-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VF1BZHWX/6ZTshwgKoIe5fHLYkl+wksIVxROS+YZPhaWP0X6qvb/e+Jnr/Iej510 5GsGUge96rF7BVVKek1VSQ== 0000799166-98-000005.txt : 19980817 0000799166-98-000005.hdr.sgml : 19980817 ACCESSION NUMBER: 0000799166-98-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASSBANK CORP CENTRAL INDEX KEY: 0000799166 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042930382 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15137 FILM NUMBER: 98687777 BUSINESS ADDRESS: STREET 1: 123 HAVEN STREET CITY: READING STATE: MA ZIP: 01867 BUSINESS PHONE: 6179428192 MAIL ADDRESS: STREET 1: 123 HAVEN STREET CITY: READING STATE: PA ZIP: 01867 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________to____________ Commission File Number 0-15137 MASSBANK Corp. (Exact name of registrant as specified in its charter) Delaware 04-2930382 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 123 HAVEN STREET Reading, Massachusetts 01867 (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (781) 662-0100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date is: Class: Common stock $1.00 per share. Outstanding at July 31, 1998: 3,600,310 shares. MASSBANK CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page ITEM 1. Financial Statements Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 3 Consolidated Statements of Income (unaudited) for the three months ended June 30, 1998 and 1997 4 and for the six months ended June 30, 1998 and 1997 5 Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 1998 (unaudited) and the year ended December 31, 1997 6 - 7 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1998 and 1997 8 - 9 Condensed Notes to the Consolidated Financial Statements 10 - 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 32 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 33 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 34 ITEM 2. Changes in Securities 34 ITEM 3. Defaults Upon Senior Securities 34 ITEM 4. Submission of Matters to a Vote of Security Holders 34 ITEM 5. Other Information 34 ITEM 6. Exhibits and Reports on Form 8-K 34 Signature Page 35 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share data)
June 30, December 31, 1998 1997 ____ ____ (unaudited) Assets: Cash and due from banks $ 7,065 $ 6,808 Short-term investments (Note 3) 160,486 109,755 ________________________________________________________________________________ Total cash and cash equivalents 167,551 116,563 Term federal funds sold 10,000 20,000 Interest-bearing deposits in banks 2,596 2,083 Securities held to maturity, at amortized cost (market value of $363 in 1998 and $372 in 1997) 363 372 Securities available for sale, at market value (amortized cost of $427,988 in 1998 and $466,749 in 1997) 445,280 482,224 Trading securities, at market value 4,985 21,260 Loans: (Note 4) Mortgage loans 265,899 248,798 Other loans 22,022 23,505 Less: allowance for loan losses (2,405) (2,334) ________________________________________________________________________________ Net loans 285,516 269,969 Premises and equipment 4,233 4,369 Real estate acquired through foreclosure 71 -- Accrued interest receivable 5,351 5,395 Goodwill 1,437 1,487 Accrued income tax asset, net 569 -- Other assets 1,720 1,681 ________________________________________________________________________________ Total assets $929,672 $925,403 Liabilities and Stockholders' Equity: Deposits $808,706 $809,850 Escrow deposits of borrowers 1,334 1,502 Employee stock ownership plan liability 781 781 Accrued income taxes payable -- 1,240 Deferred income taxes payable 5,629 4,927 Other liabilities 3,854 3,324 ________________________________________________________________________________ Total liabilities 820,304 821,624 Stockholders' Equity: 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, 7,358,616 and 7,336,800 shares issued, respectively 7,359 7,337 Additional paid-in capital 59,363 58,737 Retained earnings 74,760 70,984 ________________________________________________________________________________ 141,482 137,058 Accumulated other comprehensive income: Net unrealized gains on securities available for sale, net of tax effect 10,236 9,071 Treasury stock at cost, 3,766,022 shares (41,569) (41,569) Common stock acquired by ESOP ( 781) ( 781) ________________________________________________________________________________ Total stockholders' equity 109,368 103,779 ________________________________________________________________________________ Total liabilities and stockholders' equity $929,672 $925,403 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended June 30, (In thousands except share data) 1998 1997 ______________________________________________________________________________ Interest and dividend income: Mortgage Loans $ 4,774 $ 4,320 Other loans 511 560 Securities available for sale: Mortgage-backed securities 5,293 5,647 Other securities 2,167 2,664 Trading securities 157 241 Federal funds sold 1,749 1,223 Other investments 374 362 ______________________________________________________________________________ Total interest and dividend income 15,025 15,017 ______________________________________________________________________________ Interest expense: Deposits 8,562 8,555 ______________________________________________________________________________ Total interest expense 8,562 8,555 ______________________________________________________________________________ Net interest income 6,463 6,462 Provision for loan losses 45 52 ______________________________________________________________________________ Net interest income after provision for loan losses 6,418 6,410 ______________________________________________________________________________ Non-interest income: Deposit account service fees 210 226 Gains on securities, net 616 610 Other 275 300 ______________________________________________________________________________ Total non-interest income 1,101 1,136 ______________________________________________________________________________ Non-interest expense: Salaries and employee benefits 1,874 1,955 Occupancy and equipment 472 516 Data processing 123 156 Professional services 119 90 Merger and acquisition related expense -- 100 Advertising and marketing 54 36 Amortization of intangibles 68 57 Contributions 6 644 Other 403 370 ______________________________________________________________________________ Total non-interest expense 3,119 3,924 ______________________________________________________________________________ Income before income taxes 4,400 3,622 Income tax expense 1,694 1,173 ______________________________________________________________________________ Net income $ 2,706 $ 2,449 ______________________________________________________________________________ Weighted average common shares outstanding: Basic 3,546,194 3,528,733 Diluted 3,708,701 3,652,569 Earnings per share (in dollars): Basic $ 0.76 $ 0.69 Diluted 0.73 0.67 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Six months ended June 30, (In thousands except share data) 1998 1997 _______________________________________________________________________________ Interest and dividend income: Mortgage Loans $ 9,424 $ 8,557 Other loans 1,036 1,120 Securities available for sale: Mortgage-backed securities 10,854 11,012 Other securities 4,355 5,346 Trading securities 453 336 Federal funds sold 3,252 2,705 Other investments 744 701 _______________________________________________________________________________ Total interest and dividend income 30,118 29,777 _______________________________________________________________________________ Interest expense: Deposits 17,083 16,904 _______________________________________________________________________________ Total interest expense 17,083 16,904 _______________________________________________________________________________ Net interest income 13,035 12,873 Provision for loan losses 90 120 _______________________________________________________________________________ Net interest income after provision for loan losses 12,945 12,753 _______________________________________________________________________________ Non-interest income: Deposit account service fees 421 448 Gains on securities, net 1,428 1,078 Other 498 504 _______________________________________________________________________________ Total non-interest income 2,347 2,030 _______________________________________________________________________________ Non-interest expense: Salaries and employee benefits 3,847 3,824 Occupancy and equipment 1,027 1,019 Data processing 253 301 Professional services 240 227 Merger and acquisition related expense -- 140 Advertising and marketing 97 92 Amortization of intangibles 137 115 Contributions 7 656 Other 767 745 _______________________________________________________________________________ Total non-interest expense 6,375 7,119 _______________________________________________________________________________ Income before income taxes 8,917 7,664 Income tax expense 3,377 2,742 _______________________________________________________________________________ Net income 5,540 $ 4,922 _______________________________________________________________________________ Weighted average common shares outstanding: Basic 3,540,456 3,529,254 Diluted 3,702,676 3,649,732 Earnings per share (in dollars): Basic $ 1.56 $ 1.39 Diluted 1.50 1.35 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Six Months Ended June 30, 1998 (unaudited) (In thousands except share data)
ACCUMULATED COMMON ADDITIONAL OTHER STOCK COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL ________ __________ _________ __________ __________ _________ ________ Balance at December 31, 1997 $7,337 $58,737 $70,984 $(41,569) $9,071 $(781) $103,779 Net Income -- -- 5 ,540 -- -- -- 5,540 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 5) -- -- -- -- 1,165 -- 1,165 _____ Comprehensive income 6,705 Cash dividends declared and paid ($0.50 per share) -- -- (1,771) -- -- -- (1,771) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 7 -- -- -- 7 Amortization of ESOP shares committed to be released -- 139 -- -- -- -- 139 Exercise of stock options and related tax benefits 22 487 -- -- -- -- 509 ___________________________________________________________________________________________________________________________ Balance at June 30, 1998 $7,359 $59,363 $74,760 $(41,569) $10,236 $(781) $109,368 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Year Ended December 31, 1997 (unaudited) (In thousands except share data)
ACCUMULATED COMMON ADDITIONAL OTHER STOCK COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL ________ __________ _________ __________ __________ _________ ________ Balance at December 31, 1996 $5,476 $57,858 $65,756 $(39,904) $ 4,001 $(937) $ 92,250 Net income -- -- 10,167 -- -- -- 10,167 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 5) -- -- -- -- 5,070 -- 5,070 ______ Comprehensive income 15,237 Cash dividends declared and paid ($0.885 per share) -- -- (3,124) -- -- -- (3,124) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 15 -- -- -- 15 Net decrease in liability to ESOP -- -- -- -- -- 156 156 Amortization of ESOP shares committed to be released -- 184 -- -- -- -- 184 Purchase of treasury stock -- -- -- (1,665) -- -- (1,665) Exercise of stock options and related tax benefits 31 695 -- -- -- -- 726 Transfer resulting from four-for-three stock split 1,830 -- (1,830) -- -- -- -- __________________________________________________________________________________________________________________________ Balance at December 31, 1997 $7,337 $58,737 $70,984 $(41,569) $9,071 $(781) $103,779 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, 1998 1997 ____ ____ (In thousands) Cash flows from operating activities: Net income $ 5,540 $ 4,922 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 453 397 Loan interest capitalized (40) -- Amortization of ESOP shares committed to be released 139 -- Charitable contribution of appreciated securities -- 622 Decrease (increase) in accrued interest receivable 44 (117) Increase in other liabilities 562 648 Decrease in current income taxes payable (1,809) (400) Accretion of discounts on securities, net of amortization of premiums (596) (554) Net trading securities activity 17,424 (8,549) Gains on securities available for sale (1,389) (1,016) Gains on trading securities (38) (62) Increase in deferred mortgage loan origination fees, net of amortization 130 80 Deferred income tax expense (benefit) 49 (67) Increase in other assets (11) (148) Loans originated for sale (129) (200) Loans sold 129 200 Provision for loan losses 90 120 Gains on sales of real estate acquired through foreclosure (3) (15) Increase in escrow deposits of borrowers (168) 106 __________________________________________________________________________________________ Net cash provided by (used in) operating activities 20,377 (4,033) __________________________________________________________________________________________ Cash flows from investing activities: Purchases of term federal funds (10,000) (5,000) Proceeds from maturities of term federal funds 20,000 5,000 Increase in interest bearing bank deposits (513) (260) Proceeds from sales of investment securities available for sale 10,847 30,157 Proceeds from maturities of investment securities available for sale 25,750 31,000 Purchases of investment securities available for sale (29,957) (46,728) Purchases of investment securities held to maturity -- (230) Purchases of mortgage-backed securities -- (38,638) Principal repayments of mortgage-backed securities 32,963 18,835 Principal repayments of securities held to maturity 9 9 Principal repayments of securities available for sale 1 -- Loans originated (49,545) (28,257) Loan principal payments received 33,514 21,557 Purchases of premises & equipment (154) (398) Proceeds from sales of real estate acquired through foreclosure 191 520 Net advances on real estate acquired through foreclosure (9) (4) __________________________________________________________________________________________ Net cash provided by (used in) investing activities 33,097 (12,437) __________________________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited)
Six Months Ended June 30, 1998 1997 ____ ____ (In thousands) Cash flows from financing activities: Net (decrease) increase in deposits (1,231) 10,039 Payments to acquire treasury stock -- (656) Issuance of common stock under stock option plan 373 199 Tax benefit resulting from stock options exercised 136 72 Dividends paid on common stock (1,771) (1,431) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 7 7 __________________________________________________________________________________________ Net cash (used in) provided by financing activities (2,486) 8,230 __________________________________________________________________________________________ Net increase (decrease) in cash and cash equivalents 50,988 (8,240) Cash and cash equivalents at beginning of period 116,563 140,922 _________________________________________________________________________________________ Cash and cash equivalents at end of period $167,551 $132,682 _________________________________________________________________________________________ Supplemental cash flow disclosures: Cash transactions: Cash paid during the period for interest $17,091 $16,887 Cash paid during the period for taxes, net of refunds 4,669 3,130 Purchases of securities incomplete (not settled) at beginning of period which settled during the period 32 -- Sales of securities incomplete (not settled) at beginning of period which settled during the period -- 30 Non-cash transactions: SFAS 115: Increase (decrease) in accumulated other comprehensive income 1,165 (949) Increase in deferred tax liabilities 653 684 Transfers from loans to real estate acquired through foreclosure 250 322 Purchases of securities incomplete (not settled) at end of period -- 1,994 Transfers from securities available for sale to trading securities 1,111 -- Transfers from premises and equipment to other assets 9 -- Cost of donated securities 2 -- _________________________________________________________________________________________ See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation The financial condition and results of operations of MASSBANK Corp. (the "Company") essentially reflect the operations of its subsidiary, MASSBANK (the "Bank"). All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles, and in the opinion of management, include all adjustments of a normal recurring nature necessary for the fair presentation of the financial condition of the Company as of June 30, 1998 and December 31, 1997, and its operating results for the three and six months ended June 30, 1998 and 1997. The results of operations for any interim period are not necessarily indicative of the results to be expected for the entire year. Certain amounts in the prior year's consolidated financial statements have been reclassified to permit comparison with the current fiscal year. The Company's per share information reported for the prior year has been restated to reflect the four-for-three stock split of the Company's common stock which was effected in the form of a stock dividend on September 15, 1997. The information in this report should be read in conjunction with the financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 1997. (2) 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. (3) Short-Term Investments Short-term investments consist of the following:
________________________________________________________________________________ At At (In thousands) June 30, 1998 December 31, 1997 ________________________________________________________________________________ Federal funds sold (overnight) $136,315 $ 85,241 Money market funds 24,171 24,514 ________________________________________________________________________________ Total short-term investments $160,486 $109,755 ________________________________________________________________________________ The investments above are stated at cost which approximates market value and have original maturities of 90 days or less.
(4) Commitments At June 30, 1998, the Company had outstanding commitments to originate mortgage loans and to advance funds for construction loans amounting to $7,607,000 and commitments under existing home equity lines of credit and other loans of approximately $23,963,000 which are not reflected on the consolidated balance sheet. In addition, as of June 30, 1998, the Company had a performance standby letter of credit conveyed to others in the amount of $781,000 which is also not reflected on the consolidated balance sheet. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) (5) Reporting Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting and displaying comprehensive income, which is defined as all changes to equity except investments by, and distributions to, shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. The Company's other comprehensive income and related tax effect for the six months ended June 30, 1998 and the year ended December 31, 1997 is as follows:
For the Six Months Ended June 30, 1998 ____________________________________________________________________________________ Tax Before-Tax (Expense) Net-of-Tax (In thousands) Amount or Benefit Amount ______ __________ ______ Unrealized gains on securities: Unrealized holding gains arising during period $3,207 $(1,238) $1,969 Less: reclassification adjustment for gains realized in net income (1,389) 585 (804) ______ ________ ______ Net unrealized gains 1,818 (653) 1,165 ______ ________ ______ Other comprehensive income $1,818 $ (653) $1,165 ______ ________ _____
For the Year Ended December 31, 1997 ____________________________________________________________________________________ Tax Before-Tax (Expense) Net-of-Tax (In thousands) Amount or Benefit Amount ______ __________ ______ Unrealized gains on securities: Unrealized holding gains arising during period $10,411 $(4,290) $6,121 Less: reclassification adjustment for gains realized in net income (1,831) 780 (1,051) ______ ________ ______ Net unrealized gains 8,580 (3,510) 5,070 ______ ________ ______ Other comprehensive income $8,580 $(3,510) $5,070 ______ ________ ______
MASSBANK CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1998 The discussions set forth below and elsewhere herein contain certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. A number of important factors could cause actual results to differ materially from those in the forward- looking statements. Those factors include fluctuations in interest rates, inflation, government regulations and economic conditions and competition in the geographic and business areas in which the Company conducts its operations. Results of Operations for the three months ended June 30, 1998 GENERAL For the quarter ended June 30, 1998, MASSBANK Corp. reported consolidated net income of $2,706,000 or $0.76 in basic earnings per share compared to net income of $2,449,000, or $0.69 in basic earnings per share in the second quarter of 1997. This represents an increase of 10.5% in net income and a 10.1% increase in basic earnings per share. Diluted earnings per share increased to $0.73 per share from $0.67 per share in last year's comparable period, representing an increase of 9.0%. The current and prior year per share amounts reflect the four-for-three stock split of the Company's common stock which was effected in the form of a stock dividend on September 15, 1997. The Company's improved earnings for the three months ended June 30, 1998 resulted primarily from a decrease in non-interest expense. Non-interest expense for the recent quarter decreased by $805,000 or 20.5% to $3,119,000 from $3,924,000 for the same quarter last year. This reduction was essentially due to non-recurring expenses that the Bank incurred in the second quarter 1997 in conjunction with the establishment and endowment of a tax exempt private foundation; its acquisition of the Glendale Co-operative Bank; and a computer conversion. The expense reduction is partially offset by an increase in income tax expense. This is essentially due to a non-recurring tax benefit of $260,000 that the Bank received in the 1997 second quarter as a result of having donated appreciated securities to establish and endow the MASSBANK Charitable Foundation.
AVERAGE BALANCE SHEETS Three Months Ended June 30, 1998 1997 ______________ ______________ Interest Average Interest Average Average Income Yield/ Average Income Yield/ (In thousands) Balance Expense Rate Balance Expense Rate (4) (4) (4) (4) __________________________________________________________________________________________ Assets: Earning assets: Federal funds sold $128,599 $ 1,749 5.46% $ 89,153 $ 1,223 5.50% Short-term investments (2) 27,177 369 5.44 26,051 358 5.51 Investment securities 150,873 2,203 5.84 171,062 2,706 6.33 Mortgage-backed securities 307,654 5,293 6.88 321,987 5,647 7.02 Trading securities 11,472 157 5.48 16,622 241 5.80 Mortgage loans (1) 260,478 4,774 7.33 229,663 4,320 7.52 Other loans (1) 22,303 511 9.19 24,600 560 9.11 __________________________________________________ ________________ Total earning assets 908,556 $15,056 6.62% 879,138 $15,055 6.85% Allowance for loan losses (2,367) (2,222) __________________________________________________________________________________________ Total earning assets less allowance for loan losses 906,189 876,916 Other assets 19,951 18,948 __________________________________________________________________________________________ Total assets $926,140 $895,864 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued) Three Months Ended June 30, 1998 1997 ______________ ______________ Interest Average Interest Average Average Income Yield/ Average Income Yield/ (In thousands) Balance Expense Rate Balance Expense Rate (4) (4) (4) (4) __________________________________________________________________________________________ Liabilities: Deposits: Demand and NOW $ 69,516 $ 140 0.81% $ 64,630 $ 132 0.82% Savings 351,040 3,000 3.43 351,946 3,044 3.47 Time certificates of deposit 387,536 5,422 5.61 380,134 5,379 5.68 __________________________________________________ ________________ Total deposits 808,092 8,562 4.25 796,710 8,555 4.31 Other liabilities 9,790 6,193 __________________________________________________________________________________________ Total liabilities 817,882 802,903 Stockholders' equity 108,258 92,961 __________________________________________________________________________________________ Total liabilities and stockholders' equity $926,140 $895,864 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 6,494 6,500 Less adjustment of tax-exempt interest income 31 38 __________________________________________________________________________________________ Net interest income $ 6,463 $ 6,462 __________________________________________________________________________________________ Interest rate spread 2.37% 2.54% __________________________________________________________________________________________ Net interest margin (3) 2.86% 2.96% __________________________________________________________________________________________ (1) Loans on non-accrual 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.
Net Interest Income Net interest income was $6.463 million for the second quarter of 1998 compared to $6.462 million for the same period in 1997. The net interest income for the recent quarter reflects the positive effect of earning asset growth offset by the negative effect of a lower net interest margin. The Company's average earning assets increased by $29.4 million or 3.3% to $908.5 million in the second quarter of 1998, up from $879.1 million in the second quarter of the prior year. The Company's net interest margin was 2.86% in the recent quarter, down from 2.96% for the same quarter last year. Interest and Dividend Income Interest and dividend income on a fully taxable equivalent basis for the three months ended June 30, 1998, remained unchanged at $15.1 million when compared to the three months ended June 30, 1997. The average total earning assets of the Company increased by $29.4 million, as noted above. The increase in interest income resulting from the growth in earning assets in the recent quarter, however, was offset by a decline in yield on earning assets. As reflected in the table on page 13, the combination of yield declines in mortgage loans, investment securities, federal funds sold and short-term investments, partially offset by a modest increase in yield on other (consumer) loans, resulted in an overall decline in yield on the Company's total average earning assets of 23 basis points. The weighted average yield on earning assets for the second quarter of 1998 was 6.62% compared to 6.85% in the same quarter of the prior year. This decline in yield reflects a decrease in market interest rates combined with a significant flattening of the yield curve. Interest Expense Total interest expense for the three months ended June 30, 1998 was $8.5 million, remaining essentially unchanged from the same quarter last year. The Company's average deposits, as shown in the table on page 14, increased $11.4 million or 1.4% to $808.1 million in the second quarter of 1998, up from $796.7 million in the second quarter of 1997. The increase in interest expense resulting from the growth in deposits in the recent quarter was offset by a decrease in average cost of funds. The Company's average cost of funds for the three months ended June 30, 1998 was 4.25%, down from 4.31% for the comparable period in 1997. Provision for Loan Losses The allowance for loan losses is increased by provisions charged to operations based on management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may affect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the information available in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. The provision for loan losses for the second quarter of 1998 was $45,000 versus $52,000 for the comparable period in 1997. This decrease was essentially due to lower net loan charge-offs. Loan charge-offs net of recoveries equalled $17,000 in the recent quarter, down from $27,000 for the same quarter last year. Provision for Loan Losses (continued) The reserve coverage as a percentage of the Bank's non-performing assets declined slightly in the recent quarter. At June 30, 1998, MASSBANK's allowance for loan losses totalled $2.405 million representing 131.9% of non-performing assets compared to $2.235 million representing 149.8% of non-performing assets at the end of the second quarter in 1997. Non-Interest Income Non-interest income consists of deposit account service fees, net gains on securities and other non-interest income. Non-interest income for the second quarter of 1998 was $1,101,000, down slightly from $1,136,000, for the comparable period in 1997. The Company continues to benefit from the stock market's favorable performance. The Company's equity portfolio has yielded substantial realized and unrealized gains. Net unrealized gains in the equity securities portfolio totalled $9.8 million at June 30, 1998. The Company reported net securities gains of $616,000 for the recent quarter compared to $610,000 for the same quarter last year. Most of these gains were from the sale of equity securities. Non-Interest Expense Non-interest expenses decreased by $805,000, or 20.5% to $3,119,000 in the second quarter of 1998 from $3,924,000 in the second quarter of 1997. Salaries and employee benefits, the largest component of non-interest expense, decreased by $81,000 or 4.1% from $1,955,000 in the second quarter of 1997 to $1,874,000 in the recent quarter. This reduction is due largely to a $70,000 decrease in the Company's directors deferred compensation plan expense. The expense related to this plan is tied closely to the market value of the Company's common stock. The increase in the market value of the Company's common stock during the second quarter 1997, from $41.00 per share at March 31, 1997 to $47.75 per share at June 30, 1997, significantly increased the expense for the plan. Conversely, the price of the Company's common stock in the recent quarter declined from $50.125 per share at March 31, 1998 to $49.00 per share at June 30, 1998, decreasing the expense for the plan. Occupancy and equipment expenses decreased from $516,000 in the second quarter of 1997 to $472,000 in the second quarter of 1998. This decrease is due essentially to real estate tax abatements that the Bank received in the recent quarter. These abatements were for both current and prior years and totalled approximately $54,000. There were no merger and acquisition related expenses incurred in the second quarter of 1998. In the second quarter of last year, the Bank incurred merger and acquisition related expenses of $100,000 in connection with its acquisition of the Glendale Co-operative Bank. Bank charitable contributions for the recent quarter were $6,000 compared to $644,000 for the same quarter last year. During the 1997 second quarter, the Company established and endowed a tax exempt private foundation -- the "MASSBANK Charitable Foundation" -- for the purpose of making grants in future years to benefit the Bank's local communities. MASSBANK contributed appreciated securities to the Foundation valued at $622,000 which is included in contributions expense for the second quarter of 1997. Non-Interest Expense (continued) All other expenses combined, consisting of data processing, professional services, advertising and marketing, amortization of intangibles, and other expenses, increased by $58,000 or 8.2%, from $709,000 for the three months ended June 30, 1997 to $767,000 for the three months ended June 30, 1998. Income Tax Expense The Company, the Bank and its subsidiaries file a consolidated federal income tax return. The Parent Company is subject to a State of Delaware Franchise Tax and a State of Massachusetts Bank Excise Tax and the Bank's subsidiaries are subject to a State of Massachusetts Corporate Excise Tax. The provision for federal and state income taxes increased to $1,694,000 for the three months ended June 30, 1998 from $1,173,000 for the same period in 1997. The Company's combined effective income tax rate for the second quarter of 1998 is 38.5% compared to 32.4% for the same quarter a year ago. The increase in effective income tax rate is essentially due to a non- recurring tax benefit of approximately $260,000 that the Bank received last year as a result of having contributed appreciated securities to the MASSBANK Charitable Foundation, as previously noted. Results of Operations for the six months ended June 30, 1998 General For the six months ended June 30, 1998, the Company reported consolidated net income of $5,540,000 or $1.56 in basic earnings per share ($1.50 per share on a diluted basis) compared to net income of $4,922,000 or $1.39 in basic earnings per share ($1.35 per share on a diluted basis) earned in the first half of 1997. The Company's positive financial performance in the first six months of 1998 reflects a decrease in non-interest expense of $744,000 or 10.5%. Non- interest expense for the six months ended June 30, 1998 were $6,375,000 down from $7,119,000 for the comparable period in 1997. Additionally, the favorable earnings results for the first half of 1998 reflect an improvement in net interest income due to growth in the Company's average earning assets. Average earning assets for the first half of 1998 increased to $907.8 million, up $30.7 million from the corresponding period in 1997. Net interest income for the six months ended June 30, 1998 was $13,035,000, up $162,000 when compared to the same period a year ago. The Company's earning results for the six months ended June 30, 1998 were also impacted by the following factors: a) Non-interest income increased by $317,000 to $2,347,000 in the first six months of 1998 due to increased securities gains. b) The Bank's provision for loan losses for the six months ended June 30, 1998 decreased by 25% to $90,000 from $120,000 for the comparable period in 1997. c) Income tax expense increased in the first half of 1998 compared to the same period in 1997. This was partly due to a non-recurring tax benefit of approximately $260,000 that the Bank received in 1997 as a result of having contributed appreciated securities to establish and endow the MASSBANK Charitable Foundation, as previously noted.
AVERAGE BALANCE SHEETS Six Months Ended June 30, 1998 1997 ______________ ______________ Interest Average Interest Average Average Income Yield/ Average Income Yield/ (In thousands) Balance Expense Rate Balance Expense Rate (4) (4) (4) (4) __________________________________________________________________________________________ Assets: Earning assets: Federal funds sold $119,575 $ 3,252 5.48% $100,999 $ 2,705 5.40% Short-term investments (2) 27,092 734 5.46 25,860 694 5.41 Investment securities 150,390 4,427 5.88 170,840 5,430 6.36 Mortgage-backed securities 316,130 10,854 6.87 315,277 11,012 6.99 Trading securities 16,684 453 5.42 11,577 336 5.85 Mortgage loans (1) 255,181 9,424 7.39 227,667 8,557 7.52 Other loans (1) 22,777 1,036 9.17 24,915 1,120 8.99 __________________________________________________ ________________ Total earning assets 907,829 $30,180 6.65% 877,135 $29,854 6.81% Allowance for loan losses (2,353) (2,211) __________________________________________________________________________________________ Total earning assets less allowance for loan losses 905,476 874,924 Other assets 19,500 18,380 __________________________________________________________________________________________ Total assets $924,976 $893,304 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued) Six Months Ended June 30, 1998 1997 ______________ ______________ Interest Average Interest Average Average Income Yield/ Average Income Yield/ (In thousands) Balance Expense Rate Balance Expense Rate (4) (4) (4) (4) __________________________________________________________________________________________ Liabilities: Deposits: Demand and NOW $ 68,290 $ 273 0.81% $ 63,998 $ 260 0.82% Savings 352,271 5,982 3.42 354,507 6,097 3.47 Time certificates of deposit 387,191 10,828 5.64 375,677 10,547 5.66 __________________________________________________ ________________ Total deposits 807,752 17,083 4.26 794,182 16,904 4.29 Other liabilities 10,126 5,988 __________________________________________________________________________________________ Total liabilities 817,878 800,170 Stockholders' equity 107,098 93,134 __________________________________________________________________________________________ Total liabilities and stockholders' equity $924,976 $893,304 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 13,097 12,950 Less adjustment of tax-exempt interest income 62 77 __________________________________________________________________________________________ Net interest income $13,035 $12,873 __________________________________________________________________________________________ Interest rate spread 2.39% 2.52% __________________________________________________________________________________________ Net interest margin (3) 2.89% 2.95% __________________________________________________________________________________________ (1) Loans on non-accrual 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.
Net Interest Income Net interest income was $13.035 million for the six months ended June 30, 1998, up $162,000 from $12.873 million for the same period in 1997. This increase resulted from the growth in the Company's interest-earning assets partially offset by a decrease in net interest margin. The Company's net interest margin for the six months ended June 30, 1998 and 1997 was 2.89% and 2.95%, respectively. The Company's interest rate spread decreased to 2.39% for the first six months of 1998, from 2.52% in the first six months of last year. The yield on the Company's average earning assets in the first half of 1998 decreased by 16 basis points to 6.65% from 6.81% in the corresponding period of 1997. This decrease was partially offset by a decrease of 3 basis points in the Company's average cost of funds, from 4.29% for the six months ended June 30, 1997 to 4.26% for the same period this year. Provision for Loan Losses The provision for loan losses for the first half of 1998 was $90,000 versus $120,000 for the comparable period in 1997. This decrease was due to the lower level of net loan charge-offs which the Bank has experienced in recent quarters. For the six months ended June 30, 1998, loan charge-offs net of recoveries declined to $19,000 from $122,000 for the same period last year. Non-Interest Income Non-interest income consists of deposit account service fees, net gains on securities and other non-interest income. Non-interest income for the first six months of 1998 totalled $2,347,000, up $317,000 or approximately 16% from $2,030,000 reported in the corresponding period last year. This increase is due to net gains on securities of $1,428,000 reported for the six months ended June 30, 1998 versus $1,078,000 reported for the same period last year. The Company continues to benefit from the stock market's strong performance. Non-Interest Expense Non-interest expenses decreased by $744,000, or 10.5% to $6,375,000 in the first six months of 1998 from $7,119,000 in the first six months of 1997. Salaries and employee benefits, the largest component of non-interest expense, increased $23,000 or less than 1% from $3,824,000 in the first half of 1997 to $3,847,000 in the first half of this year. This increase is due principally to salary increases and an increase in the Company's employee stock ownership plan (ESOP) expense. These were partially offset by a $66,000 reduction in the Company's directors deferred compensation plan expense. Occupancy and equipment expenses were $1,027,000 in the first half of 1998 compared to $1,019,000 for the same period in 1997. As previously noted, occupancy and equipment expenses for the first six months of 1998 reflect the real estate abatements of approximately $54,000 that the Bank received in the recent quarter, otherwise the expense increase in 1998 would have been higher. There were no merger and acquisition related expenses incurred in the first six months of 1998. In the first six months of last year, the Bank incurred merger and acquisition related expenses of $140,000 in connection with its acquisition of the Glendale Co-operative Bank. Non-Interest Expense (continued) Bank charitable contributions for the first half of 1998 were $7,000 compared to $656,000 for the same period last year. During the first half of 1997, the Company established and endowed a tax exempt private foundation -- the "MASSBANK Charitable Foundation" -- for the purpose of making grants in future years to benefit the Bank's local communities. MASSBANK contributed appreciated securities to the Foundation valued at $622,000 which is included in contributions expense for 1997. All other expenses combined, consisting of data processing, professional services, advertising and marketing, amortization of intangibles, and other expenses, increased by $14,000 or less than 1.0%, from $1,480,000 for the six months ended June 30, 1997 to $1,494,000 for the six months ended June 30, 1998. Income Tax Expense The provision for federal and state income taxes increased to $3,377,000 for the six months ended June 30, 1998 from $2,742,000 for the same period in 1997. The Company's combined effective income tax rate for the first half of 1998 is 37.9% compared to 35.8% for the same period a year ago. The increase in effective income tax rate is essentially due to a non- recurring tax benefit of approximately $260,000 that the Bank received last year as a result of having contributed appreciated securities to the MASSBANK Charitable Foundation, as previously noted. Partially offsetting this increase is a state income tax refund, net of federal tax, of approximately $44,000 that the Bank received in the first quarter of 1998, representing the final settlement of a state income tax issue for prior years. Financial Condition Total assets at June 30, 1998 were $929.7 million, an increase of $4.3 million from $925.4 million at December 31, 1997. The Company's securities available for sale and trading securities portfolios in the first half of 1998 decreased by $36.9 million and $16.3 million, respectively. Term federal funds sold also decreased from $20.0 million to $10.0 million. These decreases were offset by increases in short- term investments of $50.7 million and an increase in the Bank's loan portfolio of $15.6 million. Since short-term interest rates have been almost as high as longer term rates in recent quarters, the Bank has opted to reinvest funds from payments, sales or maturities of investment securities in (overnight) federal funds sold. MASSBANK's loan portfolio increased to $287.9 million at June 30, 1998 reflecting a net increase in loans of $15.6 million in the six months ended June 30, 1998. This improvement was due to an increase in loan originations. Loan originations totalled $49.7 million in the six months ended June 30, 1998, up approximately 75%, or $21.2 million compared to $28.5 million in the six months ended June 30, 1997. Total deposits were $808.7 million at June 30, 1998 essentially unchanged from $809.9 million at year end 1997. Total stockholders' equity rose to $109.4 million at June 30, 1998 from $103.8 million at December 31, 1997. Book value increased to $30.44 per share, from $29.06 per share at year end 1997. The Company's book value per share has increased $3.50 or 13.0% since June 30, 1997. Investments Total investments consisting of investment securities, short-term investments, term federal funds sold and interest-bearing bank deposits equalled $623.7 million at June 30, 1998, down $12.0 million from $635.7 million at year end 1997. These investments are principally in federal funds sold, short-term U.S. Treasury notes and government agency fifteen year mortgage-backed securities. The Bank also maintains an equity securities portfolio, valued at $20.7 million as of June 30, 1998, that has yielded substantial realized and unrealized gains. Nearly all of the Bank's investment securities are classified as available for sale or trading securities. Management evaluates its investment alternatives in order to properly manage the mix of assets on its balance sheet. Investment securities available for sale and trading securities provide liquidity, facilitate interest rate sensitivity management and enhance the Bank's ability to respond to customers' needs should loan demand increase and/or deposits decline. The Bank continues to maintain a large proportion of its securities portfolio in government agency mortgage-backed securities. These represent an attractive investment with minimal credit risk, no servicing responsibilities, and no delinquencies. The Bank's investment in mortgage-backed securities totalled $298.5 million at June 30, 1998 versus $330.7 million at year end 1997. The Bank also maintains a portfolio of trading securities which consisted of the following as of the dates shown: June 30, December 31, (In thousands) 1998 1997 _____________ ____________ U.S. Treasury bills $ 2,952 $18,542 Investment in mutual funds 2,033 2,718 _______ _______ Total $ 4,985 $21,260
FINANCIAL CONDITION INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities at June 30, 1998 with gross unrealized gains and losses, follows: __________________________________________________________________________________________ Gross Gross Amortized Unrealized Unrealized Market (In thousands) At June 30, 1998 Cost Gains Losses Value __________________________________________________________________________________________ Securities held to maturity: Other bonds and obligations $ 363 $ -- $ -- $ 363 __________________________________________________________________________________________ Total securities held to maturity $ 363 $ -- $ -- $ 363 __________________________________________________________________________________________ Securities available for sale: Debt securities: U.S. Treasury obligations $119,487 $ 1,548 $ (1) $121,034 U.S. Government agency obligations 5,059 15 (6) 5,068 __________________________________________________________________________________________ Total 124,546 1,563 (7) 126,102 __________________________________________________________________________________________ Mortgage-backed securities: Government National Mortgage Association 54,934 1,361 -- 56,295 Federal Home Loan Mortgage Corporation 224,290 4,344 (30) 228,604 Federal National Mortgage Association 6,353 209 -- 6,562 Collateralized mortgage obligations 6,689 71 -- 6,760 Other 252 11 -- 263 __________________________________________________________________________________________ Total mortgage-backed securities 292,518 5,996 (30) 298,484 __________________________________________________________________________________________ Total debt securities 417,064 7,559 (37) 424,586 __________________________________________________________________________________________ Equity securities 10,924 9,841 (71) 20,694 __________________________________________________________________________________________ Total securities available for sale 427,988 $ 17,400 $ (108) $445,280 __________________________________________________________________________________________ Net unrealized gains on securities available for sale 17,292 __________________________________________________________________________________________ Total securities available for sale, net $445,280 __________________________________________________________________________________________ Trading securities $ 4,985 $ 4,985 __________________________________________________________________________________________
FINANCIAL CONDITION INVESTMENT SECURITIES (continued) The amortized cost and estimated market value of investment securities at December 31, 1997 with gross unrealized gains and losses, follows: __________________________________________________________________________________________ Gross Gross Amortized Unrealized Unrealized Market (In thousands) At December 31, 1997 Cost Gains Losses Value __________________________________________________________________________________________ Securities held to maturity: Other bonds and obligations $ 372 $ -- $ -- $ 372 __________________________________________________________________________________________ Total securities held to maturity $ 372 $ -- $ -- $ 372 __________________________________________________________________________________________ Securities available for sale: Debt securities: U.S. Treasury obligations $121,399 $ 1,622 $ -- $123,021 U.S. Government agency obligations 9,800 24 (11) 9,813 __________________________________________________________________________________________ Total 131,199 1,646 (11) 132,834 __________________________________________________________________________________________ Mortgage-backed securities: Government National Mortgage Association 60,493 1,247 (31) 61,709 Federal Home Loan Mortgage Corporation 248,744 4,257 (180) 252,821 Federal National Mortgage Association 7,733 258 -- 7,991 Collateralized mortgage obligations 7,836 62 -- 7,898 Other 298 14 -- 312 __________________________________________________________________________________________ Total mortgage-backed securities 325,104 5,838 (211) 330,731 __________________________________________________________________________________________ Total debt securities 456,303 7,484 (222) 463,565 __________________________________________________________________________________________ Investments in mutual funds 1,110 4 -- 1,114 Equity securities 9,336 8,227 (18) 17,545 __________________________________________________________________________________________ Total securities available for sale 466,749 $ 15,715 $ (240) $482,224 __________________________________________________________________________________________ Net unrealized gains on securities available for sale 15,475 __________________________________________________________________________________________ Total securities available for sale, net $482,224 __________________________________________________________________________________________ Trading securities $ 21,305 $ 21,260 __________________________________________________________________________________________
Investments (continued) The amortized cost and estimated market value of debt securities held to maturity and debt securities available for sale by contractual maturity at June 30, 1998 and December 31, 1997 are as follows: June 30, 1998 ____________________________________________ Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 38,829 $ 39,039 $ -- $ -- After 1 year but within 5 years 82,561 83,856 230 230 After 5 years but within 10 years 2,958 3,012 90 90 After 10 years but within 15 years -- -- 43 43 After 15 years 198 195 -- -- ________ _______ ______ ______ 124,546 126,102 363 363 Mortgage-backed securities 292,518 298,484 -- -- ________ _______ ______ ______ $417,064 $424,586 $ 363 $ 363
December 31, 1997 ____________________________________________ Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 37,869 $ 38,007 $ -- $ -- After 1 year but within 5 years 92,130 93,634 230 230 After 5 years but within 10 years 1,000 994 97 97 After 15 years 200 199 45 45 ________ _______ ______ ______ 131,199 132,834 372 372 Mortgage-backed securities 325,104 330,731 -- -- ________ _______ ______ ______ $456,303 $463,565 $ 372 $ 372
LOANS The composition of the Bank's loan portfolio is summarized as follows: _______________________________________________________________________________________ At At (In thousands) June 30, 1998 December 31, 1997 _______________________________________________________________________________________ Mortgage loans: Residential $263,345 $245,325 Commercial 2,528 3,861 Construction 1,076 492 _______________________________________________________________________________________ 266,949 249,678 Add: Premium on loans 303 343 Less: deferred mortgage loan origination fees (1,353) (1,223) _______________________________________________________________________________________ Total mortgage loans 265,899 248,798 Other loans: Consumer: Installment 1,949 2,199 Guaranteed education 8,468 8,934 Other secured 1,376 1,600 Home equity lines of credit 9,885 10,470 Unsecured 247 266 _______________________________________________________________________________________ Total consumer loans 21,925 23,469 Commercial 97 36 _______________________________________________________________________________________ Total other loans 22,022 23,505 _______________________________________________________________________________________ Total loans $287,921 $272,303 _______________________________________________________________________________________ The Bank's loan portfolio increased $15.6 million during the first six months of 1998, from $272.3 million at December 31, 1997 to $287.9 million at June 30, 1998. Essentially all of the increase was in the residential 1-4 family category. Loan originations increased to $49.7 million in the first six months of 1998 compared to $28.5 million in the first six months of last year, an increase of $21.2 million or 75%.
NON-PERFORMING ASSETS The following table shows the composition of the Bank's non-performing assets at June 30, 1998 and 1997, and December 31, 1997: At At At June 30, December 31, June 30, (In thousands) 1998 1997 1997 ____________________________________________________________________________________ Non-Performing Assets: Non-accrual loans $ 1,752 $ 1,771 $ 1,168 Real estate acquired through foreclosure 71 -- 324 ____________________________________________________________________________________ Total non-performing assets $ 1,823 $ 1,771 $ 1,492 ____________________________________________________________________________________ Allowance for possible loan losses $ 2,405 $ 2,334 $ 2,235 Allowance as percent of non-performing assets 131.9 % 131.8 % 149.8 % Non-accrual loans as percent of total loans 0.61% 0.65% 0.46% Non-performing assets as percent of total assets 0.20% 0.19% 0.16% ____________________________________________________________________________________ The Bank generally does not accrue interest on loans which are 90 days or more past due. It is the Bank's policy to place such loans on non-accrual status and to reverse from income all interest previously accrued but not collected and to discontinue all amortization of deferred loan fees. Non-performing assets increased slightly from December 31, 1997 to June 30, 1998 as noted in the table above. The principal balance of non- accrual loans was $1.752 million, or approximately 6/10 of 1% of total loans and real estate acquired through foreclosure was $71 thousand at June 30, 1998. Real estate formally acquired in settlement of loans is recorded at the lower of the carrying value of the loan or the fair value of the property received, less estimated costs to sell the property following foreclosure. The Bank did not have any impaired loans as of June 30, 1998.
ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows: Six Months Ended June 30, 1998 1997 _______________________________________________________________________________ (In thousands) Balance at beginning of period $ 2,334 $ 2,237 Provision for loan losses 90 120 Recoveries of loans previously charged-off 7 35 Less: Charge-offs (26) (157) _________________________________________________________________________________ Balance at end of period $ 2,405 $ 2,235 _________________________________________________________________________________ The allowance for loan losses is established through a provision for loan losses charged to operations based on management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may effect the borrowers 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 losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. At June 30, 1998 the balance of the allowance for loan losses was $2,405,000 representing 137.3% of non-accrual loans. Management believes that the allowance for loan losses is adequate to cover the risks inherent in the portfolio under current conditions. DEPOSITS Deposit accounts of all types have traditionally been the primary source of funds for the Bank's lending and investment activities. The Bank's deposit flows are influenced by prevailing interest rates, competition and other market conditions. The Bank's management attempts to manage its deposits through selective pricing and marketing. The Bank's total deposits decreased by approximately $1.2 million to $808.7 million at June 30, 1998 from $809.9 million at December 31, 1997. The composition of the Bank's total deposits as of the dates shown are summarized as follows:
June 30, December 31, 1998 1997 ______________________________________________________________________________ (In thousands) Demand and NOW $ 68,704 $ 66,859 Savings and money market accounts 350,092 352,875 Time certificates of deposit 390,741 391,034 Deposit acquisition premium, net of amortization (831) (918) ________________________________________________________________________________ Total deposits $808,706 $809,850 ________________________________________________________________________________
Recent Accounting Developments "Disclosures about Segments of an Enterprise and Related Information" In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This Statement establishes standards for reporting information about operating segments. An operating segment is defined as a component of an enterprise for which separate financial information is available and reviewed regularly by the enterprise's chief operating decision maker in order to make decisions about resources to be allocated to the segment and also to evaluate the segment's performance. SFAS No. 131 requires a company to disclose certain balance sheet and income statement information by operating segment, as well as provide a reconciliation of operating segment information to the company's consolidated balances. This Statement is effective for 1998 annual financial statements. Segment information need not be reported in financial statements for interim periods in the initial year of application. Recent Accounting Developments (continued) In June 1998, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair market value. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This Statement is not expected to have a material effect on the Company's consolidated financial statements. Liquidity and Capital Resources The Bank must maintain a sufficient amount of cash and assets which can readily be converted into cash in order to meet cash outflows from normal depositor requirements and loan demands. The Bank's primary sources of funds are deposits, loan amortization and prepayments, sales or maturities of investment securities and income on earning assets. In addition to loan payments and maturing investment securities, which are relatively predictable sources of funds, the Bank maintains a high percentage of its assets invested in overnight federal funds sold, which can be immediately converted into cash and United States Treasury and Government agency securities, which can be sold or pledged to raise funds. At June 30, 1998 the Bank had $136.3 million or 14.7% of total assets and $126.1 million or 13.6% of total assets invested, respectively, in overnight federal funds sold and United States obligations. The Bank is a Federal Deposit Insurance Corporation ("FDIC") insured institution subject to the FDIC regulatory capital requirements. The FDIC regulations require all FDIC insured institutions to maintain minimum levels of Tier 1 capital. Highly rated banks (i.e., those with a composite rating of 1 under the CAMEL rating system) are required to maintain a minimum leverage ratio of Tier 1 capital to total 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 1 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 components include supplemental capital components such as qualifying allowance for loan losses and qualifying subordinated debt. Tier I plus the Tier II capital components is referred to as total qualifying capital. The capital ratios of the Bank and the Company currently exceed the minimum regulatory requirements. At June 30, 1998, the Bank had a leverage Tier I capital to total assets ratio of 10.05%, a Tier I capital to risk- weighted assets ratio of 32.07% and a total capital to risk-weighted assets ratio of 32.92%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to total assets of 10.63%, Tier I capital to risk-weighted assets of 33.91% and total capital to risk-weighted assets of 34.75% at June 30, 1998. Year 2000 Issues As we near the 21st century, MASSBANK is taking important steps to tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or Millennium Bug. The problem originated from software designers' attempt to save memory by recording years in a two-digit format - "98" instead of "1998" for example - but didn't take into account that the year 2000, or "00" could also be interpreted, by any system that has time sensitive software, as the year 1900 rather than the year 2000. This could result in a system failure or in miscalculations. In May 1997, the Company organized a Year 2000 project team to address Y2K critical issues in order to resolve its Year 2000 computer problems. The team has completed an assessment of the Company's computer systems to identify the systems that could be affected by the year 2000 issue and has developed an implementation plan to address this issue. It has also begun testing all of the Company's computer hardware and software applications and plans to complete testing of the Company's critical information systems by December 31, 1998. Testing of the Company's non-critical applications is expected to be completed by June 30, 1999. The Company has incurred and will continue to incur expenses in connection with the testing and upgrading of its computer systems to prepare for the Year 2000. Expenditures to date have not been material. Expenditures for the remainder of the Year 2000 project are estimated at $50,000 to $250,000, depending on the Company's need to upgrade its check processing equipment which could cost as much as $200,000. The Company expects to expend approximately $40,000 in the last half of 1998 and the remainder in the first half of 1999. Since the majority of these expenditures will be to replace or upgrade existing hardware and software, these expenditures will be capitalized and amortized in accordance with the Company's existing accounting policy. The Company uses a third party data center for the majority of its data processing. The Year 2000 project team closely monitors the Year 2000 remediation efforts at the data center to assure that they are meeting their Year 2000 project objectives. The data center's remediation progress to date meets or nearly meets expectations laid out in its Year 2000 project plan. Most of the Company's other date sensitive systems operate on software supported by outside vendors. The progress made by these vendors to become Y2K compliant is also being closely monitored. Letters requesting Year 2000 certification statements have been sent to all "mission critical" vendors. Since there is no guarantee that the Company's data center or outside vendors will become Y2K compliant, the Company is developing contingency plans. There is, however, no guarantee that the systems of other companies, banks, vendors, governmental agencies, etc. that interface with the Company will be timely remediated. If they are not successful, the Year 2000 problem could have a material affect on the Company's operations. Management presently does not believe the Year 2000 issues will pose significant operational problems for the Company. 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. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Sensitivity and Liquidity See discussion and analysis of interest rate sensitivity and liquidity provided in the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997. There have been no material changes in reported market risks faced by the Corporation since the filing of the Corporation's 1997 Annual Report on Form 10-K. PART II - OTHER INFORMATION Item 1. Legal Proceedings From time to time, MASSBANK Corp. and/or the Bank are involved as a plaintiff or defendant in various legal actions incident to their business. As of June 30, 1998, none of these actions individually or in the aggregate is believed by management to be material to the financial condition of MASSBANK Corp. or the Bank. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders of MASSBANK Corp. held on April 21, 1998, stockholders voted affirmatively on the following proposals: 1.) To elect four Directors to serve until the 2001 Annual Meeting of Stockholders. Elected At Meeting Term: Samuel Altschuler 3 Years Gerard H. Brandi 3 Years Allan S. Bufferd 3 Years Peter W. Carr 3 Years 2.) To approve an amendment to the Corporation's Amended and Restated 1994 Stock Incentive Plan to increase the number of shares of the Corporation's common stock subject to issuance thereunder by 170,000 shares, or approximately 4.8% of the total number of outstanding shares. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit No. 11.1: Statement regarding computation of per share earnings. b. Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MASSBANK Corp. & Subsidiaries _____________________________ (Registrant) Date: August 14, 1998 /s/Gerard H. Brandi ___________________________ (Signature) Gerard H. Brandi President and CEO Date: August 14, 1998 /s/Reginald E. Cormier ___________________________ (Signature) Reginald E. Cormier V.P., Treasurer and CFO EX-1 2
EXHIBIT 11.1 MASSBANK CORP. Earnings Per Share The following is a calculation of earnings per share for the three and and six months ended June 30, 1998 and 1997. Three Months Ended Six Months Ended Calculation of Basic June 30, June 30, Earnings Per Share 1998 1997 1998 1997 ______________________________ ____ ____ ____ ____ Net Income $2,706,000 $2,449,000 $5,540,000 $4,922,000 _________ _________ _________ _________ Average common shares outstanding 3,590,194 3,581,533 3,584,456 3,582,054 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (44,000) (52,800) (44,000) (52,800) __________ _________ __________ ________ Weighted average shares outstanding 3,546,194 3,528,733 3,540,456 3,529,254 _________ _________ _________ _________ Earnings per share (in dollars) $ 0.76 $ 0.69 $ 1.56 $ 1.39 _________ _________ _________ _________
Three Months Ended Six Months Ended Calculation of Diluted June 30, June 30, Earnings Per Share 1998 1997 1998 1997 ______________________________ ____ ____ ____ ____ Net Income $2,706,000 $2,449,000 $5,540,000 $4,922,000 _________ _________ _________ _________ Average common shares outstanding 3,590,194 3,581,533 3,584,456 3,582,054 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (44,900) (52,800) (44,000) (52,800) Diluted stock options 162,507 123,836 162,220 120,478 _________ _________ _________ _______ Weighted average shares outstanding 3,708,701 3,652,569 3,702,676 3,649,732 _________ _________ _________ _________ Earnings per share (in dollars) $ 0.73 $ 0.67 $ 1.50 $ 1.35 _________ __________ __________ __________
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9 0000799166 MASSBANK CORP. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 7,065 2,596 146,315 4,985 445,280 363 363 287,921 (2,405) 929,672 808,706 1,334 9,483 781 0 0 7,359 102,009 929,672 10,460 15,662 3,996 30,118 17,083 17,083 13,035 90 1,428 6,375 8,917 8,917 0 0 5,540 1.56 1.50 2.89 1,752 0 0 1,752 2,334 (26) 7 2,405 2,258 0 147
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9 0000799166 MASSBANK CORP. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 7,560 2,011 110,279 13,283 481,730 381 381 255,805 (2,235) 905,417 798,504 1,377 8,288 937 0 0 5,487 90,824 905,417 9,677 16,694 3,406 29,777 16,904 16,904 12,873 120 1,078 7,119 7,664 7,664 0 0 4,922 1.39 1.35 2.95 1,168 0 0 1,168 2,237 (157) 35 2,235 1,856 0 379
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