Exhibit 13
1987 - 2001
FINANCIAL HIGHLIGHTS
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MASSBANK CORP. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS) AT DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994
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BALANCE SHEET DATA:
Total assets $971,168 $938,702 $924,716 $946,625 $925,403 $888,237 $854,542 $843,647
Mortgage loans 296,469 272,951 288,580 283,654 248,798 224,139 220,603 220,269
Other loans 34,548 37,196 36,785 21,335 23,505 25,522 28,582 30,547
Allowance for loan losses 2,643 2,594 2,555 2,450 2,334 2,237 2,529 2,566
Investments(1) 618,545 607,096 578,543 624,082 635,694 622,645 586,768 568,635
Real estate acquired through
foreclosure -- -- 62 86 -- 503 255 129
Deposits 849,684 823,625 818,057 824,031 809,850 788,350 753,657 759,676
Stockholders' equity 114,904 108,243 101,479 110,489 103,779 92,250 90,817 74,504
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(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994
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OPERATING DATA:
Interest and dividend income $ 55,117 $ 60,280 $ 58,206 $ 59,834 $ 60,733 $ 58,109 $ 56,611 $ 51,451
Interest expense 32,391 35,397 33,204 34,320 34,681 33,062 30,896 26,152
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Net interest income 22,726 24,883 25,002 25,514 26,052 25,047 25,715 25,299
Provision for loan losses 40 60 140 193 260 160 170 705
Gains on securities, net 4,363 3,525 4,033 2,893 1,939 868 92 (533)
Other non-interest income 1,450 1,463 1,529 1,697 1,859 1,797 1,856 3,070
Non-interest expense 11,721 12,513 12,566 12,515 13,425 12,124 13,178 14,213
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Income before income taxes 16,778 17,298 17,858 17,396 16,165 15,428 14,315 12,918
Income tax expense 6,019 6,187 6,547 6,482 5,998 6,001 5,556 4,733
Change in accounting principle -- -- -- -- -- -- -- --
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Net income $ 10,759 $ 11,111 $ 11,311 $ 10,914 $ 10,167 $ 9,427 $ 8,759 $ 8,185
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YEARS ENDED DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994
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OTHER DATA:
Yield on average interest-earning
assets 5.88% 6.67% 6.32% 6.56% 6.81% 6.84% 6.90% 6.22%
Cost of average interest-bearing
liabilities 3.87 4.32 4.02 4.23 4.30 4.27 4.11 3.41
Interest rate spread 2.01 2.35 2.30 2.33 2.51 2.57 2.79 2.81
Net interest margin 2.43 2.76 2.72 2.81 2.93 2.96 3.15 3.07
Non-interest expense to average
assets(4) 1.23 1.35 1.34 1.35 1.47 1.40 1.57 1.67
Efficiency ratio(2)(4) 40.9 41.7 40.9 41.4 44.7 43.5 47.4 50.8
Return on assets (net income/average
assets) 1.13 1.20 1.20 1.17 1.12 1.08 1.04 0.96
Return on equity (net income/average
stockholders' equity) 9.53 10.93 10.66 10.05 10.51 10.65 10.65 10.62
Return on average realized equity(3) 10.25 10.95 11.35 11.08 11.11 11.01 10.81 10.62
Percent non-performing loans to
total loans 0.20 0.18 0.24 0.33 0.65 0.64 0.97 0.84
Percent non-performing assets to
total assets 0.07 0.06 0.09 0.12 0.19 0.24 0.31 0.26
Stockholders' equity to assets,
at year-end 11.83 11.53 10.97 11.67 11.21 10.39 10.63 8.83
Book value per share, at year-end $ 36.51 $ 34.25 $ 30.65 $ 31.58 $ 29.06 $ 25.75 $ 24.84 $ 20.09
Earnings per share:
Basic 3.44 3.45 3.35 3.09 2.88 2.65 2.43 2.19
Diluted 3.36 3.37 3.25 2.97 2.77 2.58 2.34 2.13
Cash dividends paid per share 1.26 1.18 1/2 1.11 1.02 0.88 1/2 0.69 0.54 3/4 0.45
Dividend payout ratio 37% 34% 33% 33% 31% 26% 23% 21%
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MASSBANK CORP. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS) AT DECEMBER 31, 1993 1992 1991 1990 1989 1988 1987
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BALANCE SHEET DATA:
Total assets $855,881 $839,103 $425,428 $331,400 $307,873 $314,128 $318,365
Mortgage loans 219,347 219,932 78,064 76,118 84,809 99,127 107,606
Other loans 29,699 33,824 20,060 19,892 18,469 15,954 12,802
Allowance for loan losses 2,261 2,056 375 308 1,225 275 275
Investments(1) 589,666 564,422 315,588 221,900 187,836 183,370 183,609
Real estate acquired through
foreclosure 699 905 1,158 3,315 3,780 -- --
Deposits 766,363 761,879 356,082 260,512 230,729 228,484 235,152
Stockholders' equity 80,075 71,062 66,563 68,573 73,779 79,953 77,865
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(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989 1988 1987
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OPERATING DATA:
Interest and dividend income $ 51,541 $ 51,317 $ 29,040 $ 26,606 $ 25,877 $ 26,124 $ 26,703
Interest expense 27,485 30,991 18,644 16,898 15,763 14,630 14,957
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Net interest income 24,056 20,326 10,396 9,708 10,114 11,494 11,746
Provision for loan losses 671 884 83 312 1,445 (9) 34
Gains on securities, net 198 122 1 (1,647) 429 271 944
Other non-interest income 2,307 2,429 996 969 893 1,419 1,374
Non-interest expense 14,243 13,421 7,093 7,316 5,328 5,189 5,839
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Income before income taxes 11,647 8,572 4,217 1,402 4,663 8,004 8,641
Income tax expense 4,711 3,895 1,967 677 1,995 3,087 3,120
Change in accounting principle (241) -- -- -- -- -- --
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Net income $ 6,695 $ 4,677 $ 2,250 $ 725 $ 2,668 $ 4,917 $ 5,521
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YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989 1988 1987
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OTHER DATA:
Yield on average interest-earning
assets 6.25% 6.88% 8.06% 8.78% 8.76% 8.65% 8.53%
Cost of average interest-bearing
liabilities 3.57 4.48 6.11 6.91 6.93 6.26 6.16
Interest rate spread 2.68 2.40 1.95 1.87 1.83 2.39 2.37
Net interest margin 2.93 2.73 2.89 3.21 3.43 3.81 3.75
Non-interest expense to average
assets(4) 1.68 1.75 1.90 2.31 1.73 1.64 1.78
Efficiency ratio(2)(4) 53.3 58.3 61.8 80.1 46.5 39.4 41.5
Return on assets (net income/average
assets) 0.79 0.61 0.60 0.23 0.86 1.56 1.69
Return on equity (net income/average
stockholders' equity) 8.98 6.79 3.39 1.03 3.38 6.20 6.79
Return on average realized equity(3) 8.98 6.79 3.39 1.03 3.38 6.20 6.79
Percent non-performing loans to
total loans 0.51 0.59 1.06 0.60 1.99 1.30 0.07
Percent non-performing assets to
total assets 0.23 0.29 0.52 1.17 1.90 0.48 0.03
Stockholders' equity to assets,
at year-end 9.36 8.47 15.65 20.69 23.96 25.45 24.46
Book value per share, at year-end $ 20.46 $ 18.37 $ 17.54 $ 16.20 $ 15.16 $ 14.21 $ 13.24
Earnings per share:
Basic 1.71 1.22 0.59 0.17 0.50 0.86 0.86
Diluted 1.67 1.19 0.58 0.17 0.50 0.86 0.86
Cash dividends paid per share 0.34 0.26 1/2 0.22 3/4 0.22 0.21 0.19 0.16 1/2
Dividend payout ratio 20% 22% 39% 136% 42% 22% 19%
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(1) Consists of securities held to maturity and available for sale, trading
securities, short-term investments, term federal funds sold and
interest-bearing deposits in banks.
(2) Determined by dividing non-interest expense by fully taxable equivalent net
interest income plus non-interest income.
(3) Excludes average net unrealized gains or losses on securities available for
sale.
(4) Includes non-recurring non-interest expense of $363 thousand in 2000
related to the successful litigation to protect the Company's principal
trademark.
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 2001
presentation.
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.
FORWARD-LOOKING STATEMENT DISCLOSURE
This annual report 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. 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 and uncertainties, including
unexpected fluctuations in market interest rates, unexpected fluctuations in the
markets for equities, bonds, federal funds and other financial instruments, an
increase in the level of nonperforming assets, an increase in competitive
pricing pressures within the Company's market, 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.
FINANCIAL CONDITION
The Company's total assets amounted to $971.2 million as of December 31, 2001,
an increase of $32.5 million or 3.5% from $938.7 million at December 31, 2000.
This reflects an increase in the Bank's loan portfolio, net of allowance for
loan losses, of $20.8 million or 6.8% and an increase in total investments of
$11.5 million or 1.9%.
INVESTMENTS
At December 31, 2001, the Company's investment portfolio, consisting of
investment securities (including mortgage-backed securities), short-term
investments, term federal funds sold and interest-bearing bank deposits totaled
$618.5 million or 63.7% of total assets, compared to $607.1 million or 64.7% of
total assets at December 31, 2000. The portfolio included U.S. government and
agency obligations primarily maturing within five years, 15-year mortgage-backed
securities and equity securities. For further information concerning the
composition, maturity and market value of the Bank's investment securities, see
Notes 3 and 4 of Notes to Consolidated Financial Statements.
LOANS
The loan portfolio, net of allowance for loan losses, increased $20.8 million or
6.8% year-over-year. At December 31, 2001, the loan portfolio, net of allowance
for loan losses, was $328.4 million representing 33.8% of total assets compared
to $307.6 million representing 32.8% of total assets at December 31, 2000.
The majority of loans in the portfolio are residential mortgages.
Residential mortgage loans amounted to $293.8 million at December 31, 2001,
representing 88.7% of the loan portfolio. At year-end 2001, 87.6% and 12.4% of
the Company's residential mortgage loans were fixed rate and variable rate
loans, respectively. See note 5 of Notes to Consolidated Financial Statements
for a table setting forth the composition of the loan portfolio at year-end 2001
and 2000.
Lower interest rates in 2001 resulted in increased loan origination
growth for the Bank. In 2001, the Bank originated loans of $103.2 million, an
increase of $70.2 million or approximately triple the $33.0 million in loans
originated in the year 2000.
15
ASSET QUALITY
Asset quality remains strong. Non-accrual loans, generally those loans which are
90 days or more delinquent, were $644 thousand and $565 thousand, respectively,
at December 31, 2001 and 2000. This represents 0.19% of total loans at December
31, 2001.
The provision for loan losses, which amounted to $60 thousand in 2000,
decreased by $20 thousand to $40 thousand in 2001. The Bank received net
recoveries of $9 thousand in 2001 versus net charge-offs of $21 thousand the
prior year.
The Bank's allowance for loan losses at December 31, 2001 totaled
approximately $2.6 million, representing 410% of non-accrual loans and 0.80% 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 has no real estate acquired through foreclosure at year-end 2001.
DEPOSITS
Deposits have historically been the Bank's primary source of funds for lending
and investment activities. Deposit flows vary significantly and are influenced
by prevailing interest rates, market conditions, economic conditions and
competition. The Bank's management attempts to manage its deposits through
selective pricing and marketing. Deposits increased $26.1 million or 3.2% to
$849.7 million at December 31, 2001, from $823.6 million at December 31, 2000.
This increase was primarily the result of an increase in savings deposits of
$49.0 million or 14.6%, partially offset by a decrease in time certificates of
deposit of $25.4 million or 6.2%. Other deposits grew by $2.4 this past year.
For information concerning deposit balances at year-end 2001 and 2000, their
average cost and the maturity distribution and related rate structure of the
Bank's time certificates of deposit, see Note 10 of Notes to Consolidated
Financial Statements.
STOCKHOLDERS' EQUITY
Total stockholders' equity increased $6.7 million to $114.9 million at December
31, 2001, representing a book value per share of $36.51, from $108.2 million
representing a book value per share of $34.25 at December 31, 2000. This
represents an increase in book value per share of $2.26 or 6.6% year-over-year.
The Company's book value per share was positively affected by the increase in
the Company's retained earnings and unrealized gains on securities available for
sale, net of tax effect. Also contributing to the increase in book value per
share was the Company's repurchase of 60,200 shares of its common stock at below
book value, during 2001, pursuant to its stock repurchase program.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 2001 AND 2000
MASSBANK Corp. reported consolidated net income of $10.8 million or $3.36 in
diluted earnings per share in 2001 compared to net income of $11.1 million or
$3.37 in diluted earnings per share in 2000. Basic earnings per share for 2001
were $3.44 compared to $3.45 in the prior year. Return on average assets and
return on average realized equity were 1.13% and 10.25%, respectively, in 2001,
compared to 1.20% and 10.95%, respectively, in 2000.
The decrease in net income in 2001 reflects the continued pressure
throughout 2001 on the Company's net interest margin from declining interest
rates and the Federal Reserve Bank's multiple interest rate reductions during
the year. The Federal Open Market Committee of the Federal Reserve Bank lowered
the Federal Funds Rate eleven times in 2001, from 6.50% to 1.75%, bringing the
total decline in the targeted rate to 475 basis points for the year. Being
asset-sensitive in 2001, MASSBANK was particularly susceptible to the negative
effects of a falling interest rate environment. The Company's net interest
margin in 2001 dropped to 2.43% from 2.76% in 2000. This drop contributed to
lower than anticipated net interest income and reduced earnings per share for
the year, despite higher than expected securities gains, effective cost control
and loan growth of 6.7% year-over-year. However, the Company anticipates
sequential margin expansion in the coming year. The Company expects that due to
the current low interest rate environment in the overnight federal funds market,
it will invest a greater portion of its funds in higher yielding alternate
investments. Although these investments will necessarily bear greater interest
rate risk, the Company believes that the incurrence of this additional risk is
warranted by the higher margin opportunities available from alternative
investments.
Additionally, the Company's earnings per share performance in 2001 was
positively affected by the reduced number of average common shares outstanding
as a result of the Company's repurchase during 2001 of 60,200 shares of its
common stock pursuant to its stock repurchase program.
16
NET INTEREST INCOME
Net interest income on a fully taxable equivalent basis totaled $22.7 million in
2001 compared to $25.0 million in 2000. This decrease was primarily attributable
to a decrease in net interest margin, as noted above, partially offset by an
increase in average earning assets. Average earning assets increased $32.4
million to $938.1 million in 2001, from $905.7 million in 2000.
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 (2) changes in interest rates.
INTEREST AND DIVIDEND INCOME
Interest and dividend income on a fully taxable equivalent basis totaled $55.2
million for the year ended December 31, 2001, compared to $60.4 million for the
year ended December 31, 2000. The yield on average earning assets dropped 79
basis points to 5.88% in 2001 from 6.67% the prior year. The average total
earning assets of the Company increased $32.4 million in 2001.
As shown in the rate/volume analysis table on page 23, the decline in
yield on average earning assets in 2001 resulted in decreased interest and
dividend income of $6.7 million from 2000 levels. Conversely, the total effect
of higher average earning assets on interest and dividend income in 2001 was a
$1.5 million increase from 2000, resulting in a net decrease in interest and
dividend income of $5.2 million from the prior year.
INTEREST EXPENSE
Total interest expense decreased $3.0 million or 8.5% to $32.4 million for the
year ended December 31, 2001 from $35.4 million for the year ended December 31,
2000. This decrease is due to a drop of 45 basis points in the Company's average
cost of funds, from 4.32% in 2000 to 3.87% in 2001, resulting primarily from a
falling interest rate environment in 2001. The Company's average deposits in
2001 increased $18.0 million to $836.6 million, from $818.6 million in the prior
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
decrease of $3.5 million from 2000 levels. Conversely, the total effect of
higher average deposits on interest expense in 2001 was an increase of $0.5 over
the prior year, resulting in a net decrease in total interest expense of $3.0
million from 2000.
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
2001 was $40 thousand compared to $60 thousand in 2000. In determining the
amount to provide for loan losses, the key factor is the adequacy of the
allowance for loan losses. Management uses a methodology to systematically
measure the amount of estimated loan loss exposure inherent in the portfolio for
purposes of establishing a sufficient allowance for loan losses. The methodology
includes three elements: an analysis of individual loans deemed to be impaired
in accordance with the terms of Statement of Financial Accounting Standard No.
114, "Accounting by Creditors for Impairment of a Loan," general loss
allocations for various loan types based on loss experience factors, and an
unallocated allowance which is maintained based on management's assessment of
many factors including the risk characteristics of the portfolio, concentrations
of credit, current and anticipated economic conditions that may effect the
borrower's ability to pay, and trends in loan delinquencies and charge-offs. At
December 31, 2001, the allowance for loan losses was $2.6 million representing
410% of non-accrual loans. Non-accrual loans totaled $644 thousand at December
31, 2001, up from $565 thousand a year earlier. The Bank received $9 thousand in
net loan recoveries in 2001 compared to $21 thousand in net charge-offs in 2000.
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 $0.8 million to $5.8 million for the year
ended December 31, 2001, from $5.0 million for the year ended December 31, 2000.
The increase is due primarily to an increase in securities gains from $3.5
million in 2000 to $4.4 million in 2001. While the Company's equity securities
portfolio has produced increased realized gains in recent years, management does
not expect this trend to continue. Management believes that the equity markets
will provide more moderate returns in the near future. This will result in lower
realized equity securities gains in 2002.
All other non-interest income combined declined modestly compared to
the prior year.
17
NON-INTEREST EXPENSE
Non-interest expense totaled $11.7 million in 2001, a decrease of $0.8 million
or 6.3% compared with $12.5 million in 2000. Most of this expense decline was
due to the net litigation expenses of $363 thousand that the Bank incurred in
2000 in connection with its successful litigation to protect its principal
trademark and a decrease in salaries and employee benefit expenses. Salaries and
employee benefits, the largest component of non-interest expense, decreased $277
thousand or 4.0% to $6.7 million in 2001 from $7.0 million in 2000. Part of this
improvement resulted from a decrease of $144 thousand in payments awarded to
employees under the Company's profit sharing and incentive compensation bonus
plans as a result of the Company not achieving its net income performance
objectives in 2001. Also contributing to the lower salaries and employee benefit
expenses was an increase of $137 thousand in loan origination related salary
expenses being deferred and amortized over the life of the loans. More loan
origination expenses were deferred in 2001 than the prior year because of a
significant increase in mortgage origination activity in 2001.
INCOME TAX EXPENSE
The Company recorded income tax expense of $6.0 million in 2001, a decrease of
$168 thousand when compared to the prior year. The decrease in income tax
expense is primarily due to lower pretax earnings. The Company's effective
income tax rate for the year ended December 31, 2001 was 35.87%, up slightly
from 35.77% in the prior year.
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. 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.
18
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%.
19
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.
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 and mortgage-backed securities 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, 2001, the Bank had $204.3
million or 21.0% of total assets and $94.2 million or 9.7% 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, 2001, the Bank had a leverage
Tier I capital to average assets ratio of 10.93%, a Tier I capital to
risk-weighted assets ratio of 29.47% and a total capital to risk-weighted assets
ratio of 30.40%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to average assets of 11.40%, Tier I capital to risk-weighted
assets of 30.62% and total capital to risk-weighted assets of 31.54% at December
31, 2001.
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 Committee 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.
20
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 2001 has been negative in many years past 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 reduce or raise rates or to reduce or raise rates by a modest amount on its
savings and transaction-oriented accounts in response to a change 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.
21
INTEREST RATE RISK (continued)
The Company's policy is to limit its one-year GAP position to 20.0% of
total assets. This represents an increase from the 15% policy limit of the prior
year. 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, 2001. As of this date, the Company's one-year cumulative GAP position was
positive $78.7 million, or approximately 8.1% 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 $ 41,596 $ 14,622 $ 27,831 $ 182,465 $ 64,503 $ 331,017
Short-term investments:
Federal funds sold 204,294 -- -- -- -- 204,294
Investment in money market funds 32,088 -- -- -- -- 32,088
Interest-bearing deposits in banks 3,019 1,622 630 1,219 -- 6,490
Securities available for sale 43,140 24,476 40,336 202,175 62,457 372,584
Trading securities 3,089 -- -- -- -- 3,089
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 327,226 $ 40,720 $ 68,797 $ 385,859 $ 126,960 $ 949,562
- ---------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits(1) (2) $ 199,290 $ 77,757 $ 81,016 $ 45,794 $ 418,563 $ 822,420
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 199,290 $ 77,757 $ 81,016 $ 45,794 $ 418,563 $ 822,420
- ---------------------------------------------------------------------------------------------------------------------------
GAP for period $ 127,936 $ (37,037) $ (12,219) $ 340,065 $(291,603) $ 127,142
Cumulative GAP - December 31, 2001 $ 127,936 $ 90,899 $ 78,680 $ 418,745 $ 127,142
Cumulative GAP as a percent of total assets 13.2% 9.4% 8.1% 43.1% 13.1%
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative GAP - December 31, 2000 $ 49,977 $ 38,876 $ 33,405 $ 304,438 $ 120,793
===========================================================================================================================
(1) Excludes non-interest bearing demand accounts of $28,667.
(2) Includes escrow deposits of borrowers of $1,403.
22
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, 2001.
Expected Maturity Date
At December 31, 2001
FAIR VALUE
(In thousands) 2002 2003 2004 2005 2006 THEREAFTER TOTAL AT 12/31/01
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE ASSETS:
Fixed rate securities $ 90,593 $ 65,595 $ 70,567 $ 43,411 $ 22,602 $ 62,457 $ 355,225 $ 355,225
Average interest rate(1) 6.11% 5.35% 3.29% 3.69% 5.62% 5.38 5.19%
Variable rate securities(2) 19,507 -- -- -- -- 941 20,448 20,448
Average interest rate(1) 2.28% -- -- -- -- 2.94% 2.31%
Fixed rate loans 45,031 42,213 38,806 35,144 34,155 64,459 259,808 262,331
Average interest rate 6.66% 6.65% 6.66% 6.65% 6.65% 6.72% 6.67%
Variable rate loans 20,319 5,387 5,452 5,675 6,034 28,342 71,209 71,601
Average interest rate 4.22% 8.32% 8.01% 7.70% 7.34% 6.19% 6.14%
Other fixed rate assets(4) 4,222 814 405 -- -- -- 5,441 5,441
Average interest rate 4.45% 4.22% 4.40% -- -- -- 4.41%
Other variable rate assets(3) 237,431 -- -- -- -- -- 237,431 237,431
Average interest rate 1.62% -- -- -- -- -- 1.62%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive
assets $ 417,103 $ 114,009 $ 115,230 $ 84,230 $ 62,791 $ 156,199 $ 949,562 $ 952,477
===================================================================================================================================
INTEREST SENSITIVE LIABILITIES:
Savings and money market
deposit accounts $ 2,548 $ 2,348 $ 2,172 $ 2,015 $ 1,877 $ 373,000 $ 383,960 $ 383,960
Average interest rate 2.24% 2.26% 2.28% 2.31% 2.33% 2.77% 2.76%
Fixed rate certificates
of deposit 244,724 36,242 5,420 331 600 456 287,773 289,507
Average interest rate 4.15% 4.24% 4.31% 4.48% 4.82% 5.18% 4.17%
Variable rate certificates
of deposit 39,983 33,266 7,948 14,640 -- -- 95,837 95,837
Average interest rate 3.03% 2.87% 2.60% 2.60% -- -- 2.88%
NOW accounts -- -- -- -- -- 53,476 53,476 53,476
Average interest rate -- D -- -- -- 0.68% 0.68%
Escrow deposits of borrowers 1,403 -- -- -- -- -- 1,403 1,403
Average interest rate 0.25% -- -- -- -- -- 0.25%
Deposit acquisition premium,
net of amortization (29) -- -- -- -- -- (29) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive
liabilities $ 288,629 $ 71,856 $ 15,540 $ 16,986 $ 2,477 $ 426,932 $ 822,420 $ 824,183
===================================================================================================================================
(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 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 $16.4 million at December 31, 2001. The net
unrealized gains on these securities totaled $1.3 million at year-end 2001.
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.
23
AVERAGE BALANCE SHEETS
(In thousands)
Years ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 196,041 $ 7,444 3.80% $ 135,728 $ 8,595 6.33% $ 128,124 $ 6,294 4.91%
Short-term investments(2) 30,215 1,217 4.03 7,646 441 5.77 22,600 1,105 4.89
Investment securities 106,478 5,596 5.26 166,264 9,332 5.61 164,117 8,931 5.44
Mortgage-backed securities 284,932 18,847 6.61 273,464 19,015 6.95 275,361 18,735 6.80
Trading securities 2,984 158 5.29 5,020 310 6.18 10,760 495 4.60
Mortgage loans(1) 281,492 19,631 6.97 280,732 19,670 7.01 292,172 20,516 7.02
Other loans(1) 35,964 2,315 6.44 36,838 3,035 8.24 29,516 2,256 7.64
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 938,106 55,208 5.88% 905,692 60,398 6.67% 922,650 58,332 6.32%
===================================================================================================================================
Allowance for
loan losses (2,612) (2,571) (2,498)
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 935,494 903,121 920,152
Other assets 20,518 20,450 19,923
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 956,012 $ 923,571 $940,075
===================================================================================================================================
LIABILITIES:
Deposits:
Demand and NOW $ 80,848 461 0.57% $ 75,956 488 0.64% $ 74,933 504 0.67%
Savings 353,622 11,495 3.25 343,079 11,711 3.41 353,851 12,060 3.41
Time certificates of
deposit 402,155 20,435 5.08 399,554 23,198 5.81 397,935 20,640 5.19
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 836,625 32,391 3.87% 818,589 35,397 4.32% 826,719 33,204 4.02%
- -----------------------------------------------------------------------------------------------------------------------------------
Other liabilities 6,545 3,310 7,209
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 843,170 821,899 833,928
===================================================================================================================================
STOCKHOLDERS' EQUITY: 112,842 101,672 106,147
Total liabilities
and stockholders'
equity $ 956,012 $ 923,571 $ 940,075
===================================================================================================================================
Net interest income (tax-
equivalent basis) 22,817 25,001 25,128
Less adjustment of tax-
exempt interest income 91 118 126
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 22,726 $ 24,883 $ 25,002
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.01% 2.35% 2.30%
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin(3) 2.43% 2.76% 2.72%
===================================================================================================================================
(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.
24
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.
2001 COMPARED TO 2000 2000 COMPARED TO 1999
(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 $3,015 $(4,166) $(1,151) $392 $1,909 $2,301
Short-term investments 945 (169) 776 (834) 170 (664)
Investment securities (3,126) (583) (3,709) 116 293 409
Trading securities (112) (40) (152) (319) 134 (185)
Mortgage-backed securities 779 (947) (168) (130) 410 280
Mortgage loans 53 (92) (39) (801) (45) (846)
Other loans (70) (650) (720) 593 186 779
------ ------- ------- ---- ------ ------
Total interest and dividend income 1,484 (6,647) (5,163) (983) 3,057 2,074
------ ------- ------- ---- ------ ------
Interest expense:
Deposits:
Demand and NOW 30 (57) (27) 7 (23) (16)
Savings 353 (569) (216) (368) 19 (349)
Time certificates of deposit 150 (2,913) (2,763) 84 2,474 2,558
------ ------- ------- ---- ------ ------
Total interest expense 533 (3,539) (3,006) (277) 2,470 2,193
------ ------- ------- ---- ------ ------
Net interest income $951 $(3,108) $(2,157) $(706) $587 $(119)
====== ======= ======= ==== ====== ======
25
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.
GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS 142 requires that upon adoption of the Statement, any
goodwill recorded on an entity's balance sheet would no longer be amortized.
This would include existing goodwill (i.e., recorded goodwill at the date the
financial statement is issued), as well as goodwill arising subsequent to the
effective date of the Statement. Goodwill will not be amortized but will be
reviewed for impairment periodically or upon the occurrence of certain
triggering events. This Statement is effective for fiscal years beginning after
December 15, 2001. The Company adopted the new standard on January 1, 2002. At
December 31, 2001, the Company had $1,090,000 of goodwill on its balance sheet
that was being amortized at a rate of $99,000 annually.
26
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, 2001 and 2000, 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,
2001. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
January 8, 2002
27
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 8,945 $ 9,179
Short-term investments (Note 2) 236,382 112,842
- ----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 245,327 122,021
- ----------------------------------------------------------------------------------------------------------------
Term federal funds sold -- 30,000
Interest-bearing deposits in banks 6,490 1,678
Securities held to maturity, at amortized cost
(market value of $230 in 2000) (Note 3) -- 230
Securities available for sale, at market value
(amortized cost of $362,076 in 2001 and $432,567 in 2000) (Note 3) 372,584 442,552
Trading securities, at market value (Note 4) 3,089 19,794
Loans (Notes 5, 7 and 11):
Mortgage loans 296,469 272,951
Other loans 34,548 37,196
- ----------------------------------------------------------------------------------------------------------------
Total loans 331,017 310,147
Allowance for loan losses (Note 6) (2,643) (2,594)
- ----------------------------------------------------------------------------------------------------------------
Net loans 328,374 307,553
- ----------------------------------------------------------------------------------------------------------------
Premises and equipment (Note 9) 6,927 3,932
Accrued interest receivable 3,950 5,755
Goodwill 1,090 1,189
Current income tax asset, net 208 284
Other assets 3,129 3,714
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 971,168 $ 938,702
================================================================================================================
Liabilities and Stockholders' Equity:
Deposits (Notes 10 and 11):
Demand and NOW $ 82,143 $ 79,952
Savings 383,960 334,948
Time certificates of deposit 383,610 408,981
Deposit acquisition premium, net of amortization (29) (256)
- ----------------------------------------------------------------------------------------------------------------
Total deposits 849,684 823,625
Escrow deposits of borrowers 1,403 1,387
Employee stock ownership plan liability (Note 15) 156 312
Deferred income taxes (Note 12) 2,275 2,418
Other liabilities 2,746 2,717
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 856,264 830,459
- ----------------------------------------------------------------------------------------------------------------
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, 7,494,980 and 7,447,982 shares issued, respectively 7,495 7,448
Additional paid-in capital 62,875 61,674
Retained earnings 99,996 93,165
- ----------------------------------------------------------------------------------------------------------------
170,366 162,287
Treasury stock at cost, 4,362,289 and 4,300,489 shares, respectively (61,749) (59,704)
Accumulated other comprehensive income (Note 1) 6,443 5,972
Common stock acquired by ESOP (Note 15) (156) (312)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 114,904 108,243
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 971,168 $ 938,702
================================================================================================================
See accompanying notes to consolidated financial statements.
28
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Interest and dividend income:
Mortgage loans $ 19,631 $ 19,670 $ 20,516
Other loans 2,315 3,035 2,256
Securities available for sale:
Mortgage-backed securities 18,847 19,015 18,735
Other securities 5,502 9,203 8,790
Trading securities 158 310 495
Federal funds sold 7,444 8,595 6,294
Other investments 1,220 452 1,120
- -----------------------------------------------------------------------------------------------------------
Total interest and dividend income 55,117 60,280 58,206
- -----------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
NOW 461 488 504
Savings 11,495 11,711 12,060
Time certificates of deposit 20,435 23,198 20,640
- -----------------------------------------------------------------------------------------------------------
Total interest expense 32,391 35,397 33,204
- -----------------------------------------------------------------------------------------------------------
Net interest income 22,726 24,883 25,002
Provision for loan losses (Note 6) 40 60 140
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 22,686 24,823 24,862
- -----------------------------------------------------------------------------------------------------------
Non-interest income:
Deposit account service fees 638 688 724
Gains on securities, net 4,363 3,525 4,033
Other 812 775 805
- -----------------------------------------------------------------------------------------------------------
Total non-interest income 5,813 4,988 5,562
- -----------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 6,723 7,000 7,436
Occupancy and equipment 2,056 2,079 2,146
Data processing 494 473 486
Professional services 426 959 481
Advertising and marketing 192 198 198
Amortization of intangibles 327 330 327
Deposit insurance 173 185 114
Other 1,330 1,289 1,378
- -----------------------------------------------------------------------------------------------------------
Total non-interest expense 11,721 12,513 12,566
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 16,778 17,298 17,858
Income tax expense (Note 12) 6,019 6,187 6,547
- -----------------------------------------------------------------------------------------------------------
Net income $ 10,759 $ 11,111 $ 11,311
===========================================================================================================
Weighted average common shares outstanding:
Basic 3,123,915 3,220,390 3,374,623
Diluted 3,206,443 3,293,968 3,478,944
Earnings per share (in dollars):
Basic $ 3.44 $ 3.45 $ 3.35
Diluted 3.36 3.37 3.25
===========================================================================================================
See accompanying notes to consolidated financial statements.
29
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 10,759 $ 11,111 $ 11,311
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 892 866 993
Loan interest capitalized (37) (46) (58)
Amortization of ESOP shares committed to be released 151 93 163
Decrease (increase) in accrued interest receivable 1,805 (710) 13
Increase (decrease) in other liabilities 29 (319) 478
Decrease in current income taxes -- -- (1,015)
Decrease (increase) in current income tax asset, net 76 8 --
Accretion of discounts on securities, net of
amortization of premiums (643) (847) (961)
Net trading securities activity 17,389 (13,228) 25,174
Gains on securities available for sale (4,263) (3,049) (3,954)
Gains on trading securities (100) (476) (79)
Decrease in deferred mortgage loan origination fees,
net of amortization (44) (167) (3)
Deferred income tax benefit (195) (103) (161)
Decrease (increase) in other assets 1,035 (1,213) (327)
Provision for loan losses 40 60 140
Gains on sales of real estate acquired through foreclosure -- (8) --
Gains on sales of premises and equipment (4) -- (2)
Increase (decrease) in escrow deposits of borrowers 16 (90) 39
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 26,906 (8,118) 31,751
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of term federal funds (10,000) (50,000) --
Proceeds from maturities of term federal funds 40,000 20,000 25,000
Net (increase) decrease in interest-bearing bank deposits (4,812) 2,163 (1,808)
Proceeds from sales of investment securities available for sale 32,819 55,063 72,582
Proceeds from maturities of investment securities held to maturity
and available for sale 87,230 56,000 65,800
Purchases of investment securities available for sale (72,548) (89,621) (169,020)
Purchases of mortgage-backed securities (54,143) (43,750) (88,397)
Principal repayments of mortgage-backed securities 81,231 47,002 68,430
Principal repayments of securities held to maturity -- -- 44
Principal repayments of securities available for sale 4 4 124
Loans originated (103,246) (32,989) (82,415)
Loan principal payments received 82,412 48,346 62,254
Loans purchased -- -- (345)
Purchases of premises and equipment (3,507) (288) (376)
Proceeds from sale of premises and equipment 4 -- 2
Proceeds from sale of real estate acquired through foreclosure -- 70 86
Net advances on real estate acquired through foreclosure -- -- (4)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 75,444 12,000 (48,043)
- --------------------------------------------------------------------------------------------------------------------
(Continued)
30
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 25,832 5,337 (6,202)
Payments to acquire treasury stock (2,045) (5,814) (7,618)
Purchase of company stock for deferred compensation plan 56 366 --
Issuance of common stock under stock option plan 803 415 351
Tax benefit resulting from stock options exercised 238 250 97
Cash dividends paid on common stock (3,935) (3,829) (3,759)
Tax benefit resulting from dividends paid on unallocated shares
held by the ESOP 7 10 13
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 20,956 (3,265) (17,118)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 123,306 617 (33,410)
Cash and cash equivalents at beginning of year 122,021 121,404 154,814
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 245,327 $ 122,021 $ 121,404
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH TRANSACTIONS:
Cash paid during the year for interest $ 35,484 $ 35,382 $ 33,204
Cash paid during the year for taxes, net of refunds 5,898 6,022 7,617
Purchases of securities executed but not settled at beginning of
year which settled during the year 60 117 129
Sales of securities executed but not settled at beginning
of year which settled during the year 573 202 583
NON-CASH TRANSACTIONS:
SFAS 115:
Increase (decrease) in stockholders' equity 471 4,006 (9,725)
Increase (decrease) in deferred tax liabilities 52 2,322 (6,401)
Transfers from loans to real estate acquired through foreclosure -- -- 58
Purchases of securities executed but not settled as of year-end 46 60 117
Sales of securities executed but not settled as of year-end 1,009 573 202
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
31
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
Accumulated Common
Additional other stock
Common paid-in Retained Treasury comprehensive acquired
stock capital earnings stock income by ESOP Total
- ----------------------------------------------------------------------------------------------------------------------------------
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
Net Income -- -- 10,759 -- -- -- 10,759
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (Note 1) -- -- -- -- 471 -- 471
--------
Comprehensive income -- -- -- -- -- -- 11,230
Cash dividends declared
($1.26 per share) -- -- (3,935) -- -- -- (3,935)
Tax benefit resulting from dividends paid
on unallocated shares held by the ESOP -- -- 7 -- -- -- 7
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 151 -- -- -- -- 151
Purchase of treasury stock -- -- -- (1,989) -- -- (1,989)
Purchase of company stock for
deferred compensation plan -- 56 -- (56) -- -- --
Exercise of stock options and
related tax benefits 47 994 -- -- -- -- 1,041
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $7,495 $62,875 $99,996 $(61,749) $6,443 $(156) $114,904
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
32
MASSBANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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, Massachusetts
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 financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the balance sheet date and income and expenses
for the period. Material estimates that are particularly susceptible to
change in the near term relate to the determination of the allowance for loan
losses.
Certain amounts in the prior years' consolidated financial
statements were reclassified to facilitate 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, 2001, stockholders' equity included
approximately $6.4 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
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.
33
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 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 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.
34
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. For 2001 and prior years,
goodwill was being amortized using the straight-line method, over 15 years.
The deposit acquisition premium arising from acquisitions was reported net of
accumulated amortization. Such premium was being amortized on a straight-line
basis over 10 years. Goodwill and other intangible assets were reviewed for
possible impairment when it was determined that events or changed
circumstances may affect the underlying basis of the asset.
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill
and Other Intangible Assets." SFAS 142 requires that upon adoption of the
Statement, any goodwill recorded on an entity's balance sheet would no longer
be amortized. This would include existing goodwill (i.e., recorded goodwill
at the date the financial statement is issued), as well as goodwill arising
subsequent to the effective date of the Statement. Goodwill will not be
amortized but will be reviewed for impairment periodically or upon the
occurrence of certain triggering events. This Statement is effective for
fiscal years beginning after December 15, 2001. The Company adopted the new
standard on January 1, 2002. At December 31, 2001, the Company had $1,090,000
of goodwill on its balance sheet that was being amortized at a rate of
$99,000 annually.
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, 2001, 2000 and 1999 follows:
-----------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999
-----------------------------------------------------------------------------
Basic shares 3,124 3,220 3,375
Dilutive impact of stock options 82 74 104
-----------------------------------------------------------------------------
Diluted shares 3,206 3,294 3,479
-----------------------------------------------------------------------------
35
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 years ended December 31, 2001 and 2000 is as follows:
--------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
TAX NET- Tax Net-
BEFORE-TAX (EXPENSE) OF-TAX Before-Tax (Expense) of-Tax
AMOUNT OR BENEFIT AMOUNT Amount or Benefit Amount
--------------------------------------------------------------------------------------------------------------------------------
Unrealized gains on securities:
Unrealized holding gains
arising during period $ 4,785 $(1,833) $ 2,952 $ 9,377 $(3,613) $ 5,764
Less: reclassification adjustment for
gains realized in net income 4,262 (1,781) 2,481 3,049 (1,291) 1,758
--------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains 523 (52) 471 6,328 (2,322) 4,006
--------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 523 $ (52) $ 471 $ 6,328 $(2,322) $ 4,006
--------------------------------------------------------------------------------------------------------------------------------
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 $5.7 million and $8.7 million at
December 31, 2001 and 2000, 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, 2001 2000
-----------------------------------------------------------------------------
Federal funds sold (overnight) $204,294 $112,711
Money market funds 32,088 131
-----------------------------------------------------------------------------
Total short-term investments $236,382 $112,842
=============================================================================
The investments above are stated at cost which approximates market value.
36
3. INVESTMENT SECURITIES
The amortized cost and market value of investment securities follows:
-------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(IN THOUSANDS) AT DECEMBER 31, 2001 Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations $ 79,932 $ 1,165 $ (214) $ 80,883
U.S. Government agency obligations 10,142 115 (4) 10,253
-------------------------------------------------------------------------------------------------------------------------
Total 90,074 1,280 (218) 91,136
-------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage Association 22,499 1,025 -- 23,524
Federal Home Loan Mortgage Corporation 231,603 7,062 (31) 238,634
Federal National Mortgage Association 1,346 38 (1) 1,383
Collateralized mortgage obligations 1,452 38 -- 1,490
-------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 256,900 8,163 (32) 265,031
-------------------------------------------------------------------------------------------------------------------------
Total debt securities 346,974 9,443 (250) 356,167
-------------------------------------------------------------------------------------------------------------------------
Equity securities 15,102 3,931 (2,616) 16,417
-------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 362,076 $ 13,374 $ (2,866) $372,584
-------------------------------------------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 10,508
-------------------------------------------------------------------------------------------------------------------------
Total securities available for sale, net 372,584
-------------------------------------------------------------------------------------------------------------------------
Total investment securities, net $372,584
=========================================================================================================================
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
=========================================================================================================================
37
3. INVESTMENT SECURITIES (continued)
During the years ended December 31, 2001, 2000 and 1999, the Company realized
gains and losses on sales of securities available for sale as follows:
---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Realized Realized Realized
Gains Losses Gains Losses Gains Losses
---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 135 $ -- $ 66 $ (328) $ 2 $ (576)
Marketable equity securities 5,160 (1,033) 4,130 (819) 5,099 (571)
---------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) $ 5,295 $(1,033) $ 4,196 $(1,147) $ 5,101 $(1,147)
===========================================================================================================================
Proceeds from sales of debt securities available for sale during 2001, 2000
and 1999 were $20.6 million, $38.7 million and $48.4 million, respectively.
Proceeds from sales of equity securities available for sale during 2001, 2000
and 1999, were $14.2 million, $21.7 million and $24.1 million, respectively.
There were no sales of investment securities held-to-maturity during
2001, 2000 and 1999.
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, 2001 2000
-------------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
-------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity:
Other bonds and obligations:
Maturing within 1 year $ -- $ -- $ 230 $ 230
-------------------------------------------------------------------------------------------------------------------------
Total debt securities held to maturity -- -- 230 230
=========================================================================================================================
Investment securities available for sale:
U.S. Treasury obligations:
Maturing within 1 year 28,993 29,531 81,841 82,036
Maturing after 1 year but within 5 years 50,939 51,352 43,789 44,420
-------------------------------------------------------------------------------------------------------------------------
Total 79,932 80,883 125,630 126,456
-------------------------------------------------------------------------------------------------------------------------
U.S. Government agency obligations:
Maturing within 1 year -- -- 9,000 8,989
Maturing after 1 year but within 5 years 10,000 10,115 -- --
Maturing after 15 years 142 138 147 144
-------------------------------------------------------------------------------------------------------------------------
Total 10,142 10,253 9,147 9,133
-------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Maturing within 1 year 159 160 287 283
Maturing after 1 year but within 5 years 1,162 1,216 2,166 2,209
Maturing after 5 years but within 10 years 88,871 92,482 66,188 67,292
Maturing after 10 years but within 15 years 164,731 169,157 211,830 214,467
Maturing after 15 years 1,977 2,016 2,996 2,962
-------------------------------------------------------------------------------------------------------------------------
Total 256,900 265,031 283,467 287,213
-------------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale 346,974 356,167 418,244 422,802
=========================================================================================================================
Net unrealized gains on debt securities
available for sale 9,193 -- 4,558 --
-------------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale,
net carrying value $356,167 $356,167 $422,802 $422,802
=========================================================================================================================
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.
38
4. TRADING SECURITIES
The amortized cost and market values of trading securities are as follows:
--------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2001 2000
--------------------------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 3,087 $ 3,086 $19,784 $19,791
Investments in mutual funds 2 3 2 3
--------------------------------------------------------------------------------------------
Total trading securities $ 3,089 $ 3,089 $19,786 $19,794
============================================================================================
During the years ended December 31, 2001, 2000 and 1999, the Company realized
gains and losses on sales of trading securities as follows:
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999
----------------------------------------------------------------------------------------------------------------
Realized Realized Realized
Gains Losses Gains Losses Gains Losses
----------------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 32 $ -- $ -- $ (1) $ 4 $(11)
Investments in mutual funds -- -- -- (33) -- --
Marketable equity securities 104 (28) 500 (29) 132 (25)
----------------------------------------------------------------------------------------------------------------
Total realized gains (losses) $136 $(28) $500 $(63) $136 $(36)
================================================================================================================
Proceeds from sales of trading securities during 2001, 2000 and 1999 were
$27.3 million, $10.8 million and $13.8 million, respectively. Unrealized
gains or (losses) included in income in 2001, 2000 and 1999 were $(7)
thousand, $39 thousand and $(21) 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.
39
5. LOANS (continued)
The composition of the Bank's loan portfolio is summarized as follows:
----------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2001 2000
----------------------------------------------------------------------------
Mortgage loans:
Residential:
Conventional:
Fixed rate $ 257,381 $ 230,323
Variable rate 36,383 39,536
FHA and VA 259 471
Commercial 2,641 3,117
Construction 993 683
----------------------------------------------------------------------------
Total mortgage loans 297,657 274,130
Premium on loans 51 105
Deferred mortgage loan origination fees (1,239) (1,284)
----------------------------------------------------------------------------
Mortgage loans, net 296,469 272,951
----------------------------------------------------------------------------
Other loans:
Consumer:
Installment 1,178 1,829
Guaranteed education 4,937 6,266
Other secured 873 1,169
Home equity lines of credit 12,271 12,624
Unsecured 201 224
----------------------------------------------------------------------------
Total consumer loans 19,460 22,112
Commercial 15,088 15,084
----------------------------------------------------------------------------
Total other loans 34,548 37,196
----------------------------------------------------------------------------
Total loans $ 331,017 $ 310,147
============================================================================
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, 2001 follows:
----------------------------------------------------------------------------
(IN THOUSANDS)
----------------------------------------------------------------------------
Balance at December 31, 2000 $ 688
Additions 699
Repayments (435)
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 952
============================================================================
40
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, 2001 2000 1999
-----------------------------------------------------------------------------------
Balance at beginning of year $ 2,594 $ 2,555 $ 2,450
Provision for loan losses 40 60 140
Recoveries of loans previously charged-off 31 3 41
-----------------------------------------------------------------------------------
Total 2,665 2,618 2,631
-----------------------------------------------------------------------------------
Charge-offs:
Mortgage loans -- -- (62)
Other loans (22) (24) (14)
-----------------------------------------------------------------------------------
Balance at end of year $ 2,643 $ 2,594 $ 2,555
===================================================================================
The following table shows the allocation of the allowance for loan losses by
category of loans at December 31, 2001, 2000 and 1999.
-------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans of Loans of Loans
Amount to Total Amount to Total Amount to Total
-------------------------------------------------------------------------------------------------------
Mortgage loans:
Residential $ 960 89% $1,317 87% $1,535 88%
Commercial 8 1 9 1 7 1
Consumer loans 256 6 162 7 215 7
Commercial loans 347 4 324 5 301 4
Unallocated 1,072 -- 782 -- 497 --
-------------------------------------------------------------------------------------------------------
Total $2,643 100% $2,594 100% $2,555 100%
=======================================================================================================
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, 2001 2000 1999
--------------------------------------------------------------------------------------
Total nonaccrual loans $ 644 $ 565 $795
Total real estate acquired through foreclosure -- -- 62
--------------------------------------------------------------------------------------
Total non-performing assets $ 644 $ 565 $857
======================================================================================
Percent of non-performing loans to total loans 0.19% 0.18% 0.24%
Percent of non-performing assets to total assets 0.07% 0.06% 0.09%
The reduction in interest income associated with nonaccrual loans is as
follows:
------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999
------------------------------------------------------------------------------------------------
Interest income that would have been recorded under original terms $ 60 $ 48 $ 64
Interest income actually recorded 37 36 51
------------------------------------------------------------------------------------------------
Reduction in interest income $ 23 $ 12 $ 13
================================================================================================
During 2001, 2000 and 1999 the Company had no impaired loans.
41
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, 2001 2000
----------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to originate residential mortgage loans $17,710 $ 1,920
Unadvanced portions of construction loans 457 421
Unused credit lines, including unused portions of equity lines of credit 37,804 30,918
==========================================================================================================
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.
At December 31, 2001 the Bank also had commitments to purchase
when-issued investment securities in the amount of $12.0 million.
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, 2001 2000 (IN YEARS)
--------------------------------------------------------------------------------------------------
Premises:
Land $ 2,215 $ 1,227 --
Buildings 5,714 3,686 25-45
Building and leasehold improvements 2,200 2,078 2-30
Equipment 4,417 4,080 2-10
--------------------------------------------------------------------------------------------------
14,546 11,071
Less: accumulated depreciation and amortization 7,619 7,139
--------------------------------------------------------------------------------------------------
Total premises and equipment, net $ 6,927 $ 3,932
==================================================================================================
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, 2001, 2000 and 1999 amounted to $391 thousand, $533 thousand and
$521 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, 2001, are as follows:
-----------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS
-----------------------------------------------------------------------------
2002 $229
2003 109
2004 39
2005 33
2006 27
-----------------------------------------------------------------------------
Total $437
=============================================================================
42
10. DEPOSITS
Deposits are summarized as follows:
-----------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2001 2000
-----------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
-----------------------------------------------------------------------------------------------------
Demand and NOW:
NOW accounts $ 53,476 0.66% $ 51,390 0.96%
Demand accounts 28,667 -- 28,562 --
-----------------------------------------------------------------------------------------------------
Total demand and NOW 82,143 0.43 79,952 0.62
-----------------------------------------------------------------------------------------------------
Savings:
Regular savings and special notice accounts 368,631 2.77 317,926 3.44
Money market accounts 15,329 1.99 17,022 2.99
-----------------------------------------------------------------------------------------------------
Total savings 383,960 2.74 334,948 3.42
-----------------------------------------------------------------------------------------------------
Time certificates:
Fixed rate certificates 287,773 4.17 309,245 5.79
Variable rate certificates 95,837 3.05 99,736 7.40
-----------------------------------------------------------------------------------------------------
Total time certificates 383,610 3.89 408,981 6.18
-----------------------------------------------------------------------------------------------------
Deposit acquisition premium, net of amortization (29) -- (256) --
-----------------------------------------------------------------------------------------------------
Total deposits $ 849,684 3.03% $ 823,625 4.52%
=====================================================================================================
The maturity distribution and related rate structure of the Bank's time
certificates at December 31, 2001 follows:
--------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2001
--------------------------------------------------------------------------
Average
Amount Interest Rate
--------------------------------------------------------------------------
Due within 3 months $ 93,472 4.25%
Due within 3 - 6 months 86,318 3.74
Due within 6 - 12 months 104,916 4.05
Due within 1 - 2 years 69,508 3.67
Due within 2 - 3 years 13,368 3.38
Due within 3 - 5 years 15,571 2.86
Thereafter 457 5.18
--------------------------------------------------------------------------
Total $383,610 3.89%
==========================================================================
At December 31, 2001 and 2000, the Bank had individual time certificates of
deposit of $100 thousand or more maturing as follows:
--------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 2001 2000
--------------------------------------------------------------------------
Due within 3 months $20,262 $19,421
Due within 3 - 6 months 19,736 15,616
Due within 6 - 12 months 28,339 24,705
Due within 1 - 2 years 16,525 17,026
Due within 2 - 3 years 3,487 8,038
Due within 3 - 5 years 5,948 3,202
Thereafter -- 284
--------------------------------------------------------------------------
Total $94,297 $88,292
==========================================================================
43
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, 2001 and
2000 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, 2001 2000
-------------------------------------------------------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
-------------------------------------------------------------------------------------------------
Securities held to maturity $ -- $ -- $ 230 $ 230
Securities available for sale 372,584 372,584 442,552 442,552
Trading securities 3,089 3,089 19,794 19,794
-------------------------------------------------------------------------------------------------
Total securities $375,673 $375,673 $462,576 $462,576
=================================================================================================
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, 2001 2000
---------------------------------------------------------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------------------------------------------
Real estate:
Residential:
Variable $ 36,341 $ 36,551 $ 39,668 $ 40,055
Fixed 257,499 260,031 230,178 229,365
Commercial:
Variable 2,415 2,446 2,889 2,922
Fixed 214 209 216 208
Consumer 19,460 19,618 22,112 22,208
Commercial 15,088 15,077 15,084 15,073
---------------------------------------------------------------------------------------------------
Total loans 331,017 333,932 310,147 309,831
Allowance for loan losses (2,643) -- (2,594) --
---------------------------------------------------------------------------------------------------
Net loans $ 328,374 $ 333,932 $ 307,553 $ 309,831
===================================================================================================
44
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, 2001 and 2000. 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, 2001 2000
--------------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
--------------------------------------------------------------------------------------------------------------------------
Demand accounts $ 28,667 $ 28,667 $ 28,562 $ 28,562
NOW accounts 53,476 53,476 51,390 51,390
Regular savings and special notice accounts 368,631 368,631 317,926 317,926
Money market accounts 15,329 15,329 17,022 17,022
Time certificates 383,610 385,344 408,981 409,671
Deposit acquisition premium, net of amortization (29) -- (256) --
--------------------------------------------------------------------------------------------------------------------------
Total deposits 849,684 851,447 823,625 824,571
Escrow deposits of borrowers 1,403 1,403 1,387 1,387
--------------------------------------------------------------------------------------------------------------------------
Total $ 851,087 $ 852,850 $ 825,012 $ 825,958
==========================================================================================================================
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, 2001 and 2000 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.
45
12.INCOME TAXES
Income tax expense (benefit) was allocated as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Current income tax expense:
Federal $ 5,891 $ 5,934 $ 6,134
State 367 356 574
- --------------------------------------------------------------------------------
Total current tax expense 6,258 6,290 6,708
================================================================================
Deferred income tax benefit:
Federal (181) (79) (121)
State (58) (24) (40)
- --------------------------------------------------------------------------------
Total deferred tax benefit (239) (103) (161)
- --------------------------------------------------------------------------------
Total income tax expense $ 6,019 $ 6,187 $ 6,547
================================================================================
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, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Computed "expected" income tax expense at statutory rate $ 5,872 $ 6,054 $ 6,250
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit 201 216 347
Dividends received deduction (59) (75) (79)
Other 5 (8) 29
- ---------------------------------------------------------------------------------------------------
Income tax expense $ 6,019 $ 6,187 $ 6,547
- ---------------------------------------------------------------------------------------------------
Effective income tax rate 35.87% 35.77% 36.66%
===================================================================================================
46
12. INCOME TAXES (continued)
At December 31, 2001 and 2000, the Bank had gross deferred tax assets and
gross deferred tax liabilities as follows:
- ------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000
- ------------------------------------------------------------------------
Deferred tax assets:
Loan losses $ 879 $ 740
Deferred loan fees, net 58 9
Deferred compensation and pension cost 508 512
Depreciation 27 2
Purchase accounting 431 411
Other 38 31
- ------------------------------------------------------------------------
Gross deferred tax asset 1,941 1,705
- ------------------------------------------------------------------------
Deferred tax liabilities:
Valuation of securities 4,065 4,013
Other unrealized securities gains 106 109
Other 45 1
- ------------------------------------------------------------------------
Gross deferred tax liability 4,216 4,123
- ------------------------------------------------------------------------
Net deferred tax liability $2,275 $2,418
========================================================================
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, 2001. The primary sources of
recovery of the gross federal deferred tax asset are federal income taxes paid
in 2001, 2000 and 1999 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, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) Basic Diluted Basic Diluted Basic Diluted
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 10,759 $ 10,759 $ 11,111 $ 11,111 $ 11,311 $ 11,311
Average shares outstanding 3,140,020 3,140,020 3,245,299 3,245,299 3,408,280 3,408,280
Dilutive stock options -- 82,528 -- 73,578 -- 104,321
Unallocated Employee Stock
Ownership Plan ("ESOP") shares
not committed to be released (16,105) (16,105) (24,909) (24,909) (33,657) (33,657)
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 3,123,915 3,206,443 3,220,390 3,293,968 3,374,623 3,478,944
Earnings per share (in dollars) $ 3.44 $ 3.36 $ 3.45 $ 3.37 $ 3.35 $ 3.25
==================================================================================================================================
47
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, 2001.
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, 2001 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1)
- ----------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
TIER I CAPITAL (TO AVERAGE ASSETS):
MASSBANK Corp. (consolidated) $107,342 11.40% $28,251 3.00% N/A --
MASSBANK (the "Bank") 103,158 10.93 28,328 3.00 $ 47,213 5.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 107,342 30.62 14,025 4.00 N/A --
MASSBANK (the "Bank") 103,158 29.47 14,001 4.00 21,001 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 110,757 31.54 28,049 8.00 N/A --
MASSBANK (the "Bank") 106,393 30.40 28,002 8.00 35,002 10.00
=========================================================================================================
(1) This column presents the minimum amounts and ratios that a financial
institution must have to be categorized as well capitalized.
- ----------------------------------------------------------------------------------------------------------
(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 well capitalized.
48
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, 2001, 2000, and 1999, the plan's latest valuation
dates:
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
Actuarial present value of vested benefits $ 5,700 $ 4,787 $ 4,690
Total accumulated benefit obligation 5,730 4,811 4,724
Change in benefit obligation:
Projected benefit obligation at beginning of year $ 6,432 $ 5,906 $ 5,788
Service cost 375 386 440
Interest cost 499 458 375
Actuarial loss (gain) (130) 95 (463)
Benefits paid (167) (413) (234)
- ------------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year $ 7,009 $ 6,432 $ 5,906
============================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 7,785 $ 7,175 $ 6,243
Actual return on plan assets (843) 1,023 1,166
Employer contribution 29 -- --
Benefits paid (167) (413) (234)
- ------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 6,804 $ 7,785 $ 7,175
============================================================================================================
(Deficiency) excess of plan assets over projected benefit obligation $ (205) $ 1,353 $ 1,269
============================================================================================================
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 $ 85 $ 1,654 $ 1,535
Transition asset 126 148 169
Accrued benefit cost (416) (449) (435)
- --------------------------------------------------------------------------------------------------------
(Deficiency) excess of plan assets over projected benefit obligation $(205) $ 1,353 $ 1,269
- --------------------------------------------------------------------------------------------------------
Assumptions used in determining the actuarial present value of the projected
benefit obligation were as follows:
Discount rate 7.00% 7.75% 7.75%
Rate of compensation increase 4.50% 5.00% 4.50%
Assumptions used to develop the net periodic benefit cost data were:
Discount rate 7.75% 7.75% 6.75%
Expected return on plan assets 7.75% 8.00% 8.00%
Rate of compensation increase 5.00% 4.50% 4.00%
Components of net periodic pension (benefit) expense:
Service cost $ 375 $ 386 $ 440
Interest cost 498 458 375
Expected return on plan assets (603) (574) (499)
Transition obligation (21) (21) (21)
Recognized net actuarial gain (253) (236) (82)
- ------------------------------------------------------------------------------------------------------
Net periodic pension (benefit) expense $ (4) $ 13 $ 213
======================================================================================================
49
15. EMPLOYEE BENEFITS (continued)
PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLANS
The Bank's Profit Sharing and Incentive Compensation Bonus Plans provide for
payments to employees under certain circumstances based upon a year-end
measurement of the Company's net income and attainment of individual goals
and objectives by certain key officers. Payments of $158 thousand, $302
thousand and $426 thousand were awarded under the plans in 2001, 2000 and
1999, 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, 2001 and 2000, such outstanding liabilities
totaled $156 thousand and $312 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, 2001, the ESOP held
8,800 unallocated shares and 139,378 shares which have been allocated to
participants. The fair value of the unallocated shares at December 31, 2001
was approximately $315 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 $328 thousand, $289 thousand and $366 thousand for the years ended
December 31, 2001, 2000 and 1999, 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 $82 thousand, $173 thousand and $139 thousand in 2001, 2000 and 1999,
respectively.
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, 2001
the trust held 14,800 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.
STOCK OPTION PLAN
Effective May 28, 1986, the Board of Directors of the Bank adopted a stock
option plan for the benefit of its officers and other employees. In January,
1991, the plan was amended to authorize the grant of options to non-employee
Directors of the Company. All but 5 of the 690,000 shares reserved for
issuance under the plan were issued. On April 19, 1994, shareholders
approved and the Bank adopted the Company's 1994 Stock Incentive Plan. The
total number of shares of common stock that can be issued under this plan is
360,000 shares. Both incentive stock options and non-qualified stock options
may be granted under the plans. As of December 31, 2001, there were
126,510.7 non-qualified stock options and 190,590.0 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.
50
15. EMPLOYEE BENEFITS (continued)
A summary of the status of the Company's fixed stock option plan as of
December 31, 2001, 2000 and 1999, and changes during the years ended on
those dates is presented below:
- -----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
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 346,350.7 $ 24.31 363,317.3 $ 22.74 347,917.3 $ 20.62
Granted 21,750 31.00 36,000 28.50 40,000 37.50
Exercised (46,998) 17.09 (40,550) 10.24 (23,100) 15.17
Forfeited (4,002) 40.87 (12,416.6) 36.54 (1,500) 40.88
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 317,100.7 $ 25.63 346,350.7 $ 24.31 363,317.3 $ 22.74
=============================================================================================================================
Options exercisable at year-end 317,100.7 346,350.7 363,317.3
=============================================================================================================================
The following table summarizes information about fixed stock options outstanding
and exercisable at December 31, 2001:
- ------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2001 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 70,016.7 1.1 YEARS $15.83 70,016.7 $15.83
17.25 to 23.25 93,084 3.0 YEARS 19.19 93,084 19.19
24.56 to 31.00 92,250 6.8 YEARS 29.50 92,250 29.50
37.50 to 44.25 61,750 6.5 YEARS 40.67 61,750 40.67
- ------------------------------------------------------------------------------------------------------------------
$10.75 to 44.25 317,100.7 4.4 YEARS $25.63 317,100.7 $25.63
==================================================================================================================
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 2001.
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 2001, 2000
and 1999:
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Net income As reported $ 10,759 $ 11,111 $ 11,311
Pro forma 10,669 10,967 11,095
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share As reported $ 3.44 $ 3.45 $ 3.35
Pro forma 3.42 3.41 3.29
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share As reported $ 3.36 $ 3.37 $ 3.25
Pro forma 3.33 3.33 3.19
=========================================================================================================
Weighted average fair value $ 6.98 $ 6.69 $ 9.01
Expected life 7.4 years 7.4 years 7.3 years
Risk-free interest rate 4.66% 6.70% 4.80%
Expected volatility 22.5% 22.7% 23.0%
Expected dividend yield 3.1% 4.1% 2.9%
=========================================================================================================
51
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 automatically become part of and trade with
the Company's shares of common stock. Although the Rights are not
exercisable initially, they 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 shall be $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, 2001 2000
- ---------------------------------------------------------------------------------------------------
Assets:
Cash $ 10 $ --
Interest-bearing deposits in banks 4,264 553
Investment in subsidiaries 110,876 108,024
Due from subsidiaries -- 84
Other assets 212 190
- ---------------------------------------------------------------------------------------------------
Total assets $ 115,362 $ 108,851
===================================================================================================
Liabilities:
Employee stock ownership plan liability (Note 15) $ 156 $ 312
Due to subsidiaries 288 --
Other liabilities 14 296
- ---------------------------------------------------------------------------------------------------
Total liabilities 458 608
===================================================================================================
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, 7,494,980 and 7,447,982 shares issued, respectively 7,495 7,448
Additional paid-in capital 62,875 61,674
Retained earnings 99,996 93,165
- ---------------------------------------------------------------------------------------------------
170,366 162,287
Treasury stock at cost, 4,362,289 and 4,300,489 shares, respectively (61,749) (59,704)
Accumulated other comprehensive income (Note 1) 6,443 5,972
Common stock acquired by ESOP (Note 15) (156) (312)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 114,904 108,243
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 115,362 $ 108,851
===================================================================================================
52
17. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------
INCOME:
Dividends received from subsidiaries $ 8,800 $ 8,800 $ 9,200
Interest and dividend income 41 23 23
- ------------------------------------------------------------------------------------------
Total interest and dividend income 8,841 8,823 9,223
NON-INTEREST EXPENSE 123 115 92
- ------------------------------------------------------------------------------------------
Income before income taxes 8,718 8,708 9,131
INCOME TAX BENEFIT 16 23 53
- ------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 8,734 8,731 9,184
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 2,025 2,380 2,127
- ------------------------------------------------------------------------------------------
Net income $10,759 $11,111 $11,311
==========================================================================================
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, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,759 $ 11,111 $ 11,311
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (2,025) (2,380) (2,127)
Increase in current income tax asset, net (17) (116) (17)
Increase in deferred income tax asset, net (5) (4) --
(Decrease) increase in other liabilities (282) (25) 288
Decrease (increase) in amount due from subsidiaries 84 20 (59)
Increase in amount due to subsidiaries 288 -- --
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,802 8,606 9,396
- ------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments to acquire treasury stock (2,045) (5,814) (7,618)
Purchase of company stock for deferred compensation plan 56 366 --
Issuance of common stock under stock option plan 803 415 351
Tax benefit resulting from stock options exercised 33 91 --
Dividends paid on common stock (3,935) (3,829) (3,759)
Tax benefit resulting from dividends paid on unallocated
shares held by the ESOP 7 10 13
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,081) (8,761) (11,013)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,721 (155) (1,617)
Cash and cash equivalents at beginning of year 553 708 2,325
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,274 $ 553 $ 708
======================================================================================================
During the years ended December 31, 2001, 2000 and 1999, the Company made cash
payments for income taxes of $24 thousand, $44 thousand and $16 thousand,
respectively, and no payments for interest.
In addition, the Company made cash payments to the state of Delaware for
franchise taxes in the amount of $37 thousand, $31 thousand and $38 thousand
during the years ended December 31, 2001, 2000 and 1999, respectively.
53
18. FIFTEEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 10,759 $11,111 $11,311 $10,914 $ 10,167 $ 9,427 $ 8,759 $ 8,185
Diluted earnings per share 3.36 3.37 3.25 2.97 2.77 2.58 2.34 2.13
Cash dividends paid per share 1.26 1.18 1/2 1.11 1.02 0.88 1/2 0.69 0.54 3/4 0.45
Book value per share, at year end 36.51 34.25 30.65 31.58 29.06 25.75 24.84 20.09
Return on average assets 1.13% 1.20% 1.20% 1.17% 1.12% 1.08% 1.04% 0.96%
Return on average realized equity(1) 10.25% 10.95% 11.35% 11.08% 11.11% 11.01% 10.81% 10.62%
==============================================================================================================================
(1) Excludes average net unrealized gains or losses on securities available for
sale.
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 6,695 $ 4,677 $ 2,250 $ 725 $ 2,668 $ 4,917 $ 5,521
Diluted earnings per share 1.67 1.19 0.59 0.17 0.50 0.86 0.86
Cash dividends paid per share 0.34 0.26 1/2 0.22 3/4 0.22 0.21 0.19 0.16 1/2
Book value per share, at year end 20.46 18.37 17.54 16.20 15.16 14.21 13.24
Return on average assets 0.79% 0.61% 0.60% 0.23% 0.86% 1.56% 1.69%
Return on average realized equity(1) 8.98% 6.79% 3.39% 1.03% 3.38% 6.20% 6.79%
===============================================================================================================================
(1) Excludes average net unrealized gains or losses on securities available for
sale.
19.QUARTERLY DATA (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
(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 $12,602 $13,517 $14,105 $14,893 $15,429 $15,226 $14,915 $14,710
Interest expense 6,939 8,064 8,476 8,912 9,276 9,079 8,621 8,421
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 5,663 5,453 5,629 5,981 6,153 6,147 6,294 6,289
Provision for loan losses 4 12 12 12 15 15 15 15
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,659 5,441 5,617 5,969 6,138 6,132 6,279 6,274
Non-interest income 1,601 1,489 1,552 1,171 1,438 945 1,293 1,312
Non-interest expense 3,031 2,832 2,991 2,867 3,114 2,894 3,325 3,180
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,229 4,098 4,178 4,273 4,462 4,183 4,247 4,406
Income tax expense 1,535 1,466 1,490 1,528 1,593 1,486 1,530 1,578
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,694 $ 2,632 $ 2,688 $ 2,745 $ 2,869 $ 2,697 $ 2,717 $ 2,828
===================================================================================================================================
Earnings per share (in dollars):(1)
Basic $ 0.86 $ 0.84 $ 0.86 $ 0.88 $ 0.90 $ 0.84 $ 0.84 $ 0.87
Diluted 0.84 0.82 0.84 0.86 0.88 0.82 0.82 0.85
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding:(1)
Basic 3,128 3,119 3,116 3,133 3,173 3,217 3,229 3,263
Diluted 3,208 3,215 3,197 3,206 3,242 3,292 3,305 3,337
===================================================================================================================================
(1) Computation of earnings per share is further described in Note 1.
54
MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA
YEARS ENDED DECEMBER 31, 2001 AND 2000
MASSBANK Corp.'s common stock is currently traded on the Nasdaq Stock Market
under the symbol "MASB." At December 31, 2001 there were 3,147,491 shares
outstanding and 837 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, 2001
- --------------------------------------------------------------------
FOURTH QUARTER $ 36.75 $ 33.85 $ 0.315
THIRD QUARTER 41.00 36.25 0.315
SECOND QUARTER 39.05 32.40 0.315
FIRST QUARTER 33.50 28.875 0.315
- --------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------
Fourth Quarter $ 29.50 $ 27.875 $ 0.30
Third Quarter 29.75 28.0625 0.30
Second Quarter 29.875 27.50 0.30
First Quarter 29.50 27.00 0.285
- --------------------------------------------------------------------
55
MASSBANK BRANCH OFFICES d/b/a
MASSBANK OF READING*
123 Haven Street
Reading, MA 01867
(781) 942-8188
(978) 446-9200
MASSBANK OF CHELMSFORD
291 Chelmsford Street
Chelmsford, MA 01824
(978) 256-3751
17 North Road
Chelmsford, MA 01824
(978) 256-3733
MASSBANK OF DRACUT
45 Broadway Road
Dracut, MA 01826
(978) 441-0040
MASSBANK OF EVERETT
738 Broadway
Everett, MA 02149
(617) 387-5115
MASSBANK OF LOWELL
50 Central Street
Lowell, MA 01852
(978) 446-9200
755 Lakeview Avenue
Lowell, MA 01850
(978) 446-9216
MASSBANK OF MEDFORD
4110 Mystic Valley Parkway
Wellington Circle Plaza
Medford, MA 02155
(781) 395-4899
MASSBANK OF MELROSE
476 Main Street
Melrose, MA 02176
(781) 662-0100
27 Melrose Street
Towers Plaza
Melrose, MA 02176
(781) 662-0165
MASSBANK OF STONEHAM
240 Main Street
Stoneham, MA 02180
(781) 662-0177
MASSBANK OF TEWKSBURY
1800 Main Street
Tewksbury, MA 01876
(978) 851-0300
MASSBANK OF WESTFORD
203 Littleton Road
Westford, MA 01886
(978) 692-3467
MASSBANK OF WILMINGTON
370 Main Street
Wilmington, MA 01887
(978) 658-4000
219 Lowell Street
Lucci's Plaza
Wilmington, MA 01887
(978) 658-5775
*Main Office
56
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 16, 2002 at the
Sheraton Ferncroft Resort
50 Ferncroft Road
Danvers, MA 01923
Trademark
MASSBANK and its logo are registered trademarks of the Company
Form 10-K
Shareholders may obtain without charge a copy of the Company's 2001 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, Inc.
Boston EquiServe Division
Shareholder Services
150 Royall Street
P.O. Box 644
Canton, MA 02021
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' 2001 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
57
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
* 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
Former 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
Retired, 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
Lisa A. DiCicco
Trust Operations Officer
Karen L. Flammia
Assistant Vice President
Melissa J. Flanagan
Information Technology 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
Laura M. O'Connor
Assistant Treasurer
Erik C. Olson
Auditor and Compliance Officer
Joseph P. Orefice
Information Technology Officer
Karen L. O'Rourke
Assistant Treasurer
Mindy S. Peloquin
Assistant Vice President
Joseph D. Regan
Comptroller
Alice B. Sweeney
Assistant Comptroller
Margaret E. White
Assistant Treasurer
Patricia A. Witts
Assistant Treasurer
Michael J. Woods
Assistant Vice President
Stephen A. Yurish
Loan Officer
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
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