SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to____________
Commission File Number 0-15137
MASSBANK Corp.
(Exact name of registrant as specified in its charter)
Delaware 04-2930382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 HAVEN STREET
Reading, Massachusetts 01867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 662-0100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price for the registrant's common stock on
March 13, 2002 as reported by NASDAQ, was $136,342,143.
As of March 13, 2002, there were 3,166,315 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of MASSBANK Corp.'s 2001 Annual Report to Stockholders are
incorporated by reference in Parts I, II, III and IV of this Form 10-K. Portions
of the Definitive Notice of Annual Meeting and Proxy Statement for the 2002
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K.
Forward-Looking Statement Disclosure.
This Annual Report on Form 10-K may contain forward-looking information,
including information concerning the Company's expectations of future business
prospects. These forward-looking statements are made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. The Company
may also make written or oral forward-looking statements in other documents
filed with the Securities and Exchange Commission ("SEC"), in annual reports to
stockholders, in press releases and other written materials, and in oral
statements made by the Company's officers, directors or employees. You can
identify forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," "will," "should," and other
expressions which predict or indicate future events and trends and which do not
relate to historical matters. These forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause the Company's
actual results or performance to be materially different from the results and
performance expressed or implied by the forward-looking statements
Forward-looking statements include, but are not limited to, statements
concerning the Company's belief, expectations, or intentions concerning the
Company's future performance, the financial outlook of the markets it serves and
the performance and activities of its competitors. These statements reflect the
Company's current views, are based on numerous assumptions and are subject to
numerous risks, uncertainties and other factors including but not limited to the
following:
- Unexpected fluctuations in market interest rates
- Unexpected fluctuations in the market for equities, bonds, federal
funds and other financial instruments
- An increase in the level of non-performing assets
- An increase in competitive pricing pressures within the Company's
market which may result in the following:
- An increase in the Company's cost of funds
- Changes in volume of loan originations
- Limit the ability of the Company to attract and retain banking
customers
- Adverse legislative or regulatory developments
- Adverse impacts resulting from the continuing war on terrorism
- An increase in medical insurance and other employee-related costs
- The impact of inflation, and other factors described in the Company's
annual report.
2
PART I
Item 1. Business
Business of MASSBANK Corp.
General
MASSBANK Corp. (sometimes referred to as the "Company") is a general
business corporation incorporated under the laws of the State of Delaware on
August 11, 1986. MASSBANK Corp. was organized for the purpose of becoming the
holding company for MASSBANK (the "Bank"). The Company is a one-bank holding
company registered with the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") under the Bank Holding Company Act of 1956, as
amended. As of and since December 2, 1986, the effective date of the
reorganization whereby MASSBANK Corp. became the holding company for the Bank,
the Bank has been a wholly owned subsidiary of MASSBANK Corp. The only office of
MASSBANK Corp., and its principal place of business, is located at the main
office of the Bank at 123 Haven Street, Reading, Massachusetts 01867.
MASSBANK Corp. currently has no material assets other than its investment
in the Bank. The Company's primary business, therefore, is managing its
investment in the stock of the Bank. MASSBANK Corp. is classified by the
Commonwealth of Massachusetts as a securities corporation for tax purposes which
restricts its business to buying, selling, dealing in, or holding securities on
its own behalf. In the future, MASSBANK Corp. may become an operating company or
acquire banks or companies engaged in bank-related activities. In addition,
MASSBANK Corp. may elect to become a financial holding company and to engage in
activities permissible to financial holding companies. See "Supervision and
Regulation of the Company and its subsidiaries."
The principal sources of revenues for MASSBANK Corp. are dividends from the
Bank and, to a lesser extent, interest income received from its interest-
bearing bank deposits. These revenues are used primarily for the payment of
dividends to stockholders and for the repurchase of stock pursuant to the
Company's stock repurchase program. MASSBANK Corp.'s only assets at December 31,
2001 were represented by its investment in the Bank of $110.9 million,
interest-bearing bank deposits of $4.3 million and other assets of $0.2 million.
The Company's liabilities consisted of loan indebtedness of $0.2 million and
other liabilities of $0.3 million. The proceeds of the loan were used to
purchase shares of the Company's common stock for the Employee Stock Ownership
Plan ("ESOP"). See Note 17 to the Consolidated Financial Statements for Parent
Company only financial information. At December 31, 2001 MASSBANK Corp. on a
consolidated basis had total assets of $971.2 million, deposits of $849.7
million, and stockholders' equity of $114.9 million which represents 11.8% of
total assets. Book value per share at December 31, 2001 stood at $36.51, up from
$34.25 at year-end 2000.
The Company does not own or lease any real or personal property. Instead it
intends to utilize during the immediate future the premises, equipment and
furniture of the Bank without the direct payment of rental fees to the Bank.
Competition
The primary business of MASSBANK Corp. currently is the ongoing business of
the Bank. Therefore, the competitive conditions faced by MASSBANK Corp.
currently are the same as those faced by the Bank. See "Business of MASSBANK -
Competition." In addition, many banks and financial institutions have formed
holding companies. It is likely that these holding companies will attempt to
acquire commercial banks, thrift institutions or companies engaged in
bank-related activities. MASSBANK Corp. would face competition in undertaking
any such acquisitions and in operating any such entity subsequent to its
acquisition.
3
Employees
MASSBANK Corp. does not employ any persons other than its management
which also serves as management of, and is paid by, the Bank. See "Item 10 -
Directors and Executive Officers of the Registrant." MASSBANK Corp. utilizes
the support staff of the Bank from time to time and does not pay any separate
salaries or expenses in connection therewith.
Dividends
MASSBANK Corp. paid total cash dividends of $1.26 per share in 2001
compared to $1.185 per share in 2000. The Company's dividend payout ratios (cash
dividends paid divided by net income) for 2001 and 2000 were 37% and 34%,
respectively.
Stock Repurchase Program
During 2001, the Company continued its program of share repurchases by
repurchasing 60,200 shares of its common stock pursuant to its stock repurchase
program. On January 16, 2002 the Company's Board of Directors extended for
another year, the stock repurchase program that it authorized in January 2001.
Additionally, the Board approved an increase of 125,000 in the number of shares
of the Company's common stock authorized for repurchase in the current program,
bringing the total shares available for repurchase to 214,800 shares.
3-For-2 Stock Split
On January 16, 2002 the Company's Board of Directors approved a three-
for-two stock split of the Company's common stock to be effected in the form of
a stock dividend payable on April 19, 2002 to stockholders of record at the
close of business on March 29, 2002. The Company's per share amounts and
weighted average common shares outstanding will be restated in the second
quarter 2002 to reflect the Company's three-for-two stock split.
4
Business of MASSBANK
General
MASSBANK is a Massachusetts-chartered savings bank founded in 1872 as the
Melrose Savings Bank. In 1983, the Reading Savings Bank was merged with and into
the Melrose Savings Bank and the name of the resulting institution was changed
to MASSBANK for Savings. In 1986, the Bank converted from mutual to stock form
of ownership. In 1996, the name of the bank was changed from "MASSBANK for
Savings" to "MASSBANK".
The Bank is primarily engaged in the business of attracting deposits from
the general public through its fifteen full service banking offices in Reading,
Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Stoneham, Tewksbury,
Westford and Wilmington, and originating residential and commercial real estate
mortgages, construction loans, commercial loans, and a variety of consumer
loans. The Bank invests a significant portion of its funds in U.S. Treasury and
Government agency securities, mortgage-backed securities, federal funds sold,
and other authorized investments. The Bank also invests a portion of its funds
in equity securities traded on a national securities exchange or quoted on the
NASDAQ System. The Bank's earnings depend largely upon net interest income,
which is the difference between the interest and dividend income derived by the
Bank from its loans and investments and the interest paid by the Bank on its
deposits and borrowed funds. The Company's earnings results are also affected by
the provision for loan losses; non-interest income, such as fee-based revenues
and net securities gains or losses; non-interest expense; and income taxes.
The Bank's deposits are insured to applicable limits by the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC") and
excess deposit accounts are insured by the Depositors Insurance Fund, Inc.
("DIF"), a private industry-sponsored deposit insurer.
The Bank recognizes that loan and investment opportunities change over time
and that yields derived from such opportunities can vary significantly even when
the risks associated with those opportunities are comparable. By developing a
relatively liquid loan and investment portfolio, the Bank has attempted to
position itself so as to be able to take advantage of these changing
opportunities. Consequently, the Bank expects that the relative mix of its loan
and investment portfolios will change over time in response to changing market
conditions.
5
Market Area
The Bank is headquartered in Reading, Massachusetts, which is located
approximately 15 miles north of Boston. The Bank's market area includes a
significant portion of eastern Massachusetts and is served by a network of 15
branch offices located on a broad arc stretching from Melrose and Everett in the
south, Dracut in the north, and Westford in the west.
The Bank's general market area consists of the municipalities in which it
operates banking offices and all of the contiguous cities and towns.
The Bank currently operates banking offices in the municipalities of
Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Reading, Stoneham,
Tewksbury, Westford and Wilmington.
Lending Activities
The Bank's net loan portfolio totaled $328.4 million at December 31, 2001.
The following table sets forth information concerning the Bank's loan portfolio
by type of loan at the dates shown:
- -------------------------------------------------------------------------------------------
(In thousands) At December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------
Mortgage loans:
Residential:
Conventional $293,764 $269,859 $286,429 $280,681 $243,482
FHA and VA 259 471 740 1,181 1,843
Commercial 2,641 3,117 2,471 2,257 3,861
Construction 993 683 232 730 492
- -------------------------------------------------------------------------------------------
Total mortgage loans 297,657 274,130 289,872 284,849 249,678
Premium on loans 51 105 159 259 343
Deferred mortgage loan
origination fees (1,239) (1,284) (1,451) (1,454) (1,223)
- -------------------------------------------------------------------------------------------
Mortgage loans, net 296,469 272,951 288,580 283,654 248,798
- -------------------------------------------------------------------------------------------
Other loans:
Consumer:
Installment 1,178 1,829 1,418 1,547 2,199
Guaranteed education 4,937 6,266 7,037 7,967 8,934
Other secured 873 1,169 1,318 1,366 1,600
Home equity lines of credit 12,271 12,624 11,737 10,159 10,470
Unsecured 201 224 225 235 266
- -------------------------------------------------------------------------------------------
Total consumer loans 19,460 22,112 21,735 21,274 23,469
Commercial 15,088 15,084 15,050 61 36
- -------------------------------------------------------------------------------------------
Total other loans 34,548 37,196 36,785 21,335 23,505
- -------------------------------------------------------------------------------------------
Total loans 331,017 310,147 325,365 304,989 272,303
Allowance for loan losses (2,643) (2,594) (2,555) (2,450) (2,334)
- -------------------------------------------------------------------------------------------
Net loans $328,374 $307,553 $322,810 $302,539 $269,969
- -------------------------------------------------------------------------------------------
6
The following table shows the maturity distribution and interest rate
sensitivity of the Bank's loan portfolio at December 31, 2001:
<Table>
<Caption>
Maturity/Scheduled Payments(1)
------------------------------------------------------------
Within One to Five to After
(In thousands) one year five years ten years ten years Total
- -------------------------------------------------------------------------------------------
Mortgage loans:
Residential $ 616 $ 9,928 $74,817 $207,486 $292,847
Commercial & construction 245 153 323 2,901 3,622
- -------------------------------------------------------------------------------------------
Total mortgage loans 861 10,081 75,140 210,387 296,469
Other loans 15,967 2,068 4,222 12,291 34,548
- -------------------------------------------------------------------------------------------
Total loans $16,828 $12,149 $79,362 $222,678 $331,017
- -------------------------------------------------------------------------------------------
</Table>
(1) Loan amounts are accumulated as if the entire balance came due on the last
contractual payment date. Accordingly, the amounts do not reflect proceeds from
contractual loan amortization or anticipated prepayments.
The following table shows the amounts, included in the table above, which
are due after one year and which have fixed or adjustable interest rates:
Total Due After One Year
--------------------------
Fixed Adjustable
(In thousands) Rate Rate Total
- -------------------------------------------------------------------------------------------
Mortgage loans:
Residential $255,932 $36,299 $292,231
Commercial & construction 1,047 2,330 3,377
- -------------------------------------------------------------------------------------------
Total mortgage loans 256,979 38,629 295,608
Other loans 1,167 17,414 18,581
- -------------------------------------------------------------------------------------------
Total loans $258,146 $56,043 $314,189
- -------------------------------------------------------------------------------------------
Mortgage Lending. The Bank believes that the repayment periods of long-
term first mortgage loans, the general resistance of the public to variable rate
mortgage instruments and the highly competitive nature of the mortgage industry
require a prudent approach to mortgage lending. Consequently, as part of its
policy of generally attempting to match the maturities of its assets and its
liabilities, the Bank has kept its mortgage loan portfolio to a level at which
the Bank believes there is an acceptable risk-to-reward ratio in light of
opportunities in the market-place and its long-term objectives. The Bank's net
loan portfolio represented approximately 33.8% and 32.8% of the Company's total
assets at December 31, 2001, and 2000, respectively. The Bank realizes that this
low level of loans with respect to assets in relation to the securities
portfolio results in a reduction in yield; however, the Bank believes that this
reduction would be more than offset in risk and loss associated with lending
during periods of economic decline. In today's economic climate, the Bank would
prefer a more even mix of loans and securities. However, there remains a
tremendous amount of competition for mortgages in the Bank's area. In spite of
the competition, the Bank in 2001 originated $103.2 million in loans, a 213%
increase over the $33.0 million originated in the year 2000. Much of this volume
was due to mortgage refinancing in an historically low rate environment, which
also resulted in significant loan payoffs. The net result was that the Bank
added $20.9 million to its loan portfolio, a 6.7% increase over last year. The
Bank's loan portfolio was $331.0 million and $310.1 million at December 31, 2001
and 2000, respectively.
7
Mortgage Lending (continued)
Loan originations come from a number of sources, including referrals from
real estate brokers, walk-in customers, purchasers of property owned by existing
customers and refinancings for existing customers. In addition to actively
soliciting loan referrals, the Bank conducts an advertising and promotion
program, directed both toward the general public and real estate professionals
who might refer potential borrowers.
Substantially all of the real estate loans originated by the Bank during
2001 were secured by real estate located in the Bank's primary lending area,
reflecting the Bank's commitment to serve the credit needs of the local
communities in which it operates banking offices.
The Bank makes both conventional fixed and adjustable-rate loans on one-
to-four family residential properties for a term of ten to thirty years. The
Bank currently retains all of the mortgages it originates for its own portfolio
These are primarily 10, 12, 15 or 20 year fixed rate and adjustable rate
mortgages. The few long-term (25 or 30 year) fixed rate mortgage loans that the
Bank originates from time to time are also added to the loan portfolio.
Adjustable rate mortgage loans ("ARMs") have rates that are re-set at either 1,
3, 5 or 10 year intervals and provide a margin over various mortgage indices.
In addition to its traditional mortgage products, the Bank offers several
other loan programs which have been well received by customers. It offers a
program featuring a 5/1 and 7/1 year ARM product with an initial fixed rate for
5 or 7 years and a 1 year adjustable rate thereafter. A special first time home
buyers program has also been instituted featuring a discounted 7/1 ARM. This
program is designed for first-time home buyers meeting certain income and
property location criteria. The Bank has also introduced the "Home Town
Advantage" mortgage program which has produced some good results. This program
offers home buyers a (0.125) percent discount on their mortgage rate if they
purchase residential property located in one of the communities where the Bank
operates a retail branch.
At December 31, 2001, 1-4 family residential mortgage loans totaled $292.8
million, or 88.5% of the total loan portfolio, compared to $269.2 million, or
86.8% of the total loan portfolio, at December 31, 2000. Residential mortgage
loan originations amounted to $91.0 million during 2001, a significant increase
from $19.9 million in 2000. Origination volumes are sensitive to interest rates
and are affected by the interest rate environment. The low interest rate
environment in 2001 significantly increased the demand for mortgage refinancings
in 2001. As a result, the Bank was able to far exceed the prior year's level of
residential mortgage loan originations.
The Bank also originates construction loans and mortgage loans secured by
commercial or investment property such as multifamily housing, strip shopping
centers, office buildings and retail buildings. At December 31, 2001, commercial
and multifamily real estate mortgages and construction loans totaled
approximately $3.6 million, or 1.1% of the total loan portfolio, compared to
$3.8 million, or 1.2% of the total loan portfolio, at December 31, 2000. In
2001, commercial and multifamily real estate mortgage loan and construction loan
originations amounted to $2.0 million.
8
Mortgage Lending (continued)
The total amount of first mortgage loans held by the Bank at December 31,
2001 was $296.5 million as indicated in the maturity distribution table
appearing on page seven. Of this amount, $38.8 million was subject to interest
rate adjustments. The remaining $257.7 million in fixed rate mortgage loans
represents 26.5% of the Company's total assets.
Fees received for originating loans and related direct incremental loan
origination costs are offset and the resulting net amount is deferred and
amortized over the life of the related loans using the level-yield method.
The Bank also receives fees and charges relating to existing loans,
primarily late charges and prepayment penalties.
Other Loans. The Bank makes a variety of consumer loans and had a consumer
loan portfolio of approximately $19.5 million at December 31, 2001 representing
5.9% of the Bank's total loan portfolio. Of this amount $4.9 million or 1.5% of
the total loan portfolio are education loans made under the Massachusetts Higher
Education Assistance Corporation.
The balance of the Bank's consumer loan portfolio consists of home equity
lines of credit and installment consumer credit contracts such as automobile
loans, home improvement loans and other secured and unsecured financings. These
loans totaled $14.5 million at December 31, 2001, representing 4.4% of the
Bank's total loan portfolio.
At December 31, 2001, the Bank also had $15.1 million in outstanding loans
to commercial enterprises not secured by real estate.
Loan Approval. The Bank's loan approval process for all loans generally
includes a review of an applicant's financial statements, credit history,
banking history and verification of employment. For mortgage loans, the Bank
generally obtains an independent appraisal of the subject property. The Bank has
a formal lending policy approved by the Board of Directors of the Bank which
delegates levels of loan approval authority to Bank personnel. All loans in
excess of established limits require approval of the Bank's Board of Directors.
The Bank issues commitments to prospective borrowers to make loans subject
to certain conditions for generally up to 60 days. The interest rate applicable
to the committed loans is usually the rate in effect at the time the application
fee is paid. At December 31, 2001, the Bank had issued commitments on
residential first mortgage loans totaling $17,710,000, and had commitments to
advance funds on construction loans and unused credit lines, including unused
portions of home equity lines of credit, of $457,000 and $37,804,000,
respectively.
Loan Delinquencies. It is the Bank's policy to manage its loan portfolio so
as to recognize problem loans at an early stage and thereby minimize loan
losses. Loans are considered delinquent when any payment of principal or
interest is 30 days or more past due. The Bank generally commences collection
procedures, however, when accounts are 15 days past due. It is the Bank's
practice to generally discontinue accrual of interest on all loans for which
payments are 90 days or more past due. Loans delinquent for 90 or more days, as
shown in the table on the following page, totaled $644,000 at December 31, 2001.
9
Real Estate Acquired through Foreclosure.
Real estate acquired through foreclosure is comprised of foreclosed
properties where the Bank has actually received title and loans determined to be
substantially repossessed. Real estate loans that are substantially repossessed
include only those loans for which the Bank has taken possession of the
collateral but has not completed legal foreclosure proceedings. Loan losses
arising from the acquisition of such properties are charged against the
allowance for loan losses. Real estate acquired through foreclosure is recorded
at the lower of the carrying value of the loan or the fair value of the property
constructively or actually received, less estimated costs to sell the property
following foreclosure. Operating expenses and any subsequent provisions to
reduce the carrying value to fair value are charged to current period earnings.
Gains and losses upon disposition are reflected in earnings as realized. At
year-end 2001, MASSBANK had no real estate acquired through foreclosure on its
balance sheet.
Non-Performing Assets
The following table shows the composition of non-performing assets at the
dates shown:
- ------------------------------------------------------------------------------------------------
(In thousands) At December 31, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Nonaccrual loans:
Mortgage loans:
Residential:
Conventional $ 477 $ 386 $ 655 $ 845 $1,536
FHA and VA 4 8 -- -- 9
Commercial -- -- -- -- --
Consumer 163 171 140 159 226
- ------------------------------------------------------------------------------------------------
Total nonaccrual loans 644 565 795 1,004 1,771
- ------------------------------------------------------------------------------------------------
Real estate acquired through foreclosure:
Residential:
Conventional -- -- 62 86 --
- ------------------------------------------------------------------------------------------------
Total real estate acquired through
foreclosure -- -- 62 86 --
- ------------------------------------------------------------------------------------------------
Total non-performing assets $ 644 $ 565 $ 857 $1,090 $1,771
- ------------------------------------------------------------------------------------------------
Percent of non-performing loans to
total loans 0.19% 0.18% 0.24% 0.33% 0.65%
Percent of non-performing assets to
Total assets 0.07% 0.06% 0.09% 0.12% 0.19%
The reduction in interest income associated with nonaccrual loans is as
follows:
- ------------------------------------------------------------------------------------------------
(In thousands) Years Ended December 31, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Interest income that would have been
recorded under original terms $ 60 $ 48 $ 64 $ 84 $163
Interest income actually recorded 37 36 51 61 97
- ------------------------------------------------------------------------------------------------
Reduction in interest income $ 23 $ 12 $ 13 $ 23 $ 66
- ------------------------------------------------------------------------------------------------
10
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 Statement of Financial Accounting Standard No.
114, "Accounting by Creditors for Impairment of a Loan", general loss
allocations for various loan types based on loss experience factors and an
unallocated allowance which is maintained based on management's assessment of
many factors including the risk characteristics of the portfolio, concentrations
of credit, current and anticipated economic conditions that may effect the
borrower's ability to pay, and trends in loan delinquencies and charge-offs.
Realized losses, net of recoveries, are charged directly to the allowance. While
management uses the current 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.
The following table sets forth the activity in the allowance for loan losses
during the years indicated:
- ------------------------------------------------------------------------------------------------
(In thousands) Years ended December 31, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Balance at beginning of year $2,594 $2,555 $2,450 $2,334 $2,237
Glendale Co-Operative Bank acquisition -- -- -- -- 105
Provision for loan losses 40 60 140 193 260
Charge-offs:
Residential real estate -- -- (62) (81) (221)
Consumer loans (22) (24) (14) (22) (12)
Other loans -- -- -- -- (94)
Recoveries:
Residential real estate 25 2 39 17 34
Commercial real estate 5 -- -- -- 20
Consumer loans 1 1 2 6 1
Other Loans -- -- -- 3 4
- ------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) 9 (21) (35) (77) (268)
- ------------------------------------------------------------------------------------------------
Balance at end of year $2,643 $2,594 $2,555 $2,450 $2,334
- ------------------------------------------------------------------------------------------------
Net loan charge offs as a percent of
average loans outstanding during
the period -- 0.01% 0.01% 0.03% 0.10%
Allowance for loan losses as a percent
of total loans outstanding at year-end 0.80% 0.84% 0.79% 0.80% 0.86%
Allowance for loan losses as a percent
of nonaccrual loans 410.4% 459.1% 321.4% 244.0% 131.8%
- ------------------------------------------------------------------------------------------------
11
Investment Activities
The Bank believes that investment opportunities in United States
Government, corporate and other securities are at times more attractive than the
opportunities present in the loan market. As compared to loans, these
investments of the Bank are generally shorter-term and hence more liquid, are
subject to lower risk of loss, and present an opportunity for appreciation. In
addition, these investments often permit the Bank to better match the maturities
of its assets and its liabilities.
The Bank's investment portfolio is managed by its officers in accordance
with an investment policy approved by the Bank's Board of Directors. The
objectives of that policy are to provide a level of liquidity, earnings and
diversification consistent with the exercise of prudent investment judgment. The
policy authorizes the senior management of the Bank to make and execute
investment decisions and requires that those persons report all investment
transactions to the Bank's Board of Directors at each of its regular meetings.
In addition, management is required to report all gains or losses on all
securities transactions at each meeting of the Bank's Board of Directors.
Purchases and sales of securities by the Bank are generally required to be made
on a competitive basis and all investments must be permitted by applicable law.
The Bank invests in a wide variety of securities and obligations,
including: Federal funds sold (which are sold only to institutions included on
the Bank's internally-prepared approved list of adequately capitalized
institutions); commercial paper and bankers' acceptances; United States Treasury
and Government agency obligations; United States agency guaranteed and other
mortgage-backed securities; investment grade corporate debt securities
(generally limited to those rated A or better by Standard & Poor's); mutual
funds; and equity securities traded on a national securities exchange or quoted
on the NASDAQ System.
Under the investment policy management determines the appropriate
classification of securities at the time of purchase. Those securities that the
Company has the intent and the ability to hold to maturity are classified as
securities held to maturity and are carried at amortized historical cost.
Those securities held for indefinite periods of time and not intended to be
held to maturity are classified as available for sale. Securities held for
indefinite periods of time include securities that management intends to use as
part of its asset/liability management strategy and that may be sold in response
to changes in market conditions, interest rates, changes in prepayment risk, the
need to increase regulatory capital and other factors. Income on debt securities
available for sale is accrued and included in interest and dividend income. The
specific identification method is used to determine realized gains or losses on
sales of securities available for sale which are also reported in non-interest
income under the caption "gains on securities, net." When a security suffers a
loss in value which is considered other than temporary, such loss is recognized
by a charge to earnings.
12
Investment Activities (continued)
Investments classified as trading securities are stated at market with
unrealized gains or losses included in earnings. Income on trading securities is
accrued and included in interest and dividend income. All of the Company's
mortgage-backed securities are currently classified as available for sale. At
times of low loan demand, short-term mortgage-backed securities may be used as
substitutes for loans as certain of their financial characteristics are very
similar to short-term mortgage loans.
At December 31, 2001, the Company's investments, which consist of
securities available for sale (including mortgage-backed securities), trading
securities, short-term investments (including federal funds sold) and
interest-bearing deposits in banks totaled $618.5 million, representing 63.7% of
the Company's total assets.
13
The following table sets forth the composition of the Company's investment
portfolio as of the dates indicated:
Investment Portfolio
- ---------------------------------------------------------------------------------------------
(In thousands) At December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Federal funds sold:
Overnight federal funds $204,294 $112,711 $ 86,211
Term federal funds -- 30,000 --
- ---------------------------------------------------------------------------------------------
Total federal funds sold 204,294 142,711 86,211
Money market funds 32,088 131 24,717
Interest-bearing deposits in bank 6,490 1,678 3,841
- ---------------------------------------------------------------------------------------------
Total federal funds sold and other
short-term investments $242,872 $144,520 $114,769
- ---------------------------------------------------------------------------------------------
Percent of total assets 25.0% 15.4% 12.4%
- ---------------------------------------------------------------------------------------------
(In thousands) At December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Securities held to maturity: (a)
Other bonds and obligations $ -- $ 230 $ 230
- ---------------------------------------------------------------------------------------------
Total securities held to maturity -- 230 230
Securities available for sale: (b)(c)
U.S. Treasury obligations 80,883 126,456 137,615
U.S. Government agency obligations 10,253 9,133 16,015
Equity securities 16,417 19,750 21,537
Mortgage-backed securities 265,031 287,213 282,335
- ---------------------------------------------------------------------------------------------
Total securities available for sale 372,584 442,552 457,502
Trading securities: (b)
U.S. Treasury obligations 3,086 19,791 4,956
Investments in mutual funds 3 3 1,086
- ---------------------------------------------------------------------------------------------
Total trading securities 3,089 19,794 6,042
- ---------------------------------------------------------------------------------------------
Total securities $375,673 $462,576 $463,774
- ---------------------------------------------------------------------------------------------
Percent of total assets 38.7% 49.3% 50.2%
- ---------------------------------------------------------------------------------------------
Total investments $618,545 $607,096 $578,543
Total investments as a percent of total assets 63.7% 64.7% 62.6%
- ---------------------------------------------------------------------------------------------
(a) At amortized cost.
(b) At market value.
(c) The market value of callable securities included in securities available
for sale totaled $10.1 million as of December 31, 2001.
14
The following table presents the amortized cost of debt securities
available for sale at December 31, 2001 maturing within stated periods with the
weighted average interest yield from securities falling within the range of
maturities:
Debt Securities Available for Sale
U.S.
U. S. Government Mortgage-
Treasury agency backed
(Dollars in thousands) obligations obligations (2) securities (1) Total
- ----------------------------------------------------------------------------------------------
Maturing within 1 year
Amount $ 29,984 $ -- $ 300 $ 30,284
Yield 6.31% -- 8.11% 6.33%
Maturing after 1
but within 5 years
Amount 49,948 10,000 1,021 60,969
Yield 4.01% 4.04% 8.70% 4.10%
Maturing after 5
but within 10 years
Amount -- -- 88,871 88,871
Yield -- -- 6.83% 6.83%
Maturing after 10
but within 15 years
Amount -- -- 164,731 164,731
Yield -- -- 6.68% 6.68%
Maturing after 15 years
Amount -- 142 1,977 2,119
Yield -- 5.50% 6.40% 6.34%
- ----------------------------------------------------------------------------------------------
Total
Amount $ 79,932 $10,142 $256,900 $346,974
Yield 4.88% 4.06% 6.74% 6.23%
- ----------------------------------------------------------------------------------------------
Average life in years 1.72 2.50
Average contractual
maturity in years 11.20
(1) Mortgage-backed securities are based on contractual maturities. Actual
maturities will differ from contractual maturities due to scheduled
amortization and prepayments.
(2) The amortized cost of callable securities included in securities available
for sale totaled $10.0 million as of December 31, 2001.
At December 31, 2001, the Company did not have an investment in any issuer
(other than securities of the U.S. Government and Government Agencies) in excess
of 10% of stockholders equity.
15
Deposits and Other Sources of Funds
General. Deposits have been the Bank's primary source of funds for making
investments and loans. In addition to deposits, the Bank's other major sources
of funds are derived from amortization and prepayment of loans and
mortgage-backed securities, from sales or maturities of securities, and from
operations. Deposit flows can vary significantly and are influenced by
prevailing interest rates, money market conditions, economic conditions and
competition. The Bank can respond to changing market conditions and competition
through the pricing of its deposit accounts. Management can attempt to control
the level of its deposits to a significant degree through its pricing policies.
Another important factor in attracting deposits is convenience. In addition to
the Bank's fifteen conveniently located banking offices, customers can access
accounts through the Bank's Automated Teller Machine ("ATM") network. The Bank
is a member of the Transaxion ("TX"), "NYCE" and CIRRUS System, Inc. ("CIRRUS")
networks which allow access to ATMs in over 100,000 locations worldwide.
Deposits. A substantial amount of the Bank's deposits are derived from
customers who live or work within the Bank's market area. The Bank does not
solicit deposits through any outside agents. The Bank's deposits consist of
regular, silver and smart savings accounts, special notice accounts, NOW and
Super NOW accounts, business checking accounts, money market deposit accounts,
IRA and Keogh accounts, and term deposit accounts.
Deposits increased by $26.1 million during the twelve months ended December
31, 2001, from $823.6 million at year-end 2000 to $849.7 million at year-end
2001.
Borrowed Funds. From time to time the Bank has obtained funds through
repurchase agreements with its customers and federal funds purchased. The Bank
also has the ability, although it has never exercised it, to borrow from the
Federal Reserve Bank and The Depositors Insurance Fund, Inc. The Bank did not
have any borrowed funds in 2001 or 2000.
16
DEPOSITS
The following table shows the composition of the deposits as of the dates
indicated:
(In thousands) at December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
Demand and NOW
NOW $ 53,476 6.29% $ 51,390 6.24% $ 48,422 5.92%
Demand accounts
(non interest-bearing) 28,667 3.37 28,562 3.47 24,516 3.00
-------- ------ -------- ------ -------- ------
Total demand and NOW 82,143 9.66 79,952 9.71 72,938 8.92
Savings:
Regular savings and
special notice accounts 368,631 43.39 317,926 38.60 333,535 40.77
Money market accounts 15,329 1.80 17,022 2.07 19,555 2.39
-------- ------ -------- ------ -------- ------
Total savings 383,960 45.19 334,948 40.67 353,090 43.16
Time Certificates of deposit:
Fixed rate certificates 287,773 33.87 309,245 37.54 302,423 36.97
Variable rate certificates 95,837 11.28 99,736 12.11 90,093 11.01
-------- ------ -------- ------ -------- ------
Total time certificates
of deposit 383,610 45.15% 408,981 49.65 392,516 47.98
Deposit acquisition premium,
net of amortization (29) -- (256) (.03) (487) (.06)
-------- ------ -------- ------ -------- ------
Total deposits $849,684 100.00% $823,625 100.00% $818,057 100.00%
In the following table the average amount of deposits and average rate is
shown for each of the years as indicated.
(In thousands) Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
NOW accounts $ 51,689 0.89% $ 49,860 0.97% $ 49,559 1.01%
Demand (non interest-bearing)
accounts 28,070 -- 24,945 -- 24,189 --
Escrow deposits of borrowers 1,089 0.19 1,151 0.21 1,185 0.19
Money market accounts 16,402 2.44 17,941 2.97 20,519 2.96
Regular savings and
special notice accounts 337,220 3.29 325,138 3.44 333,332 3.44
Time certificates of deposit 402,155 5.08 399,554 5.81 397,935 5.19
-------- ---- -------- ---- -------- -----
$836,625 3.87% $818,589 4.32% $826,719 4.02%
17
Investment Management and Trust Services
The Bank's Trust and Investment Services Division offers a variety of
investment, trust and estate planning services and also serves as Trustee,
Executor, and Executor's Agent for bank customers.
As of December 31, 2001 the Trust Division had approximately $28.1 million
(market value) of assets in custody and under management.
Competition
The Bank faces substantial competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from other
thrift institutions, commercial banks, credit unions and mortgage banking
companies. The Bank competes for loans principally on the basis of interest
rates and loan fees, the types of loans originated and the quality of services
provided to borrowers.
In attracting deposits, the Bank's primary competitors are other thrift
institutions, commercial banks, mutual funds and credit unions located in its
market area. The Bank's attraction and retention of deposits depend on its
ability to provide investment opportunities that satisfy the requirements of
customers with respect to rate of return, liquidity, risk and other factors. The
Bank attracts a significant amount of deposits through its branch offices
primarily from the communities in which those branch offices are located. The
Bank competes for these deposits by offering competitive rates, convenient
branch and ATM locations and convenient business hours.
18
Supervision and Regulation of the Company and its Subsidiaries
The Company and the Bank are in a heavily regulated industry. As a
Delaware business corporation, the Company is subject to all of the federal and
state laws and regulations that apply to corporations generally, including the
federal and state securities laws and the Delaware Business Corporation Law. In
addition, as a company that owns and controls a bank, the Company is regulated
as a bank holding company, is subject to supervision, examination and regulation
by the Federal Reserve Board under the federal Bank Holding Company Act of 1956,
as amended (the "BHC Act"), and is subject to statutes, regulations and policies
administered by the Federal Reserve Board relating to, among other things,
mergers, acquisitions and changes in controlling ownership, non-bank activities
and subsidiaries, capital adequacy, the receipt and payment of dividends, and
the provision of financial and managerial support to its subsidiary bank. In
addition, the Company is subject to certain state law restrictions administered
by the Massachusetts Division of Banks (the "Division"), relating to, among
other things, the acquisition of additional banking institutions and the conduct
of nonbank activities.
As a Massachusetts-chartered savings bank whose deposits are insured by the
"FDIC" (and, with respect to any deposits in excess of FDIC limits, by the DIF),
the Bank is subject to regulation, supervision and examination by federal and
state regulatory authorities, including the FDIC and the Division. The Bank is
also subject to certain requirements established by the Federal Reserve Board.
This framework of federal and state banking supervision and regulation is
administered primarily for the benefit of borrowers, depositors and the
respective deposit insurance funds and not for the benefit of the Bank, the
Company or its stockholders.
The Bank is subject to extensive federal and state statutes, regulations,
policies and standards regarding virtually all aspects of its operations,
including capital adequacy, reserves, liquidity, payment of dividends,
transactions with affiliates, loans to officers, directors, principal
shareholders and their related interests, mergers, acquisitions and changes in
controlling ownership, establishment, relocation and closure of branch banking
offices, community reinvestment, equal credit opportunity, credit reporting,
real estate settlement procedures, funds availability, disclosure to consumers,
financial accounting and reporting and recordkeeping. In the event the Bank
failed to maintain adequate capital or otherwise failed to operate in accordance
with applicable federal and Massachusetts statutes, regulations or policies, the
FDIC and the Division have authority to place the Bank in receivership or
conservatorship or impose other sanctions, including but not limited to
restrictions on dividend or other payments by the Bank to the Company,
termination of the Bank's deposit insurance, restrictions on the Bank's growth,
issuance of orders to cease and desist from or to take specified actions,
assessment of money penalties, and removal of officers or directors.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") establishes five categories of banking institutions - in descending
order of capital adequacy: "well-capitalized," "adequately capitalized,"
"undercapitalized," significantly undercapitalized," and "critically
undercapitalized" -- and imposes certain restrictions and requires federal bank
regulatory agencies to take "prompt corrective action" with respect to banks
that are in one of the three "undercapitalized" categories. As of December 31,
2001, the Bank was "well capitalized" as defined under the prompt corrective
action guidelines issued pursuant to FDICIA. For a discussion of the Bank's
capital adequacy, see Note 14 to the Company's Consolidated Financial
Statements, on page 48.
19
Supervision and Regulation of the Company and its Subsidiaries (continued)
FDICIA establishes a system of risk-based deposit insurance assessments
that takes a bank's capital level and supervisory risk characteristics into
account in calculating the amount of its federal deposit insurance assessment.
In addition, FDICIA places certain restrictions on the equity investments and
other "principal" activities of all state-chartered banks, including the Bank.
FDICIA further requires the FDIC and other federal bank regulatory agencies to
establish regulatory "safety and soundness" standards to govern various aspects
of bank operations including internal controls, information systems and audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, executive compensation, asset quality, earnings and stock
valuation, as the agencies consider appropriate. The FDIC may require a bank
that is not in compliance with safety and soundness standards promulgated under
FDICIA to submit and implement a written plan to achieve compliance within a
specified time period and may impose sanctions on a bank that fails to submit
and implement an acceptable plan when required. At December 31, 2001, the Bank's
operations were in substantial compliance with all applicable safety and
soundness standards promulgated under FDICIA.
The Riegle-Neal Interstate Bank and Branching Act of 1994 and applicable
Massachusetts legislation permit interstate branching, mergers and bank
acquisitions by Massachusetts bank holding companies and banks and permit out-
of-state bank holding companies and banks to expand their banking operations
into Massachusetts by merger, acquisition or de novo branching subject to
certain regulatory approval requirements and other limitations.
The Gramm-Leach-Bliley Act repeals provisions of the Glass-Steagall Act:
Section 20, which restricted the affiliation of banks with firms "engaged
principally" in specified securities activities; and Section 32, which
restricted officer, director, or employee interlocks between a bank and any
company or person "primarily engaged" in specified securities activities.
Moreover, the general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHCA framework to permit a holding company system, such as the
Company, to engage in a full range of financial activities through a new entity
known as a financial holding company. "Financial activities" is broadly defined
to include not only banking, insurance, and securities activities, but also
merchant banking and additional activities that the Federal Reserve Board in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. In sum, the Gramm-Leach-Bliley
Act permits bank holding companies that qualify and elect to be treated as a
financial holding company to engage in a significantly broader range of
financial activities than the activities described above that are not so
treated.
20
Supervision and Regulation of the Company and its Subsidiaries (continued)
Generally, the Gramm-Leach-Bliley Act and its implementing regulations:
- repeal historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
- permit investment in non-financial enterprises, subject to
significant operational, holding period and other restrictions;
- provide a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding
companies;
- broaden the activities that may be conducted by national banks (and
derivatively state banks), banking subsidiaries of bank holding
companies, and their financial subsidiaries;
- require all financial institutions to provide notice of their privacy
policies at specified times to their retail customers and customers of
their financial products or services, and permit retail customers and
consumers, under certain circumstances, to prohibit financial
institutions from sharing certain nonpublic information pertaining to
them by opting out of such sharing.
- establish guidelines for safeguarding the security, confidentiality
and integrity of customer information.
- adopt a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
- modify the laws governing the implementation of the Community
Reinvestment Act of 1977; and
- address a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial
institutions.
In order to elect to become a financial holding company and engage in the
new activities, a bank holding company, such as the Company, must meet certain
tests and file an election form with the Federal Reserve Board which generally
is acted on within thirty days. To qualify, all of a bank holding company's
subsidiary banks must be well-capitalized and well-managed, as measured by
regulatory guidelines. In addition, to engage in the new activities each of the
bank holding company's banks must have been rated "satisfactory" or better in
its most recent federal Community Reinvestment Act evaluation. Furthermore, a
bank holding company that elects to be treated as a financial holding company
may face significant consequences if any of its banks fail to maintain the
required capital and management ratings, including entering into an agreement
with the Federal Reserve Board which imposes limitations on its operations and
may even require divestitures. Such possible ramifications may limit the ability
of a bank subsidiary to significantly expand or acquire less than
well-capitalized and well-managed institutions. To date, the Company has not
elected to become a financial holding company.
21
Supervision and Regulation of the Company and its Subsidiaries (continued)
Section 24 of the Federal Deposit Insurance Act ("FDIA") generally limits
the activities as principal and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. In 1999,
the FDIC substantially revised its regulations implementing Section 24 to ease
the ability of state banks to engage in certain activities not permissible for
national banks, and to expedite FDIC review of bank applications and notice to
engage in such activities. In response to a Massachusetts law enacted in 1996,
in 1997 and 1999, the Division finalized rules that generally give Massachusetts
banks, and their subsidiaries, many powers equivalent to those of national
banks. The Division also has adopted regulations and procedures expediting the
approval process for well- capitalized banks to establish branches or to engage
in certain activities.
Further, the Gramm-Leach-Bliley Act, which includes new sections of the
National Bank Act and the FDIA governing the establishment and operation of
financial subsidiaries, permits national banks and state banks, to the extent
permitted under state law, to engage in certain new activities which are
permissible for subsidiaries of a financial holding company. In addition, it
expressly preserves the ability of national banks and state banks to retain all
existing subsidiaries. In order to form a financial subsidiary, a national bank
or state bank must be well-capitalized, and such banks would be subject to
certain capital deduction, risk management and affiliate transaction rules.
Also, the FDIC recently issued final rules governing the establishment of
financial subsidiaries by insured state nonmember banks. The final rules restate
the FDIC's position that activities that a national bank could only engage in
through a financial subsidiary, such as securities underwriting, only may be
conducted in a financial subsidiary by a state nonmember bank. However,
activities that a national bank could not engage in through a financial
subsidiary, such as real estate development or investment, will continue to be
governed by the FDIC's standard activities rules. Moreover, to mirror the
Federal Reserve Board's actions with respect to state member banks, the final
rules provide that a state bank subsidiary that engages only in activities that
the bank could engage in directly (regardless of the nature of the activities)
will not be deemed a financial subsidiary.
The Federal Change in Bank Control Act prohibits a person or group of
persons from acquiring `control' of a bank holding company unless the Federal
Reserve Board has been given at least 60 days to review the proposal. Under a
rebuttable presumption established by the Federal Reserve Board, the acquisition
of 10% or more of a class of voting stock of a bank holding company, such as the
Company, with a class of securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended would, under the circumstances set
forth in the presumption, constitute the acquisition of control.
In addition, any company, as that term is broadly defined in the statute,
would be required to obtain the approval of the Federal Reserve Board before
acquiring 25% (5% in the case of an acquirer that is a bank holding company) or
more, or such lesser percentage of the Company's outstanding common stock as the
Federal Reserve Board deems to constitute control over the Company.
22
The Federal Reserve Board, the FDIC and other bank regulatory agencies have
adopted final guidelines (the `Guidelines') for safeguarding confidential
customer information. The Guidelines require each financial institution, under
the supervision and ongoing oversight of its Board of Directors, to create a
comprehensive written information security program designed to ensure the
security and confidentiality of customer information, protect against any
anticipated threats or hazards to the security or integrity of such information,
and protect against unauthorized access to or use of such information that could
result in substantial harm or inconvenience to any customer.
The Graham-Leach-Bliley Act requires financial institutions to implement
policies and procedures regarding the disclosure of nonpublic personal
information about consumers to nonaffiliated third parties. In general, the
statute requires the Company and the Bank to explain to consumers its policies
and procedures regarding the disclosure of such nonpublic personal information,
and, except as otherwise required by law, the Company and the Bank are
prohibited from disclosing such information except as provided in its policies
and procedures.
The USA Patriot Act of 2001 (the `Patriot Act'), designed to deny
terrorists and others the ability to obtain anonymous access to the United
States financial system, has significant implications for depository
institutions, brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act mandates or will require financial institutions to
implement additional policies and procedures with respect to, or additional
measures designed to address, any or all of the following matters, among others:
money laundering, suspicious activities, currency transaction reporting, and
currency crimes.
From time to time the U.S. Congress and the Massachusetts Legislature adopt
legislation and the federal and state bank regulatory agencies issue regulations
and policies that may significantly affect the operations of the Bank and the
Company. No assurance can be given as to whether or when such additional
legislation, regulations or policies may be adopted or as to the effect any such
legislation, regulations or policies may have on the Company or the Bank.
23
Employees
MASSBANK Corp. utilizes the support staff of the Bank from time to time
without the payment of any fees. No separate compensation is being paid to the
executive officers of MASSBANK Corp., all of whom are executive officers of the
Bank and receive compensation as such. As of December 31, 2001, the Bank had 123
full-time employees (including 31 officers) and 75 part-time employees
(including 1 officer). None of the Bank's employees is represented by a
collective bargaining group, and management believes that its employee relations
are good. The Bank provides its employees with formal training in product
knowledge, sales techniques, fair lending, and motivation. In addition, each
supervisor at the Bank receives management training before assuming his or her
supervisory duties and periodically thereafter. The Bank maintains a
comprehensive employee benefit program for qualified employees that includes a
qualified pension plan, an Employee Stock Ownership Plan (ESOP), health and
dental insurance, life and long-term disability insurance and tuition
assistance.
Subsidiaries
The Bank has three wholly owned subsidiaries: Readibank Investment
Corporation, Melbank Investment Corporation, and Readibank Properties, Inc.
Readibank Investment Corporation and Melbank Investment Corporation were
established for the purpose of managing portions of the Bank's investment
portfolio. Assets of Readibank Investment Corporation and Melbank Investment
Corporation totaled $149.7 million and $149.3 million, respectively, at December
31, 2001.
Readibank Properties, Inc. incorporated primarily for the purpose of real
estate development, had total assets of $623 thousand at December 31, 2001.
Executive Officers of the Registrant
The executive officers of the Company and the Bank and the age of each
officer as of March 4, 2002 are as follows:
Name Age Office
Gerard H. Brandi 53 Chairman of the Board of Directors,
President and Chief Executive
Officer of the Company and the Bank
David F. Carroll 54 Vice President of the Bank
Reginald E. Cormier 54 Senior Vice President, Treasurer and
Chief Financial Officer of the
Company and the Bank
Thomas J. Queeney 39 Vice President and Senior Trust
Officer of the Bank
Donald R. Washburn 58 Senior Vice President of the Bank
Donna H. West 56 Senior Vice President of the Bank
and Assistant Secretary of the
Company
24
Executive Officers of the Registrant (continued)
Gerard H. Brandi. Mr. Brandi has served in various capacities with
MASSBANK since he joined the Bank in 1975 as Vice President of the Lending
Division. He served as Senior Vice President from 1978 to 1981, Executive
Vice President and Senior Lending Officer from 1981 to 1983, and Executive
Vice President and Treasurer from 1983 to 1986. Mr. Brandi was named
President of the Company and the Bank in 1986, Chief Executive Officer in 1992
and Chairman in 1993.
David F. Carroll. Mr. Carroll has been employed by the Bank since 1983
and has been Vice President of Operations since 1984. He served as Vice
President of the Lending Division for a year before becoming Vice President of
Operations.
Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in
September, 1987 and served in this capacity until his promotion to Vice
President, Treasurer and Chief Financial Officer in January, 1995. In
December 1999, he was promoted to Senior Vice President, Treasurer and Chief
Financial Officer.
Thomas J. Queeney. Mr. Queeney joined the Bank in 1986 as a Management
Trainee in Loan Origination. He became an Assistant Manager in 1987 and was
promoted to Assistant Treasurer in 1988. He then served as a Marketing and
Investor Relations Representative until his promotion to Loan Servicing Manager
in 1990. In 1992, he was promoted to Loan Officer and Commercial Lending
Manager. He was promoted to Assistant Vice President, Lending in 1997, where he
served until his promotion to AVP/Trust Administrator in July of 1998. In
January of 1999, he was promoted to Vice President and Senior Trust Officer.
Donald R. Washburn. Mr. Washburn joined the Bank in 1973 as a Loan
Officer. He became an Assistant Vice President in January, 1977 and a Vice
President in the Lending Division in June, 1980. Mr. Washburn served as Vice
President of the Operations Division from February, 1983 to January, 1984, as
Vice President of the Community Banking Division from January, 1984 to
January, 1986 and as Vice President of the Lending Division from January, 1986
until his promotion to Senior Vice President of the Lending Division in June,
1994.
Donna H. West. Mrs. West has been employed by the Bank since 1979 and
has served as Vice President of the Community Banking Division since October,
1987. Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West
became a Branch Manager in 1981, an Assistant Treasurer and Branch Manager in
1982, an Assistant Treasurer and Regional Branch Administrator in 1984 and an
Assistant Vice President and Regional Branch Administrator in 1986. She
served in this capacity until her October, 1987 promotion to Vice President of
the Community Banking Division. In June, 1994, Mrs. West was promoted to
Senior Vice President of the Community Banking Division.
25
Item 2. Properties
The main office of MASSBANK Corp. and MASSBANK is located at 123 Haven
Street, Reading, Massachusetts. Additionally, the Bank has fourteen branches and
three operations facilities. The Bank owns its main office, two operations
facilities and seven of its branches. All of the remaining branches and other
facilities are leased under various leases. At December 31, 2001, management
believes that the Bank's existing facilities are adequate for the conduct of its
business.
The following table sets forth certain information relating to the Bank's
existing facilities.
Owned Lease Renewal
or Expiration Option
Location Leased Date Through
MAIN OFFICE: 123 Haven Street, Reading, MA Owned ---- ----
BRANCH 291 Chelmsford Street, Chelmsford, MA Owned ---- ----
OFFICES: 17 North Road, Chelmsford, MA Owned ---- ----
45 Broadway Road, Dracut, MA Leased 2002 ----
738 Broadway, Everett, MA Owned ---- ----
50 Central Street, Lowell, MA Owned ---- ----
755 Lakeview Avenue, Lowell, MA Owned ---- ----
4110 Mystic Valley Pkwy, Medford, MA Leased 2002 ----
476 Main Street, Melrose, MA Owned ---- ----
27 Melrose Street, Towers Plaza,
Melrose, MA Leased 2004 2014
240 Main Street, Stoneham, MA Leased 2003 ----
1800 Main Street, Tewksbury, MA Owned ---- ----
203 Littleton Road, Westford, MA Owned ---- ----
370 Main Street, Wilmington, MA Owned ---- ----
219 Lowell Street, Lucci's Plaza,
Wilmington, MA Leased 2006 ----
OPERATIONS
FACILITIES: 159 Haven Street, Reading, MA Owned ---- ----
169 Haven Street, Reading, MA Owned ---- ----
11 North Road, Chelmsford, MA Owned ---- ----
Item 3. Legal Proceedings
From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their business. As
of December 31, 2001, none of these actions individually or in the aggregate is
believed by management to be material to the financial condition of MASSBANK
Corp. or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
None.
26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information contained under the caption "MASSBANK Corp. and
Subsidiaries Stockholder Data" in the Registrant's 2001 Annual Report to
Stockholders is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained under the caption "MASSBANK Corp. and
Subsidiaries - Selected Consolidated Financial Data" in the Registrant's 2001
Annual Report to Stockholders is incorporated herein by reference.
This selected consolidated financial data should be read in conjunction
with the consolidated statements and related notes thereto appearing in the
Registrant's 2001 Annual Report to Stockholders which are incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
2001 Annual Report to Stockholders is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained under the captions "Asset and Liability
Management", "Interest Rate Risk" and "Other Market Risks" included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of the Registrant's 2001 Annual Report to Stockholders is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's consolidated financial statements and notes thereto,
together with the report of KPMG LLP, contained in the Registrant's 2001 Annual
Report to Stockholders are incorporated herein by reference. The unaudited
quarterly financial data set forth on page 54 of such Annual Report is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Independent Accountants on
Accounting and Financial Disclosure
None.
27
PART III
Item 10. Directors and Executive Officers of the Registrant
The information appearing under the caption "Election of Directors" and
"Compliance with Section 16(A) of the Exchange Act" in the Registrant's
definitive proxy statement relating to its 2002 Annual Meeting of Stockholders
is incorporated herein by reference. Information required by this item
concerning the Executive Officers of the Registrant is contained in Part I of
this Form 10-K.
Item 11. Executive Compensation
The information appearing under the caption "Executive Compensation" in
the Registrant's definitive proxy statement relating to its 2002 Annual Meeting
of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing under the captions "Election of Directors"
and "Principal Stockholders" in the Registrant's definitive proxy statement
relating to its 2002 Annual Meeting of Stockholders is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information contained in Note 5 of the Consolidated Financial
Statements under the caption "Loans" in the Registrant's 2001 Annual Report to
Stockholders is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following financial statements and financial statement schedules
are contained herein or are incorporated herein by reference:
(a)1. Financial Statements
Reference to 2001
Annual Report
to Stockholders
(Pages)
Independent Auditors' Report 27
Consolidated Balance Sheets at December 31,
2001 and 2000 28
Consolidated Statements of Income for the three
years ended December 31, 2001 29
Consolidated Statements of Cash Flows for the three
years ended December 31, 2001 30-31
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31,
2001 32
Notes to Consolidated Financial Statements 33-54
2. Financial Statement Schedules
All schedules are omitted as the required information is either not
applicable or is included in the consolidated financial statements or related
notes.
28
3. Exhibits
Exhibit No. Description of Exhibit
3.1 Restated Certificate of Incorporation of the
Registrant - incorporated by reference to Exhibit
3.1 of the Registrant's Form S-4 Registration
Statement (Reg. No. 33-7916).
3.2 By-Laws of the Registrant - incorporated by reference to
Exhibit 3 of the Registrant's Form 10-Q for the quarter
ended September 30, 1991.
4.1 Shareholder Rights Agreement dated as of January 18, 2000,
between the Company and The First National Bank of Boston,
as Rights Agent - incorporated herein by reference to the
Exhibit to the Company's Report on Form 8-K dated as of
January 20, 2000.
10.1 MASSBANK Corp. 1986 Stock Option Plan, as amended -
incorporated by reference to Exhibit 28.1 to the
Registrant's Form S-8 Registration Statement
(Reg. No. 33-11949).
10.1.2 Amendment to MASSBANK Corp. 1986 Stock Option Plan dated
April 19, 1991 - incorporated by reference to Exhibit
10.1.2 to the Registrant's annual report on Form 10-K for
the year ended December 31, 1992.
10.1.3 MASSBANK Corp. 1994 Stock Incentive Plan - incorporated
by reference to Exhibit 10.1 to the Registrant's Form S-8
Registration Statement (Reg. No. 33-82110).
10.1.4 Amendment to MASSBANK Corp. 1994 Stock Incentive Plan
dated April 21, 1998 - incorporated by reference to
Exhibit 10.1.4 to the Registrant's annual report on Form
10-K for the year ended December 31, 1997.
10.2 MASSBANK for Savings Employees' Stock Ownership Plan
and Trust Agreement - incorporated by reference to
Exhibit 10.2 of the Registrant's Form S-4 Registration
Statement (Reg. No. 33-7916).
10.2.1 Amendments to the MASSBANK for Savings Employee's Stock
Ownership Plan and Trust Agreement - incorporated by
reference to Exhibit 10.2.1 to the Registrant's annual
report on Form 10-K for the year ended December 31, 1993.
10.2.2 Amendments to the MASSBANK for Savings Employee's Stock
Ownership Plan and Trust Agreement - incorporated by
reference to Exhibit 10.2.2 to the Registrant's annual
report on Form 10-K for the year ended December 31, 1997.
10.3 Form of Employment Agreement, as amended, with Gerard H.
Brandi - incorporated by reference to Exhibit 10.3 of the
Registrant's annual report on Form 10-K for the year ended
December 31, 1986 and Exhibit 10.3.1 of the Registrant's
annual report on Form 10-K for the year ended December 31,
1989.
29
Exhibit No. Description of Exhibit
10.3.2 Amendment to the Employment Agreement with Gerard H.
Brandi - incorporated by reference to Exhibit 10.3.2 of
the Registrant's annual report on Form 10-K for the year
ended December 31, 1990.
10.3.3 Second amendment dated as of February 1, 1993 to the
Employment Agreement with Gerard H. Brandi - incorporated
by reference to Exhibit 10.3.3. to the Registrant's annual
report on Form 10-K for the year ended December 31, 1992.
10.3.7 Form of Employment Agreement with David F. Carroll dated
as of February 1, 1993 - incorporated by reference to
Exhibit 10.3.7 to the Registrant's annual report on Form
10-K for the year ended December 31, 1992.
10.3.8 Form of Employment Agreement with Reginald E. Cormier
dated as of February 1, 1993 - incorporated by reference
to Exhibit 10.3.8 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1992.
10.3.9 Form of Employment Agreement with Donald R. Washburn dated
as of February 1, 1993 - incorporated by reference to
Exhibit 10.3.9 to the Registrant's annual report on Form
10-K for the year ended December 31, 1992.
10.3.10 Form of Employment Agreement with Donna H. West dated as
of February 1, 1993 - incorporated by reference to Exhibit
10.3.10 to the Registrant's annual report on Form 10-K for
the year ended December 31, 1992.
10.3.11 Executive Severance Agreement with Gerard H. Brandi dated
as of January 18, 1994 - incorporated by reference to
exhibit 10.3.11 to the Registrant's annual report on Form
10-K for the year ended December 31, 1993.
10.3.12 Executive Severance Agreement with David F. Carroll dated
as of December 23, 1993 - incorporated by reference to
exhibit 10.3.12 to the Registrant's annual report on Form
10-K for the year ended December 31, 1993.
10.3.13 Executive Severance Agreement with Reginald E. Cormier
dated as of December 23, 1993 - incorporated by reference
to exhibit 10.3.13 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1993.
30
Exhibit No. Description of Exhibit
10.3.14 Executive Severance Agreement with Donald R. Washburn
dated as of December 23, 1993 - incorporated by reference
to exhibit 10.3.14 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1993.
10.3.15 Executive Severance Agreement with Donna H. West dated as
of December 23, 1993 - incorporated by reference to
exhibit 10.3.15 to the Registrant's annual report on Form
10-K for the year ended December 31, 1993.
10.4 Form of Executive Supplemental Retirement Agreement, as
amended, with Gerard H. Brandi - incorporated by reference
to Exhibit 10.4 of Registrant's annual report on Form 10-K
for the year ended December 31, 1986.
10.4.1 Amendments to the Executive Supplemental Retirement
Agreement with Gerard H. Brandi are incorporated by
reference to Exhibit 10.4.1 of the Registrant's annual
report on Form 10-K for the year ended December 31, 1996.
10.5 Amended Deferred Compensation Plan for Directors of
MASSBANK Corp. adopted March 8, 2000 - incorporated by
reference to Exhibit 10.5 of the Registrant's annual
report on Form 10-K for the year ended December 31, 2000.
10.6 Deferred Compensation Program for Bank employees dated
November 14, 1994.
11 The computation of per share earnings can be readily
determined from the material contained in the Annual
Report on Form 10-K for the fiscal year ended December 31,
2001.
12 Statement re: Computation of Ratios - Not applicable as
MASSBANK Corp. does not have any debt securities
registered under Section 12 of the Securities Exchange
Act of 1934.
13 2001 Annual Report to Stockholders - except for those
portions of the 2000 Annual Report to Stockholders which
are expressly incorporated by reference in this report,
such 2001 Annual Report to Stockholders is furnished for
the information of the SEC and is not to be deemed "filed"
with the SEC.
22 Subsidiaries of the Registrant - A list of subsidiaries
of the Registrant is attached hereto as Exhibit 22 to
this Annual Report.
23 Independent Accountants' Consent.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last
quarter of the period covered by this Form 10-K.
(c) Exhibits to this Form 10-K are attached or
incorporated by reference as stated in the
Index to Exhibits.
(d) Not applicable.
31
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MASSBANK CORP.
/s/ Gerard H. Brandi
---------------------------------------
Gerard H. Brandi
Chairman, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Gerard H. Brandi Chairman, President, March 13, 2002
- ------------------------- Chief Executive Officer and
Gerard H. Brandi Director
/s/ Reginald E. Cormier Senior Vice President, Treasurer March 13, 2002
- ------------------------- and Chief Financial Officer
Reginald E. Cormier (Principal Financial and
Accounting Officer)
/s/ Mathias B. Bedell Director March 13, 2002
- -------------------------
Mathias B. Bedell
Director
- -------------------------
Allan S. Bufferd
/s/ Peter W. Carr Director March 21, 2002
- -------------------------
Peter W. Carr
/s/ Alexander S. Costello Director March 19, 2002
- -------------------------
Alexander S. Costello
32
Director
- ------------------------
Robert S. Cummings
/s/ Leonard Lapidus Director March 20, 2002
- ------------------------
Leonard Lapidus
/s/ Stephen E. Marshall Director March 13, 2002
- ------------------------
Stephen E. Marshall
/s/ Nancy L. Pettinelli Director March 19, 2002
- ------------------------
Nancy L. Pettinelli
/s/ Herbert G. Schurian Director March 13, 2002
- ------------------------
Herbert G. Schurian
/s/ Donald B. Stackhouse Director March 19, 2002
- ------------------------
Donald B. Stackhouse
33