principal repayments of securities held to maturity -- 44 18
Principal repayments of securities available for sale 4 124 4
Loans originated (32,989) (82,415) (105,103)
Loan principal payments received 48,346 62,254 71,687
Loans purchased -- (345) --
Purchases of premises and equipment (288) (376) (508)
Proceeds from sale of premises and equipment -- 2 --
Proceeds from sale of real estate acquired through foreclosure 70 86 316
Net advances on real estate acquired through foreclosure -- (4) (20)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 12,000 (48,043) 32,543
- ----------------------------------------------------------------------------------------------------------
(Continued)
28
17
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 5,337 (6,202) 13,978
Payments to acquire treasury stock (5,814) (7,618) (4,703)
Purchase of company stock for deferred compensation plan 366 -- --
Issuance of common stock under stock option plan 415 351 741
Tax benefit resulting from stock options exercised 250 97 329
Cash dividends paid on common stock (3,829) (3,759) (3,605)
Tax benefit resulting from dividends paid on unallocated shares
held by the ESOP 10 13 15
- --------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (3,265) (17,118) 6,755
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 617 (33,410) 38,251
Cash and cash equivalents at beginning of year 121,404 154,814 116,563
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 122,021 $ 121,404 $ 154,814
- --------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the year for interest $ 35,382 $ 33,204 $ 34,319
Cash paid during the year for taxes, net of refunds 6,022 7,617 6,185
Purchases of securities executed but not settled at beginning of
year which settled during the year 117 129 32
Sales of securities executed but not settled at beginning
of year which settled during the year 202 583 --
Non-cash transactions:
SFAS 115:
(Decrease) increase in stockholders' equity 4,006 (9,725) 2,620
(Decrease) increase in deferred tax liabilities 2,322 (6,401) 1,688
Securities reclassified from available for sale to trading -- -- 1,111
Transfers from loans to real estate acquired through foreclosure -- 58 377
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 60 117 129
Sales of securities executed but not settled as of year-end 573 202 583
- --------------------------------------------------------------------------------------------------------
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, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Common
Additional other stock
Common paid-in Retained Treasury comprehensive acquired
stock capital earnings stock income by ESOP Total
- ------------------------------------------------------------------------------------------------------------------------------------
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
Net Income -- -- 11,111 -- -- -- 11,111
Other comprehensive income, net of tax:
Unrealized (gains) on securities, net of
reclassification adjustment (Note 1) -- -- -- -- 4,006 -- 4,006
Comprehensive income -- -- -- -- -- -- 15,117
Cash dividends declared
($1.185 per share) -- -- (3,829) -- -- -- (3,829)
Tax benefit resulting from dividends paid
on unallocated shares held by the ESOP -- -- 10 -- -- -- 10
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 93 -- -- -- -- 93
Purchase of treasury stock -- -- -- (5,448) -- -- (5,448)
Purchase of company stock for
deferred compensation plan -- 366 -- (366) -- -- --
Exercise of stock options and
related tax benefits 41 624 -- -- -- -- 665
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 7,448 $ 61,674 $ 93,165 $ (59,704) $ 5,972 $ (312) $ 108,243
====================================================================================================================================
See accompanying notes to consolidated financial statements.
30
19
MASSBANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 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 1/2nancial 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, 2000, stockholders'
equity included approximately $6.0 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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." These Statements
establish comprehensive accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
They require that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair market
value. Under these Statements, an entity that elects to apply hedge accounting
is required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determing the ineffective aspect of the hedge. The Company adopted
these Statements on January 1, 2001. The adoption of these Statements did not
have a material effect on the Company's consolidated financial statements.
31
20
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 the estimated loan loss exposure
inherent in the portfolio. Management uses a methodology to systematically
measure the amount of estimated loan loss exposure inherent in the portfolio for
purposes of establishing a sufficient allowance for loan losses. The methodology
includes three elements: an analysis of individual loans deemed to be impaired
in accordance with the terms of SFAS 114, general loss allocations for various
loan types based on loss experience factors and an unallocated allowance which
is maintained based on management's assessment of many factors including the
risk characteristics of the portfolio, concentrations of credit, current and
anticipated economic conditions that may effect the borrower's ability to pay,
and trends in loan delinquencies and charge-offs. 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.
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)
GOODWILL AND OTHER INTANGIBLES
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. 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. Goodwill and
other intangible assets are reviewed for possible impairment when it is
determined that events or changed circumstances may affect the underlying basis
of the asset.
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.
EARNINGS PER COMMON SHARE
Basic EPS is computed
by dividing net income by the weighted average number of shares of common stock
outstanding during the year reduced by the weighted average number of
unallocated shares held by the Employee Stock Ownership Plan ("ESOP"). Diluted
EPS reflects the effect on the weighted average shares outstanding of the number
of additional shares outstanding if dilutive stock options were converted into
common stock using the treasury stock method.
The treasury shares acquired in connection with the Company's directors
deferred compensation plan are considered outstanding in the computation of
earnings per share and book value per share.
A reconciliation of the weighted average shares outstanding for the
years ended December 31, 2000, 1999 and 1998 follows:
- --------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998
- --------------------------------------------------------------------
Basic shares 3,220 3,375 3,529
Dilutive impact of stock options 74 104 148
- --------------------------------------------------------------------
Diluted shares 3,294 3,479 3,677
- --------------------------------------------------------------------
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, 2000 and the year ended December 31, 1999 is as follows:
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999
- ---------------------------------------------------------------------------------------------------------------
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 $ 9,377 $ (3,613) $ 5,764 $(12,171) $ 4,716 $ (7,455)
Less: reclassification adjustment for
gains realized in net income 3,049 (1,291) 1,758 (3,954) 1,684 (2,270)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 6,328 (2,322) 4,006 (16,125) 6,400 (9,725)
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $ 6,328 $ (2,322) $ 4,006 $(16,125) $ 6,400 $ (9,725)
- ---------------------------------------------------------------------------------------------------------------
33
22
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The amount of this reserve requirement, included in
"Cash and Due from Banks," was $8.7 million and $7.4 million at December 31,
2000 and 1999, respectively.
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.
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
- ----------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2000 1999
- ----------------------------------------------------------------------
Federal funds sold (overnight) $112,711 $ 86,211
Money market funds 131 24,717
- ----------------------------------------------------------------------
Total short-term investments $112,842 $ 110,928
======================================================================
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, 2000 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
Securities held to maturity:
Other bonds and obligations $ 230 $ -- $ -- $ 230
- -------------------------------------------------------------------------------------------
Total securities held to maturity 230 -- -- 230
- -------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations 125,630 827 (1) 126,456
U.S. Government agency obligations 9,147 -- (14) 9,133
- -------------------------------------------------------------------------------------------
Total 134,777 827 (15) 135,589
- -------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage Association 30,847 543 (3) 31,387
Federal Home Loan Mortgage Corporation 247,925 3,322 (125) 251,122
Federal National Mortgage Association 2,230 43 (9) 2,264
Collateralized mortgage obligations 2,465 12 (37) 2,440
- -------------------------------------------------------------------------------------------
Total mortgage-backed securities 283,467 3,920 (174) 287,213
- -------------------------------------------------------------------------------------------
Total debt securities 418,244 4,747 (189) 422,802
- -------------------------------------------------------------------------------------------
Equity securities 14,323 7,132 (1,705) 19,750
- -------------------------------------------------------------------------------------------
Total securities available for sale 432,567 $ 11,879 $ (1,894) $442,552
- -------------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 9,985
- -------------------------------------------------------------------------------------------
Total securities available for sale, net 442,552
- -------------------------------------------------------------------------------------------
Total investment securities, net $442,782
===========================================================================================
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, 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
===========================================================================================
During the years ended December 31, 2000, 1999 and 1998, the Company realized
gains and losses on sales of securities available for sale as follows:
- -------------------------------------------------------------------------------------------------
(In thousands) At December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Realized Realized Realized
Gains Losses Gains Losses Gains Losses
- -------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 66 $ (328) $ 2 $ (576) $ 180 $ --
Marketable equity securities 4,130 (819) 5,099 (571) 3,577 (959)
- -------------------------------------------------------------------------------------------------
Total realized gains (losses) $ 4,196 $(1,147) $ 5,101 $(1,147) $ 3,757 $ (959)
=================================================================================================
Proceeds from sales of debt securities available for sale during 2000, 1999 and
1998 were $38.7 million, $48.4 million and $13.1 million, respectively. Proceeds
from sales of equity securities available for sale during 2000, 1999 and 1998,
were $21.7 million, $24.1 million and $13.7 million, respectively.
There were no sales of investment securities held-to-maturity during
2000, 1999 and 1998.
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, 2000 1999
- ------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------
Total debt securities held to maturity 230 230 230 230
================================================================================================
Investment securities available for sale:
U.S. Treasury obligations:
Maturing within 1 year 81,841 82,036 52,845 52,825
Maturing after 1 year but within 5 years 43,789 44,420 82,707 81,919
Maturing after 5 years but within 10 years -- -- 2,966 2,871
- ------------------------------------------------------------------------------------------------
Total 125,630 126,456 138,518 137,615
- ------------------------------------------------------------------------------------------------
U.S. Government agency obligations:
Maturing within 1 year 9,000 8,989 6,992 6,971
Maturing after 1 year but within 5 years -- -- 9,000 8,899
Maturing after 15 years 147 144 151 145
- ------------------------------------------------------------------------------------------------
Total 9,147 9,133 16,143 16,015
- ------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Maturing within 1 year 287 283 523 518
Maturing after 1 year but within 5 years 2,166 2,209 3,869 3,922
Maturing after 5 years but within 10 years 66,188 67,292 56,571 56,227
Maturing after 10 years but within 15 years 211,830 214,467 221,202 217,629
Maturing after 15 years, 2,996 2,962 4,103 4,039
- ------------------------------------------------------------------------------------------------
Total 283,467 287,213 286,268 282,335
- ------------------------------------------------------------------------------------------------
Total debt securities available for sale 418,244 422,802 440,929 435,965
================================================================================================
Net unrealized gains on debt securities
available for sale 4,558 -- (4,964) --
- ------------------------------------------------------------------------------------------------
Total debt securities available for sale,
net carrying value $ 422,802 $ 422,802 $ 435,965 $ 435,965
================================================================================================
Maturities of mortgage-backed securities are based on contractual maturities
with scheduled amortization. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
36
25
4. TRADING SECURITIES
The amortized cost and market values of trading securities are as follows:
- --------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2000 1999
- --------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- --------------------------------------------------------------------
U.S. Treasury obligations $19,784 $19,791 $ 4,960 $ 4,956
Investments in mutual funds 2 3 1,112 1,086
- --------------------------------------------------------------------
Total trading securities $19,786 $19,794 $ 6,072 $ 6,042
====================================================================
During the years ended December 31, 2000, 1999 and 1998, the Company realized
gains and losses on sales of trading securities as follows:
- --------------------------------------------------------------------------------
(In thousands) Years ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Realized Realized Realized
Gains Losses Gains Losses Gains Losses
- --------------------------------------------------------------------------------
U.S. Treasury obligations $ -- $ (1) $ 4 $(11) $ 48 $ --
Investments in mutual funds -- (33) -- -- 11 (35)
Marketable equity securities 500 (29) 132 (25) 55 (20)
- --------------------------------------------------------------------------------
Total realized gains (losses) $500 $(63) $136 $(36) $114 $(55)
================================================================================
Proceeds from sales of trading securities during 2000, 1999 and 1998 were $10.8
million, $13.8 million and $50.2 million, respectively. Unrealized gains or
(losses) included in income in 2000, 1999 and 1998 were $39 thousand, $(21)
thousand and $36 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, 2000 1999
- ------------------------------------------------------------------
Mortgage loans:
Residential:
Conventional:
Fixed rate $ 230,323 $ 247,512
Variable rate 39,536 38,917
FHA and VA 471 740
Commercial 3,117 2,471
Construction 683 232
- ------------------------------------------------------------------
Total mortgage loans 274,130 289,872
Premium on loans 105 159
Deferred mortgage loan origination fees (1,284) (1,451)
- ------------------------------------------------------------------
Mortgage loans, net 272,951 288,580
- ------------------------------------------------------------------
Other loans:
Consumer:
Installment 1,829 1,418
Guaranteed education 6,266 7,037
Other secured 1,169 1,318
Home equity lines of credit 12,624 11,737
Unsecured 224 225
- ------------------------------------------------------------------
Total consumer loans 22,112 21,735
Commercial 15,084 15,050
- ------------------------------------------------------------------
Total other loans 37,196 36,785
- ------------------------------------------------------------------
Total loans $ 310,147 $ 325,365
==================================================================
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, 2000 follows:
- ------------------------------------------------------------------
(IN THOUSANDS)
- ------------------------------------------------------------------
Balance at December 31, 1999 $613
Additions 397
Repayments (322)
- ------------------------------------------------------------------
Balance at December 31, 2000 $688
==================================================================
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, 2000 1999 1998
- --------------------------------------------------------------------------
Balance at beginning of year $ 2,555 $ 2,450 $ 2,334
Provision for loan losses 60 140 193
Recoveries of loans previously charged-off 3 41 26
- --------------------------------------------------------------------------
Total 2,618 2,631 2,553
- --------------------------------------------------------------------------
Charge-offs:
Mortgage loans -- (62) (81)
Other loans (24) (14) (22)
- --------------------------------------------------------------------------
Balance at end of year $ 2,594 $ 2,555 $ 2,450
==========================================================================
The following table shows the allocation of the allowance for loan losses by
category of loans at December 31, 2000, 1999 and 1998.
- -----------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans of Loans of Loans
Amount to Total Amount to Total Amount to Total
- -----------------------------------------------------------------------------
Mortgage loans:
Residential $1,317 87% $1,535 88% $1,786 92%
Commercial 9 1 7 1 2 1
Consumer loans 162 7 215 7 153 7
Commercial loans 324 5 301 4 25 --
Unallocated 782 -- 497 -- 484 --
- -----------------------------------------------------------------------------
Total $2,594 100% $2,555 100% $2,450 100%
=============================================================================
An integral component of the Company's risk management process is to ensure the
proper allocation of the allowance for loan losses based upon an analysis of
risk characteristics, demonstrated losses and other factors. The unallocated
component of the allowance for loan losses represents management's view that
given the complexities of the loan portfolio, there are probable losses that
have been incurred within the portfolio but have not yet been specifically
identified. The unallocated portion of the allowance for loan losses is based on
management's assessment of many factors including the risk characteristics of
the loan portfolio, concentrations of credit, current and anticipated economic
conditions that may effect the borrower's ability to pay, and trends in loan
delinquencies and charge-offs. The unallocated portion of the allowance for loan
losses may change periodically after evaluating factors impacting assumptions
utilized in the calculation of the allocated portion of the allowance for loan
losses.
7. NON-PERFORMING ASSETS
The following schedule summarizes non-performing assets at the dates shown:
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Total nonaccrual loans $ 565 $ 795 $1,004
Total real estate acquired through foreclosure -- 62 86
- -----------------------------------------------------------------------------------------------
Total non-performing assets $ 565 $ 857 $1,090
===============================================================================================
Percent of non-performing loans to total loans 0.18% 0.24% 0.33%
Percent of non-performing assets to total assets 0.06% 0.09% 0.12%
The reduction in interest income associated with nonaccrual loans is as follows:
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Interest income that would have been recorded under original terms $ 48 $ 64 $ 84
Interest income actually recorded 36 51 61
- -----------------------------------------------------------------------------------------------
Reduction in interest income $ 12 $ 13 $ 23
===============================================================================================
During 2000, 1999 and 1998 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, 2000 1999
- ----------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to originate residential mortgage loans $ 1,920 $ 2,829
Unadvanced portions of construction loans 421 65
Unused credit lines, including unused portions of equity lines of credit 30,918 31,693
==============================================================================================
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, 2000 1999 (IN YEARS)
- --------------------------------------------------------------------------------
Premises:
Land $ 1,227 $ 1,227 --
Buildings 3,686 3,637 15-45
Building and leasehold improvements 2,078 2,030 1-30
Equipment 4,080 3,889 1-30
- -----------------------------------------------------------------------------
11,071 10,783
Less: accumulated depreciation and amortization 7,139 6,656
- -----------------------------------------------------------------------------
Total premises and equipment, net $ 3,932 $ 4,127
=============================================================================
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,
2000, 1999 and 1998 amounted to $533 thousand, $521 thousand and $518 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, 2000, are as follows:
- ------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS
- ------------------------------------------------------------------
2001 $269
2002 168
2003 109
2004 39
2005 32
2006 27
- ------------------------------------------------------------------
Total $644
==================================================================
40
29
10. DEPOSITS
Deposits are summarized as follows:
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2000 1999
- ------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------
Demand and NOW:
NOW accounts $ 51,390 0.96% $ 48,422 0.98%
Demand accounts 28,562 -- 24,516 --
- ------------------------------------------------------------------------------------------------
Total demand and NOW 79,952 0.62 72,938 0.65
- ------------------------------------------------------------------------------------------------
Savings:
Regular savings and special notice accounts 317,926 3.44 333,535 3.45
Money market accounts 17,022 2.99 19,555 2.97
- ------------------------------------------------------------------------------------------------
Total savings 334,948 3.42 353,090 3.42
- ------------------------------------------------------------------------------------------------
Time certificates:
Fixed rate certificates 309,245 5.79 302,423 4.98
Variable rate certificates 99,736 7.40 90,093 6.56
- ------------------------------------------------------------------------------------------------
Total time certificates 408,981 6.18 392,516 5.35
- ------------------------------------------------------------------------------------------------
Deposit acquisition premium, net of amortization (256) -- (487) --
- ------------------------------------------------------------------------------------------------
Total deposits $ 823,625 4.52% $ 818,057 4.10%
================================================================================================
The maturity distribution and related rate structure of the Bank's time
certificates at December 31, 2000 follows:
- ------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2000
- ------------------------------------------------
Average
Amount Interest Rate
- ------------------------------------------------
Due within 3 months $ 99,489 5.77%
Due within 3-6 months 89,450 5.91
Due within 6-12 months 102,058 6.22
Due within 1-2 years 83,610 6.58
Due within 2-3 years 24,182 7.26
Due within 3-5 years 9,698 6.59
Thereafter 494 5.34
- ------------------------------------------------
Total $408,981 6.18%
================================================
At December 31, 2000 and 1999, the Bank had individual time certificates of
deposit of $100 thousand or more maturing as follows:
- ----------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2000 1999
- ----------------------------------------------------
Due within 3 months $19,421 $19,152
Due within 3-6 months 15,616 12,615
Due within 6-12 months 24,705 16,393
Due within 1-2 years 17,026 15,309
Due within 2-3 years 8,038 9,760
Due within 3-5 years 3,202 223
Thereafter 284 270
- ----------------------------------------------------
Total $88,292 $73,722
====================================================
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, 2000 and 1999
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, 2000 1999
- -------------------------------------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------
Securities held to maturity $ 230 $ 230 $ 230 $ 230
Securities available for sale 442,552 442,552 457,502 457,502
Trading securities 19,794 19,794 6,042 6,042
- -------------------------------------------------------------------------------
Total securities $462,576 $462,576 $463,774 $463,774
===============================================================================
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, 2000 1999
- ---------------------------------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------
Real estate:
Residential:
Variable $ 39,668 $ 40,055 $ 38,844 $ 38,259
Fixed 230,178 229,365 247,273 243,483
Commercial:
Variable 2,889 2,922 2,463 2,454
Fixed 216 208 -- --
Consumer 22,112 22,208 21,735 21,899
Commercial 15,084 15,073 15,050 15,050
- ---------------------------------------------------------------------------
Total loans 310,147 309,831 325,365 321,145
Allowance for loan losses (2,594) -- (2,555) --
- ---------------------------------------------------------------------------
Net loans $ 307,553 $ 309,831 $ 322,810 $ 321,145
===========================================================================
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, 2000 and 1999. 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, 2000 1999
- --------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------
Demand accounts $ 28,562 $ 28,562 $ 24,516 $ 24,516
NOW accounts 51,390 51,390 48,422 48,422
Regular savings and special notice accounts 317,926 317,926 333,535 333,535
Money market accounts 17,022 17,022 19,555 19,555
Time certificates 408,981 409,671 392,516 392,158
Deposit acquisition premium, net of amortization (256) -- (487) --
- --------------------------------------------------------------------------------------------------
Total deposits 823,625 824,571 818,057 818,186
- --------------------------------------------------------------------------------------------------
Escrow deposits of borrowers 1,387 1,387 1,477 1,477
- --------------------------------------------------------------------------------------------------
Total $ 825,012 $ 825,958 $ 819,534 $ 819,663
==================================================================================================
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, 2000 and 1999 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, 2000 1999 1998
- ------------------------------------------------------------------------
Current income tax expense:
Federal $ 5,934 $ 6,134 $ 5,565
State 356 574 771
- ------------------------------------------------------------------------
Total current tax expense 6,290 6,708 6,336
========================================================================
Deferred income tax (benefit) expense:
Federal (79) (121) 110
State (24) (40) 40
Change in valuation reserve -- -- (4)
- ------------------------------------------------------------------------
Total deferred tax (benefit) expense (103) (161) 146
- ------------------------------------------------------------------------
Total income tax expense $ 6,187 $ 6,547 $ 6,482
========================================================================
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, 2000 1999 1998
- ------------------------------------------------------------------------------------------
Computed "expected" income tax expense at statutory rate $ 6,054 $ 6,250 $ 6,089
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit 216 347 527
Dividends received deduction (75) (79) (87)
Other (8) 29 (43)
Change in valuation reserve -- -- (4)
- ------------------------------------------------------------------------------------------
Income tax expense $ 6,187 $ 6,547 $ 6,482
- ------------------------------------------------------------------------------------------
Effective income tax rate 35.77% 36.66% 37.26%
==========================================================================================
44
33
12. INCOME TAXES (CONTINUED)
At December 31, 2000 and 1999, the Bank had gross deferred tax assets and gross
deferred tax liabilities as follows:
- ----------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999
- ----------------------------------------------------------
Deferred tax assets:
Loan losses $ 740 $ 609
Deferred loan fees, net 9 8
Deferred compensation and pension cost 512 502
Depreciation 2 14
Purchase accounting 411 415
Other 31 41
- ----------------------------------------------------------
Gross deferred tax asset 1,705 1,589
- ----------------------------------------------------------
Deferred tax liabilities:
Valuation of securities 4,013 1,691
Other unrealized securities gains 109 93
Other 1 4
- ----------------------------------------------------------
Gross deferred tax liability 4,123 1,788
- ----------------------------------------------------------
Net deferred tax liability $2,418 $ 199
==========================================================
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, 2000. The primary sources of
recovery of the gross federal deferred tax asset are federal income taxes paid
in 2000, 1999 and 1998 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, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) Basic Diluted Basic Diluted Basic Diluted
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 11,111 $ 11,111 $ 11,311 $ 11,311 $ 10,914 $ 10,914
Average shares outstanding 3,245,299 3,245,299 3,408,280 3,408,280 3,571,298 3,571,298
Dilutive stock options -- 73,578 -- 104,321 -- 147,825
Unallocated Employee Stock
Ownership Plan ("ESOP") shares
not committed to be released (24,909) (24,909) (33,657) (33,657) (42,481) (42,481)
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 3,220,390 3,293,968 3,374,623 3,478,944 3,528,817 3,676,642
Earnings per share (in dollars) $ 3.45 $ 3.37 $ 3.35 $ 3.25 $ 3.09 $ 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, 2000.
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, 2000 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1)
- ------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------
TIER I CAPITAL (TO AVERAGE ASSETS):
Massbank Corp. (consolidated) $100,826 10.94% $ 27,639 3.00% N/A --
Massbank (the "Bank") 100,295 10.89 27,639 3.00 $46,065 5.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
Massbank Corp. (consolidated) 100,826 34.30 11,757 4.00 N/A --
Massbank (the "Bank") 100,295 34.14 11,750 4.00 17,625 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Massbank Corp. (consolidated) 105,862 36.02 23,515 8.00 N/A --
Massbank (the "Bank") 105,331 35.86 23,500 8.00 29,376 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, 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.
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, 2000, 1999, and 1998, the plan's latest valuation dates:
- -----------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------
Actuarial present value of vested benefits $ 4,787 $ 4,690 $ 4,442
Total accumulated benefit obligation 4,811 4,724 4,481
Change in benefit obligation:
Projected benefit obligation at beginning of year $ 5,906 $ 5,788 $ 4,990
Service cost 386 440 443
Interest cost 458 375 362
Actuarial loss (gain) 95 (463) 283
Benefits paid (413) (234) (290)
- -----------------------------------------------------------------------------------------
Projected benefit obligation at end of year $ 6,432 $ 5,906 $ 5,788
=========================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 7,175 $ 6,243 $ 5,810
Actual return on plan assets 1,023 1,166 469
Employer contribution -- -- 254
Benefits paid (413) (234) (290)
- -----------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 7,785 $ 7,175 $ 6,243
- -----------------------------------------------------------------------------------------
Excess of plan assets over projected benefit obligation $ 1,353 $ 1,269 $ 455
=========================================================================================
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 $ 1,654 $ 1,535 $ 487
Transition asset 148 169 190
Accrued benefit cost (449) (435) (222)
- -----------------------------------------------------------------------------------------
Excess of plan assets over projected benefit obligation $ 1,353 $ 1,269 $ 455
=========================================================================================
Assumptions used in determining the actuarial present value of the projected
benefit obligation were as follows:
Discount rate 7.75% 7.75% 6.75%
Rate of compensation increase 5.00% 4.50% 4.50%
Assumptions used to develop the
net periodic benefit cost data were:
Discount rate 7.75% 6.75% 7.25%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.50% 4.00% 4.50%
Components of net periodic benefit cost:
Service cost $ 386 $ 440 $ 443
Interest cost 458 375 362
Expected return on plan assets (574) (499) (465)
Transition obligation (21) (21) (21)
Recognized net actuarial (gain) loss (236) (82) (119)
- -----------------------------------------------------------------------------------------
Net periodic benefit cost $ 13 $ 213 $ 200
=========================================================================================
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
objec- tives by certain key officers. Payments of $302 thousand, $426 thousand
and $399 thousand were awarded under the plans in 2000, 1999 and 1998,
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,
2000 and 1999, such outstanding liabilities totaled $312 thousand and $468
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, 2000, the ESOP held
17,600 unallocated shares and 139,948 shares which have been allocated to
participants. The fair value of the unallocated shares at December 31, 2000 was
approximately $515 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 $289 thousand, $366 thousand and $462 thousand for the years ended December
31, 2000, 1999 and 1998, 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 $173
thousand, $139 thousand and $105 thousand in 2000, 1999 and 1998, 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
plan. As of December 31, 2000, there were 135,010.7 non-qualified stock options
and 211,340.0 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.
DIRECTORS DEFERRED COMPENSATION PLAN
In 1988, the Company established a deferred compensation plan for its directors.
The plan allows the Company's directors to defer receipt of all or a portion of
their compensation until the earlier of: (1) their attaining the age of 72, or
(2) their termination as a director of the Company. In 2000, the plan was
amended to allow the directors compensation to be invested in Company stock held
in an irrevocable trust. At December 31, 2000 the trust held 13,200 shares of
Massbank Corp. stock that the Company has classified as treasury stock. The
treasury shares are considered outstanding in the computation of earnings per
share and book value per share.
48
37
15. EMPLOYEE BENEFITS (CONTINUED)
A summary of the status of the Company's fixed stock option plan as of December
31, 2000, 1999 and 1998, and changes during the years ended on those dates is
presented below:
- ------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
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 363,317.3 $ 22.74 347,917.3 $ 20.62 360,200 $ 17.65
Granted 36,000 28.50 40,000 37.50 35,250 44.25
Exercised (40,550) 10.24 (23,100) 15.17 (47,532) 15.59
Forfeited (12,416.6) 36.54 (1,500) 40.88 (0.7) 30.09
- ------------------------------------------------------------------------------------------------------
Outstanding at end of year 346,350.7 $ 24.31 363,317.3 $ 22.74 347,917.3 $ 20.62
======================================================================================================
Options exercisable at year-end 346,350.7 363,317.3 347,917.3
======================================================================================================
The following table summarizes information about fixed stock options outstanding
and exercisable at December 31, 2000:
- ---------------------------------------------------------------------------------------------
AT DECEMBER 31, 2000 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
- ---------------------------------------------------------------------------------------------
$10.75 to $16.88 99,516.7 2.0 years $ 15.06 99,516.7 $ 15.06
17.25 to 23.25 103,417.3 4.0 years 19.22 103,417.3 19.22
24.56 to 30.09 77,666.7 7.3 years 29.09 77,666.7 29.09
37.50 to 44.25 65,750 7.6 years 40.68 65,750 40.68
- ---------------------------------------------------------------------------------------------
$10.75 to $44.25 346,350.7 4.8 years $ 24.31 346,350.7 $ 24.31
=============================================================================================
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 2000.
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 2000, 1999
and 1998:
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
Net income As reported $11,111 $11,311 $10,914
Pro forma 10,967 11,095 10,743
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share As reported $ 3.45 $ 3.35 $ 3.09
Pro forma 3.41 3.29 3.04
- -------------------------------------------------------------------------------------------------------------
Diluted earnings per share As reported $ 3.37 $ 3.25 $ 2.97
Pro forma 3.33 3.19 2.92
=============================================================================================================
Weighted average fair value $ 6.69 $ 9.01 $ 8.23
Expected life 7.4 years 7.3 years 7.3 years
Risk-free interest rate 6.70% 4.80% 5.53%
Expected volatility 22.7% 23.0% 23.0%
Expected dividend yield 4.1% 2.9% 2.7%
==============================================================================================================
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16. SHAREHOLDER RIGHTS PLAN
On January 18, 2000, the Board of Directors adopted a new Shareholder Rights
Plan to replace the Company Plan that expired on January 16, 2000. In connection
with the adoption of the new Shareholder Rights Plan, the Board of Directors
authorized the issuance of one preferred stock purchase right for each share of
common stock of the Company outstanding as of January 19, 2000. Under the Plan,
the Rights initially are attached to and trade with the Company's shares of
common stock. Although the Rights are not exercisable initially, they separate
from the shares of common stock and become exercisable if a person becomes an
"acquiring person" by acquiring 11% or more of the Company's common stock or if
a person commences a tender offer that could result in that person owning 11% or
more of the common stock of Massbank Corp. In the event that a person becomes an
"acquiring person," each holder of a Right (other than the acquiring person)
would be entitled to acquire such number of shares of preferred stock which are
equivalent to Massbank common stock having a value of twice the exercise price
of the Right. The exercise price of a Right initially is $136.00 per one
one-thousandth of a share of the Company's preferred stock. If Massbank Corp. is
acquired in a merger or other business combination transaction after any such
event, each holder of a Right would be entitled to purchase, at the then-current
exercise price, shares of the acquiring company's common stock having a value of
twice the exercise price of the Right. The Rights will expire on January 19,
2010, but may be redeemed at the option of the Board of Directors for $0.01 per
Right at any time prior to the time at which any person becomes an acquiring
person or until the expiration date of the Shareholder Rights 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, 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Assets:
Cash $ -- $ 2
Interest-bearing deposits in banks 553 706
Investment in subsidiaries 108,024 101,386
Due from subsidiaries 84 104
Other assets 190 70
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 108,851 $ 102,268
===============================================================================================================
Liabilities:
Employee stock ownership plan liability (Note 15) $ 312 $ 468
Other liabilities 296 321
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 608 789
===============================================================================================================
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, 7,447,982 and 7,407,432 shares issued, respectively 7,448 7,407
Additional paid-in capital 61,674 60,591
Retained earnings 93,165 85,873
- ---------------------------------------------------------------------------------------------------------------
162,287 153,871
Treasury stock at cost, 4,300,489 and 4,096,189 shares, respectively (59,704) (53,890)
Accumulated other comprehensive income (Note 1) 5,972 1,966
Common stock acquired by ESOP (Note 15) (312) (468)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 108,243 101,479
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 108,851 $ 102,268
===============================================================================================================
50
39
17. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------------
Income:
Dividends received from subsidiaries $ 8,800 $ 9,200 $ 6,400
Interest and dividend income 23 23 96
- -----------------------------------------------------------------------------------
Total interest and dividend income 8,823 9,223 6,496
Non-interest expense 115 92 99
- -----------------------------------------------------------------------------------
Income before income taxes 8,708 9,131 6,397
Income tax benefit 23 53 28
- -----------------------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 8,731 9,184 6,425
Equity in undistributed earnings of subsidiaries 2,380 2,127 4,489
- -----------------------------------------------------------------------------------
Net income $11,111 $11,311 $10,914
===================================================================================
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, 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 11,111 $ 11,311 $ 10,914
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (2,380) (2,127) (4,489)
(Decrease) increase in accrued income taxes payable (116) (17) 25
Deferred income tax benefit (4) -- (1)
(Decrease) increase in other liabilities (25) 288 4
Decrease (increase) in amount due from subsidiaries 20 (59) (45)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,606 9,396 6,408
- ------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Payments to acquire treasury stock (5,814) (7,618) (4,703)
Purchase of company stock for deferred compensation plan 366 -- --
Issuance of common stock under stock option plan 415 351 741
Tax benefit resulting from stock options exercised 91 -- 66
Dividends paid on common stock (3,829) (3,759) (3,605)
Tax benefit resulting from dividends paid on unallocated
shares held by the ESOP 10 13 15
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (8,761) (11,013) (7,486)
- ------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (155) (1,617) (1,078)
Cash and cash equivalents at beginning of year 708 2,325 3,403
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 553 $ 708 $ 2,325
================================================================================================
During the years ended December 31, 2000, 1999 and 1998, the Company made cash
payments for income taxes of $44 thousand, $16 thousand and $24 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 $31 thousand, $38 thousand and $29 thousand
during the years ended December 31, 2000, 1999 and 1998, respectively.
51
40
18. TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 11,111 $11,311 $10,914 $ 10,167 $9,427 $ 8,759 $8,185 $6,695 $ 4,677 $ 2,250
Basic earnings per share 3.45 3.35 3.09 2.88 2.65 2.43 2.19 1.71 1.22 0.59
Cash dividends declared per share 1.18 1/2 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 34.25 30.65 31.58 29.06 25.75 24.84 20.09 20.46 18.37 17.54
Return on average assets 1.20% 1.20% 1.17% 1.12% 1.08% 1.04% 0.96% 0.79% 0.61% 0.60%
Return on average realized equity(1) 10.95% 11.35% 11.08% 11.11% 11.01% 10.81% 10.62% 8.98% 6.79% 3.39%
====================================================================================================================================
(1) Excludes average net unrealized gains or losses on securities available for
sale.
19. QUARTERLY DATA (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000 1999
- -------------------------------------------------------------------------------------------------------------------
(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 $15,429 $15,226 $14,915 $14,710 $14,758 $14,730 $14,345 $14,373
Interest expense 9,276 9,079 8,621 8,421 8,365 8,391 8,215 8,233
- -------------------------------------------------------------------------------------------------------------------
Net interest income 6,153 6,147 6,294 6,289 6,393 6,339 6,130 6,140
Provision for loan losses 15 15 15 15 15 15 60 50
- -------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,138 6,132 6,279 6,274 6,378 6,324 6,070 6,090
Non-interest income 1,438 945 1,293 1,312 1,154 1,089 1,578 1,741
Non-interest expense 3,114 2,894 3,325 3,180 3,210 3,066 3,122 3,168
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,462 4,183 4,247 4,406 4,322 4,347 4,526 4,663
Income tax expense 1,593 1,486 1,530 1,578 1,573 1,564 1,660 1,750
- -------------------------------------------------------------------------------------------------------------------
Net income $ 2,869 $ 2,697 $ 2,717 $ 2,828 $ 2,749 $ 2,783 $ 2,866 $ 2,913
===================================================================================================================
Earnings per share (in dollars):(1)
Basic $ 0.90 $ 0.84 $ 0.84 $ 0.87 $ 0.83 $ 0.83 $ 0.85 $ 0.84
Diluted 0.88 0.82 0.82 0.85 0.81 0.80 0.82 0.82
- -------------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding:(1)
Basic 3,173 3,217 3,229 3,263 3,318 3,352 3,380 3,451
Diluted 3,242 3,292 3,305 3,337 3,389 3,466 3,496 3,567
===================================================================================================================
(1) Computation of earnings per share is further described in Note 1.
52
41
MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA
YEARS ENDED DECEMBER 31, 2000 AND 1999
Massbank Corp.'s common stock is currently traded on the Nasdaq Stock Market
under the symbol "MASB." At December 31, 2000 there were 3,160,693 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, 2000
- -------------------------------------------------------------
Fourth Quarter 29 1/2 27 7/8 $ 0.30
Third Quarter 29 3/4 28 1/16 0.30
Second Quarter 29 7/8 27 1/2 0.30
First Quarter 29 1/2 27 0.285
=============================================================
- -------------------------------------------------------------
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
=============================================================
(1) Stock prices have been adjusted to reflect the 4-for-3 split of the
Company's common stock effective September 15, 1997.
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 NorthRoad
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 17, 2001 at the
Crowne Plaza Woburn
2 Forbes Road
Woburn, MA 01801
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
2000 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 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'
2000 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
Senior Trust Officer
Thomas J. Queeney
Vice President and
Senior Trust Officer
Gerard F. Frechette
Director of Human Resources
Marilyn H. Abbott
Assistant Treasurer
Andrea S. Bradford
Assistant Vice President
Ernest G. Campbell, Jr.
Collections and Security Officer
Marianne J. Carpenter
Assistant Treasurer
Keri L. DeRosa
Mortgage Origination Officer
Karen L. Flammia
Assistant Vice President
Melissa J. Flanagan
Information Technology Officer
Scott A. Forbes
Mortgage Origination Officer
Rachael E. Garneau
Assistant Treasurer
Kathleen M. Hardy
Assistant Treasurer
Scott H. Hilfiker
Portfolio Manager
Brian W. Hurley
Assistant Vice President
Kimberly A. Judge
Assistant Treasurer
Kenneth A. Masson
Assistant Vice President
Joseph P. Orefice
Information Technology Officer
Karen L. O'Rourke
Assistant Treasurer
Mindy S. Peloquin
Assistant Vice President
Renald A. Robillard
Assistant Treasurer
Alice B. Sweeney
Assistant Comptroller
Richard A. Tatarczuk
Assistant Vice President
and Comptroller
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