-----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, BzDcL/GmmzIw4g+q210XyhsG+psOIqoX3EEDnSbDACUyukmVSbJgfRa3ewkXR34z xF0rzSyZ1ABiZ41J5V6krA== 0000799166-98-000006.txt : 19981118 0000799166-98-000006.hdr.sgml : 19981118 ACCESSION NUMBER: 0000799166-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98750462 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 September 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 October 31, 1998: 3,534,610 shares. MASSBANK CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page ITEM 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 3 Consolidated Statements of Income (unaudited) for the three months ended September 30, 1998 and 1997 4 and for the nine months ended September 30, 1998 and 1997 5 Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 1998 (unaudited) and the year ended December 31, 1997 6 - 7 Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 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 - 33 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)
September 30, December 31, 1998 1997 (unaudited) Assets: Cash and due from banks $ 7,473 $ 6,808 Short-term investments (Note 3) 169,963 109,755 ________________________________________________________________________________ Total cash and cash equivalents 177,436 116,563 Term federal funds sold 20,000 20,000 Interest-bearing deposits in banks 1,848 2,083 Securities held to maturity, at amortized cost (market value of $358 in 1998 and $372 in 1997) 358 372 Securities available for sale, at market value (amortized cost of $407,790 in 1998 and $466,749 in 1997) 426,539 482,224 Trading securities, at market value 1,129 21,260 Loans: (Note 4) Mortgage loans 274,747 248,798 Other loans 22,202 23,505 Less: allowance for loan losses (2,425) (2,334) ________________________________________________________________________________ Net loans 294,524 269,969 Premises and equipment 4,241 4,369 Real estate acquired through foreclosure 53 -- Accrued interest receivable 4,788 5,395 Goodwill 1,412 1,487 Accrued income tax asset, net 541 -- Other assets 1,589 1,681 ________________________________________________________________________________ Total assets $934,458 $925,403 Liabilities and Stockholders' Equity: Deposits $811,666 $809,850 Escrow deposits of borrowers 1,522 1,502 Employee stock ownership plan liability 781 781 Accrued income taxes payable -- 1,240 Deferred income taxes payable 6,472 4,927 Other liabilities 3,649 3,324 ________________________________________________________________________________ Total liabilities 824,090 821,624 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, 7,370,532 and 7,336,800 shares issued, respectively 7,371 7,337 Additional paid-in capital 59,722 58,737 Retained earnings 76,570 70,984 ________________________________________________________________________________ 143,663 137,058 Accumulated other comprehensive income: Net unrealized gains on securities available for sale, net of tax effect 11,151 9,071 Treasury stock at cost, 3,816,922 and 3,766,022 shares, respectively (43,665) (41,569) Common stock acquired by ESOP ( 781) ( 781) ________________________________________________________________________________ Total stockholders' equity 110,368 103,779 ________________________________________________________________________________ Total liabilities and stockholders' equity $934,458 $925,403 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended September 30, (In thousands except share data) 1998 1997 ______________________________________________________________________________ Interest and dividend income: Mortgage Loans $ 4,927 $ 4,535 Other loans 493 557 Securities available for sale: Mortgage-backed securities 4,958 5,625 Other securities 2,045 2,536 Trading securities 54 182 Federal funds sold 2,152 1,625 Other investments 366 400 ______________________________________________________________________________ Total interest and dividend income 14,995 15,460 ______________________________________________________________________________ Interest expense: Deposits 8,703 8,937 ______________________________________________________________________________ Total interest expense 8,703 8,937 ______________________________________________________________________________ Net interest income 6,292 6,523 Provision for loan losses 15 45 ______________________________________________________________________________ Net interest income after provision for loan losses 6,277 6,478 ______________________________________________________________________________ Non-interest income: Deposit account service fees 194 242 Gains on securities, net 430 423 Other 172 221 ______________________________________________________________________________ Total non-interest income 796 886 ______________________________________________________________________________ Non-interest expense: Salaries and employee benefits 1,598 1,983 Occupancy and equipment 522 527 Data processing 132 71 Professional services 101 81 Merger and acquisition related expense -- 16 Advertising and marketing 44 39 Amortization of intangibles 82 68 Contributions 4 6 Other 388 400 ______________________________________________________________________________ Total non-interest expense 2,871 3,191 ______________________________________________________________________________ Income before income taxes 4,202 4,173 Income tax expense 1,507 1,584 ______________________________________________________________________________ Net income $ 2,695 $ 2,589 ______________________________________________________________________________ Weighted average common shares outstanding: Basic 3,548,156 3,519,618 Diluted 3,692,269 3,670,570 Earnings per share (in dollars): Basic $ 0.76 $ 0.74 Diluted 0.73 0.70 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine months ended September 30, (In thousands except share data) 1998 1997 _______________________________________________________________________________ Interest and dividend income: Mortgage Loans $14,351 $13,092 Other loans 1,529 1,677 Securities available for sale: Mortgage-backed securities 15,812 16,637 Other securities 6,400 7,882 Trading securities 507 518 Federal funds sold 5,404 4,330 Other investments 1,110 1,101 _______________________________________________________________________________ Total interest and dividend income 45,113 45,237 _______________________________________________________________________________ Interest expense: Deposits 25,786 25,841 _______________________________________________________________________________ Total interest expense 25,786 25,841 _______________________________________________________________________________ Net interest income 19,327 19,396 Provision for loan losses 105 165 _______________________________________________________________________________ Net interest income after provision for loan losses 19,222 19,231 _______________________________________________________________________________ Non-interest income: Deposit account service fees 615 690 Gains on securities, net 1,858 1,501 Other 670 725 _______________________________________________________________________________ Total non-interest income 3,143 2,916 _______________________________________________________________________________ Non-interest expense: Salaries and employee benefits 5,445 5,807 Occupancy and equipment 1,549 1,546 Data processing 385 372 Professional services 341 308 Merger and acquisition related expense -- 156 Advertising and marketing 141 131 Amortization of intangibles 219 183 Contributions 11 662 Other 1,155 1,145 _______________________________________________________________________________ Total non-interest expense 9,246 10,310 _______________________________________________________________________________ Income before income taxes 13,119 11,837 Income tax expense 4,884 4,326 _______________________________________________________________________________ Net income $ 8,235 $ 7,511 _______________________________________________________________________________ Weighted average common shares outstanding: Basic 3,543,051 3,526,007 Diluted 3,699,169 3,656,754 Earnings per share (in dollars): Basic $ 2.32 $ 2.13 Diluted 2.23 2.05 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Nine Months Ended September 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 -- -- 8 ,235 -- -- -- 8,235 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 5) -- -- -- -- 2,080 -- 2,080 _____ Comprehensive income 10,315 Cash dividends declared and paid ($0.75 per share) -- -- (2,660) -- -- -- (2,660) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 11 -- -- -- 11 Amortization of ESOP shares committed to be released -- 199 -- -- -- -- 199 Purchase of treasury stock -- -- -- (2,096) -- -- (2,096) Exercise of stock options and related tax benefits 34 786 -- -- -- -- 820 ___________________________________________________________________________________________________________________________ Balance at September 30, 1998 $7,371 $59,722 $76,570 $(43,665) $11,151 $(781) $110,368 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)
Nine Months Ended September 30, 1998 1997 ____ ____ (In thousands) Cash flows from operating activities: Net income $ 8,235 $ 7,511 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 687 621 Loan interest capitalized (65) -- Amortization of ESOP shares committed to be released 199 131 Charitable contribution of appreciated securities -- 622 Decrease in accrued interest receivable 607 380 Increase in other liabilities 357 731 Decrease in current income taxes payable (1,780) (318) Accretion of discounts on securities, net of amortization of premiums (866) (859) Net trading securities activity 21,296 (7,734) Gains on securities available for sale (1,804) (1,398) Gains on trading securities (54) (104) Increase in deferred mortgage loan origination fees, net of amortization 187 113 Deferred income tax expense (benefit) 349 (364) Decrease in other assets 120 638 Loans originated for sale (129) (335) Loans sold 129 335 Provision for loan losses 105 165 Gains on sales of real estate acquired through foreclosure (4) (16) Gains on sales of premises and equipment -- (1) Increase in escrow deposits of borrowers 20 337 __________________________________________________________________________________________ Net cash provided by operating activities 27,589 455 __________________________________________________________________________________________ Cash flows from investing activities: Cash and cash equivalents for acquisitions -- (2,874) Purchases of term federal funds (30,000) (5,000) Proceeds from maturities of term federal funds 30,000 15,000 Increase in interest bearing bank deposits (581) (880) Proceeds from maturities of interest bearing bank deposits 816 -- Proceeds from sales of investment securities available for sale 17,639 33,086 Proceeds from maturities of investment securities available for sale 35,650 41,250 Purchases of investment securities available for sale (42,467) (54,684) Purchases of investment securities held to maturity -- (230) Purchases of mortgage-backed securities -- (43,601) Principal repayments of mortgage-backed securities 49,664 29,191 Principal repayments of securities held to maturity 14 13 Principal repayments of securities available for sale 1 1 Loans originated (75,281) (39,952) Loan principal payments received 50,130 34,375 Purchases of premises & equipment (297) (447) Proceeds from sales of premises and equipment -- 9 Proceeds from sales of real estate acquired through foreclosure 262 633 Net advances on real estate acquired through foreclosure (12) (28) __________________________________________________________________________________________ Net cash provided by investing activities 35,538 5,862 __________________________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited)
Nine Months Ended September 30, 1998 1997 ____ ____ (In thousands) Cash flows from financing activities: Net increase in deposits 1,671 2,604 Payments to acquire treasury stock (2,096) (1,447) Issuance of common stock under stock option plan 558 284 Tax benefit resulting from stock options exercised 262 103 Dividends paid on common stock (2,660) (2,278) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 11 16 __________________________________________________________________________________________ Net cash used in financing activities (2,254) (718) __________________________________________________________________________________________ Net increase in cash and cash equivalents 60,873 5,599 Cash and cash equivalents at beginning of period 116,563 140,922 _________________________________________________________________________________________ Cash and cash equivalents at end of period $177,436 $146,521 _________________________________________________________________________________________ Supplemental cash flow disclosures: Cash transactions: Cash paid during the period for interest $25,791 $25,828 Cash paid during the period for taxes, net of refunds 5,717 4,466 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 in accumulated other comprehensive income 2,080 4,000 Increase in deferred tax liabilities 1,195 2,829 Securities reclassified from available for sale to trading securities 1,111 -- Transfers from loans to real estate acquired through foreclosure 299 376 Transfers from loans to other assets 19 -- Sales of securities incomplete (not settled) at end of period -- 192 Transfers from premises and equipment to other assets 9 -- Cost of donated securities -- 2 _________________________________________________________________________________________ In connection with the acquisition of Glendale Co-operative Bank in July, 1997, assets acquired and liabilities assumed were as follows: Assets acquired -- $31,561 Goodwill -- 1,530 Liabilities assumed -- 30,217 _________________________________________________________________________________________ See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. CONDENSED 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 September 30, 1998 and December 31, 1997, and its operating results for the three and nine months ended September 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) September 30, 1998 December 31, 1997 ________________________________________________________________________________ Federal funds sold (overnight) $144,958 $ 85,241 Money market funds 25,005 24,514 ________________________________________________________________________________ Total short-term investments $169,963 $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 September 30, 1998, the Company had outstanding commitments to originate mortgage loans and to advance funds for construction loans amounting to $6,691,000 and commitments under existing home equity lines of credit and other loans of approximately $25,859,000 which are not reflected on the consolidated balance sheet. In addition, as of September 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. CONDENSED 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 nine months ended September 30, 1998 and the year ended December 31, 1997 is as follows:
For the Nine Months Ended September 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 $5,079 $(1,953) $3,126 Less: reclassification adjustment for gains realized in net income (1,804) 758 (1,046) ______ ________ ______ Net unrealized gains 3,275 (1,195) 2,080 ______ ________ ______ Other comprehensive income $3,275 $(1,195) $2,080 ______ ________ _____
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 September 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 September 30, 1998 GENERAL For the quarter ended September 30, 1998, MASSBANK Corp. reported consolidated net income of $2,695,000 or $0.76 in basic earnings per share compared to net income of $2,589,000, or $0.74 in basic earnings per share in the third quarter of 1997. Diluted earnings per share increased to $0.73 per share from $0.70 per share in the third quarter of last year. 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 favorable earnings results for the recent quarter can be attributed to a decrease in non-interest expense, income tax expense, and provision for loan losses. These improvements were partially offset by a reduction in non-interest income and a decrease in net interest income resulting from a decline in net interest margin. The Company's net interest margin for the third quarter of 1998 was 2.77% compared to 2.88% for the same quarter a year earlier. Non-interest expense for the third quarter of 1998, when compared to the same quarter of 1997, shows a decrease of $320,000.
AVERAGE BALANCE SHEETS Three Months Ended September 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 $156,588 $ 2,152 5.45% $116,775 $ 1,625 5.52% Short-term investments (2) 26,213 361 5.47 27,219 395 5.75 Investment securities 144,386 2,094 5.80 165,324 2,580 6.24 Mortgage-backed securities 290,679 4,958 6.82 323,672 5,625 6.95 Trading securities 3,840 54 5.59 12,461 182 5.84 Mortgage loans (1) 270,208 4,927 7.29 240,639 4,535 7.54 Other loans (1) 21,980 493 8.91 24,643 557 8.99 __________________________________________________ ________________ Total earning assets 913,894 $15,039 6.56% 910,733 $15,499 6.79% Allowance for loan losses (2,413) (2,281) __________________________________________________________________________________________ Total earning assets less allowance for loan losses 911,481 908,452 Other assets 19,474 19,654 __________________________________________________________________________________________ Total assets $930,955 $928,106 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued) Three Months Ended September 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 $ 70,522 $ 138 0.77% $ 66,951 $ 137 0.81% Savings 348,558 3,016 3.43 356,728 3,068 3.41 Time certificates of deposit 392,973 5,549 5.60 398,118 5,732 5.71 __________________________________________________ ________________ Total deposits 812,053 8,703 4.25 821,797 8,937 4.31 Other liabilities 8,949 8,007 __________________________________________________________________________________________ Total liabilities 821,002 829,804 Stockholders' equity 109,953 98,302 __________________________________________________________________________________________ Total liabilities and stockholders' equity $930,955 $928,106 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 6,336 6,562 Less adjustment of tax-exempt interest income 44 39 __________________________________________________________________________________________ Net interest income $ 6,292 $ 6,523 __________________________________________________________________________________________ Interest rate spread 2.31% 2.48% __________________________________________________________________________________________ Net interest margin (3) 2.77% 2.88% __________________________________________________________________________________________ (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 $6,292,000 for the third quarter of 1998 compared to $6,523,000 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 $3.2 million to $913.9 million in the third quarter of 1998, up from $910.7 million in the third quarter of the prior year. The Company's net interest margin was 2.77% in the recent quarter, down from 2.88% 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 September 30, 1998, decreased to $14,995,000 from $15,460,000 for the three months ended September 30, 1997. The average total earning assets of the Company increased by $3.2 million, as noted above. The increase in interest income resulting from the growth in earning assets in the recent quarter, however, was more than offset by a decline in yield on earning assets. As reflected in the table on page 13, yield declines in each of the Bank's categories of earning assets 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 third quarter of 1998 was 6.56% compared to 6.79% 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 September 30, 1998 was $8,703,000, down from $8,937,000 for the same quarter last year. The Company's average deposits, as shown in the table on page 14, decreased $9.7 million or 1.2% to $812.1 million in the third quarter of 1998, from $821.8 million in the third quarter of 1997. The decrease in interest expense resulted from a decrease in average cost of funds and a decrease in total deposits. The Company's average cost of funds for the three months ended September 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 best 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 third quarter of 1998 was $15,000 versus $45,000 for the comparable period in 1997. This decrease was essentially due to lower net loan charge-offs. In the recent quarter the Bank recorded net recoveries on loans of $5,000 compared to net charge-offs on loans of $131,000 for same quarter last year. Provision for Loan Losses (continued) The reserve coverage as a percentage of the Bank's non-performing assets increased in the recent quarter. At September 30, 1998, MASSBANK's allowance for loan losses totalled $2,425,000 representing 166.2% of non-performing assets compared to $2,254,000 representing 155.1% of non-performing assets at the end of the third 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 third quarter of 1998 was $796,000, down from $886,000 for the comparable period in 1997. This decrease is due to lower deposit account service fees and a decrease in other income, partially offset by slightly higher securities gains. The Bank's other non-interest income reflects a decrease in income earned on the Bank's deferred compensation plan assets, the result of the stock market performance in the recent quarter. The Plan incurred a loss of $30,000 in the recent quarter, compared to income of $16,000 for the same quarter last year. Since the Bank reflects a corresponding deferred compensation plan liability on its balance sheet, it has recorded an offsetting reduction in deferred compensation expense for the third quarter 1998 that is included in salaries and employee benefits. Non-Interest Expense Non-interest expenses decreased by $320,000, or 10.0% to $2,871,000 in the third quarter of 1998 from $3,191,000 in the third quarter of 1997. Salaries and employee benefits, the largest component of non-interest expense, decreased by $385,000 or 19.4% from $1,983,000 in the third quarter of 1997 to $1,598,000 in the recent quarter. This reduction is due largely to a decrease of $247,000 in the Company's directors deferred compensation plan expense and a decrease of $98,000 in the expense amount provided for payments to employees under the Bank's profit sharing and incentive compensation bonus plans. The expense related to the directors deferred compensation 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 third quarter 1997, from $35.8125 per share at June 30, 1997 to $47.50 per share at September 30, 1997, significantly increased the expense for the plan. Conversely, the price of the Company's common stock in the recent quarter having declined from $49.00 per share at June 30, 1998 to $38.75 per share at September 30, 1998, decreased the expense for the plan. Occupancy and equipment expense was $522,000 in the third quarter of 1998, essentially unchanged from $527,000 in the third quarter of last year. There were no merger and acquisition related expenses incurred in the third quarter of 1998. In the third quarter of last year, the Bank incurred merger and acquisition related expenses of $16,000 in connection with its acquisition of the Glendale Co-operative Bank. Data processing expenses increased from $71,000 for the quarter ended September 30, 1997 to $132,000 for the quarter ended September 30, 1998. In the third quarter of last year, the Bank transferred its data processing to a different service bureau. As part of the initial contract that the Bank negotiated with the new service bureau it received $150,000 in total credits that were to be applied against data processing expenses in 1997. One half or $75,000 was applied in the third quarter of 1997 and the remaining balance was applied in the fourth quarter of last year, significantly reducing data processing expenses for the second half of 1997. Non-Interest Expense (continued) All other expenses combined, consisting of professional services, advertising and marketing, amortization of intangibles, contributions and other expenses, increased by $25,000 from $594,000 for the three months ended September 30, 1997 to $619,000 for the three months ended September 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 decreased to $1,507,000 for the three months ended September 30, 1998 from $1,584,000 for the same period in 1997. This decrease is due to a reduction in the Company's effective income tax rate. The Company's combined effective income tax rate for the third quarter of 1998 is 35.9% compared to 38.0% for the same quarter a year ago. Results of Operations for the nine months ended September 30, 1998 General For the nine months ended September 30, 1998, the Company reported consolidated net income of $8,235,000 or $2.32 in basic earnings per share ($2.23 per share on a diluted basis) compared to net income of $7,511,000 or $2.13 in basic earnings per share ($2.05 per share on a diluted basis) earned in the first nine months of 1997. This represents an increase in net income of 9.6%. The Company's positive financial performance in the first nine months of 1998 reflects a decrease in non-interest expense of $1,064,000 or 10.3%. Non- interest expenses for the nine months ended September 30, 1998 were $9,246,000, down from $10,310,000 for the comparable period in 1997. In addition, non- interest income for the nine months ended September 30, 1998 increased by $227,000 due to increased securities gains. The Company's earnings results for the nine months ended September 30, 1998 were also impacted by the following factors: a) Net interest income decreased by $69,000 to $19,327,000 for the first nine months of 1998, from $19,396,000 for the same period in 1997. b) The Bank's provision for loan losses for the nine months ended September 30, 1998 decreased by 36% to $105,000 from $165,000 for the comparable period in 1997. c) Income tax expense increased in the first nine months 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.
AVERAGE BALANCE SHEETS Nine Months Ended September 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 $132,048 $ 5,404 5.47% $106,315 $ 4,330 5.45% Short-term investments (2) 26,796 1,096 5.47 26,318 1,088 5.53 Investment securities 148,366 6,521 5.86 168,981 8,010 6.32 Mortgage-backed securities 307,553 15,812 6.85 318,106 16,637 6.97 Trading securities 12,356 506 5.44 11,875 518 5.85 Mortgage loans (1) 260,245 14,351 7.35 232,039 13,092 7.52 Other loans (1) 22,509 1,529 9.08 24,823 1,677 9.02 __________________________________________________ ________________ Total earning assets 909,873 $45,219 6.62% 888,457 $45,352 6.80% Allowance for loan losses (2,373) (2,235) __________________________________________________________________________________________ Total earning assets less allowance for loan losses 907,500 886,222 Other assets 19,491 18,810 __________________________________________________________________________________________ Total assets $926,991 $905,032 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued) Nine Months Ended September 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 $ 69,042 $ 411 0.80% $ 64,994 $ 398 0.82% Savings 351,020 8,998 3.43 355,256 9,165 3.45 Time certificates of deposit 389,139 16,377 5.63 383,239 16,278 5.68 __________________________________________________ ________________ Total deposits 809,201 25,786 4.26 803,489 25,841 4.30 Other liabilities 9,730 6,667 __________________________________________________________________________________________ Total liabilities 818,931 810,156 Stockholders' equity 108,060 94,876 __________________________________________________________________________________________ Total liabilities and stockholders' equity $926,991 $905,032 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 19,433 19,511 Less adjustment of tax-exempt interest income 106 115 __________________________________________________________________________________________ Net interest income $19,327 $19,396 __________________________________________________________________________________________ Interest rate spread 2.36% 2.50% __________________________________________________________________________________________ Net interest margin (3) 2.85% 2.93% __________________________________________________________________________________________ (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 totalled $19,327,000 for the first nine months of 1998 compared to $19,396,000 for the same period in 1997. The decrease of $69,000 was due principally to a decrease in net interest margin. The impact of the lower net interest margin in 1998 was partially offset by an increase in the Company's average earning assets from $888.5 million in the first nine months of 1997 to $909.9 million in the first nine months of 1998. The Company's net interest margin for the nine months ended September 30, 1998 was 2.85%, 8 basis points lower than the 2.93% for the comparable period of the prior year. The Company's interest rate spread decreased to 2.36% for the first nine months of 1998, from 2.50% in the first nine months of last year. The yield on the Company's average earning assets in the first half of 1998 decreased by 18 basis points to 6.62% from 6.80% in the corresponding period of 1997. This decrease was partially offset by a decrease of 4 basis points in the Company's average cost of funds, from 4.30% for the nine months ended September 30, 1997 to 4.26% for the same period this year. Provision for Loan Losses The provision for loan losses for the first nine months of 1998 was $105,000 versus $165,000 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 nine months ended September 30, 1998, loan charge-offs net of recoveries declined to $14,000 from $253,000 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 nine months of 1998 totalled $3,143,000, up $227,000 or approximately 8% from $2,916,000 reported in the corresponding period last year. This increase is due to net gains on securities of $1,858,000 reported for the nine months ended September 30, 1998 versus $1,501,000 reported for the same period last year. The Company has benefited significantly from the stock market's strong performance during the first half of 1998. The Company's equity portfolio has yielded substantial realized and unrealized gains. Net unrealized gains in the equity securities portfolio still totalled $6.7 million at September 30, 1998 despite the downturn in the stock market during the recent quarter. The improvement in net interest income due to the increase in securities gains was partially offset by a decrease of $75,000 in deposit account service fees and a decrease of $55,000 in other non-interest income. Non-Interest Expense Non-interest expenses decreased by $1,064,000, or 10.3% to $9,246,000 in the first nine months of 1998 from $10,310,000 in the first nine months of 1997. Salaries and employee benefits, the largest component of non-interest expense, decreased $362,000 or 6.2%, from $5,807,000 in the first nine months of 1997 to $5,445,000 in the first nine months of this year. This reduction is due principally to a decrease of $313,000 in the Company's directors deferred compensation plan expense and a decrease of $133,000 in the expense amount provided for payments to employees under the Bank's profit sharing and incentive compensation bonus plans. The expense related to the directors deferred compensation plan is tied closely to the market value of the Company's common stock as previously indicated. Non-Interest Expense (continued) Occupancy and equipment expenses were $1,549,000 for the nine months ended September 30, 1998, essentially unchanged from $1,546,000 for the same period last year. There were no merger and acquisition related expenses incurred in the first nine months of 1998. In the first nine months of last year, the Bank incurred merger and acquisition related expenses of $156,000 in connection with its acquisition of the Glendale Co-operative Bank. Bank charitable contributions for the first nine months of 1998 were $11,000 compared to $662,000 for the same period last year. During the first nine months 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 $102,000 or 4.8%, from $2,139,000 for the nine months ended September 30, 1997 to $2,241,000 for the nine months ended September 30, 1998. Income Tax Expense The provision for federal and state income taxes increased to $4,884,000 for the nine months ended September 30, 1998 from $4,326,000 for the same period in 1997. The Company's combined effective income tax rate for the first nine months of 1998 is 37.2% compared to 36.5% 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 relating to prior years. In addition, the Company in 1998 changed its tax year from an October 31 fiscal year to a calendar year. This change resulted in a lower state income tax rate for the Bank. Since the tax rate for years beginning during 1997 and 1998 was 11.32% and 10.91%, respectively, the Bank lowered its state income tax rate. Financial Condition Total assets at September 30, 1998 were $934.5 million, an increase of $9.1 million from $925.4 million at December 31, 1997. The Company's available for sale securities and trading securities portfolios in the first nine months of 1998 decreased by $55.7 million and $20.1 million, respectively. These decreases were offset by increases in short- term investments of $60.2 million and an increase in the Bank's loan portfolio of $24.6 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 $296.9 million at September 30, 1998 reflecting a net increase in loans of $24.6 million in the nine months ended September 30, 1998. This improvement results from an increase in loan originations. Loan originations totalled $75.4 million in the nine months ended September 30, 1998, up approximately 87%, or $35.1 million from $40.3 million in the first nine months of 1997. Total deposits were $811.7 million at September 30, 1998 essentially unchanged from $809.9 million at year end 1997. Total stockholders' equity rose to $110.4 million at September 30, 1998 from $103.8 million at December 31, 1997. Book value increased to $31.06 per share, from $29.06 per share at year end 1997. The Company's book value per share has increased $2.81 or 9.9% since September 30, 1997. Investments Total investments consisting of investment securities, short-term investments, term federal funds sold and interest-bearing bank deposits equalled $619.8 million at September 30, 1998, down $15.9 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 $21.9 million as of September 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 $284.7 million at September 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: September 30, December 31, (In thousands) 1998 1997 _____________ ____________ U.S. Treasury bills $ -- $18,542 Investment in mutual funds 1,129 2,718 _______ _______ Total $ 1,129 $21,260
FINANCIAL CONDITION INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities at September 30, 1998 with gross unrealized gains and losses, follows: __________________________________________________________________________________________ Gross Gross Amortized Unrealized Unrealized Market (In thousands) At September 30, 1998 Cost Gains Losses Value __________________________________________________________________________________________ Securities held to maturity: Other bonds and obligations $ 358 $ -- $ -- $ 358 __________________________________________________________________________________________ Total securities held to maturity $ 358 $ -- $ -- $ 358 __________________________________________________________________________________________ Securities available for sale: Debt securities: U.S. Treasury obligations $107,590 $ 3,264 $ -- $110,854 U.S. Government agency obligations 8,963 62 -- 9,025 __________________________________________________________________________________________ Total 116,553 3,326 -- 119,879 __________________________________________________________________________________________ Mortgage-backed securities: Government National Mortgage Association 51,712 1,857 -- 53,569 Federal Home Loan Mortgage Corporation 211,939 6,533 (7) 218,465 Federal National Mortgage Association 5,654 222 -- 5,876 Collateralized mortgage obligations 6,457 114 -- 6,571 Other 233 13 -- 246 __________________________________________________________________________________________ Total mortgage-backed securities 275,995 8,739 (7) 284,727 __________________________________________________________________________________________ Total debt securities 392,548 12,065 (7) 404,606 __________________________________________________________________________________________ Equity securities 15,242 7,493 (802) 21,933 __________________________________________________________________________________________ Total securities available for sale 407,790 $ 19,558 $ (809) $426,539 __________________________________________________________________________________________ Net unrealized gains on securities available for sale 18,749 __________________________________________________________________________________________ Total securities available for sale, net $426,539 __________________________________________________________________________________________ Trading securities $ 1,112 $ 1,129 __________________________________________________________________________________________
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 September 30, 1998 and December 31, 1997 are as follows: September 30, 1998 ____________________________________________ Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 45,940 $ 46,465 $ -- $ -- After 1 year but within 5 years 67,457 69,974 230 230 After 5 years but within 10 years 2,959 3,237 86 86 After 10 years but within 15 years -- -- 42 42 After 15 years 197 203 -- -- ________ _______ ______ ______ 116,553 119,879 358 358 Mortgage-backed securities 275,995 284,727 -- -- ________ _______ ______ ______ $392,548 $404,606 $ 358 $ 358
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) September 30, 1998 December 31, 1997 _______________________________________________________________________________________ Mortgage loans: Residential $272,315 $245,325 Commercial 2,439 3,861 Construction 1,116 492 _______________________________________________________________________________________ 275,870 249,678 Add: Premium on loans 286 343 Less: deferred mortgage loan origination fees (1,409) (1,223) _______________________________________________________________________________________ Total mortgage loans 274,747 248,798 Other loans: Consumer: Installment 1,686 2,199 Guaranteed education 8,270 8,934 Other secured 1,574 1,600 Home equity lines of credit 10,379 10,470 Unsecured 252 266 _______________________________________________________________________________________ Total consumer loans 22,161 23,469 Commercial 41 36 _______________________________________________________________________________________ Total other loans 22,202 23,505 _______________________________________________________________________________________ Total loans $296,949 $272,303 _______________________________________________________________________________________ The Bank's loan portfolio increased $24.6 million during the first nine months of 1998, from $272.3 million at December 31, 1997 to $296.9 million at September 30, 1998. Essentially all of the increase was in the residential 1-4 family category. Loan originations increased to $75.4 million in the first nine months of 1998 compared to $40.3 million in the first nine months of last year, an increase of $35.1 million or 87%.
NON-PERFORMING ASSETS The following table shows the composition of the Bank's non-performing assets at September 30, 1998 and 1997, and December 31, 1997: At At At September 30, December 31, September 30, (In thousands) 1998 1997 1997 ____________________________________________________________________________________ Non-Performing Assets: Non-accrual loans $ 1,406 $ 1,771 $ 1,163 Real estate acquired through foreclosure 53 -- 290 ____________________________________________________________________________________ Total non-performing assets $ 1,459 $ 1,771 $ 1,453 ____________________________________________________________________________________ Allowance for possible loan losses $ 2,425 $ 2,334 $ 2,254 Allowance as percent of non-performing assets 166.2 % 131.8 % 155.1 % Non-accrual loans as percent of total loans 0.47% 0.65% 0.43% Non-performing assets as percent of total assets 0.16% 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 decreased from December 31, 1997 to September 30, 1998 as noted in the table above. The principal balance of non-accrual loans was $1,406,000, or approximately one-half of 1% of total loans and real estate acquired through foreclosure was $53 thousand at September 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 September 30, 1998.
ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows: Nine Months Ended September 30, 1998 1997 _______________________________________________________________________________ (In thousands) Balance at beginning of period $ 2,334 $ 2,237 Glendale Co-operative Bank acquisition -- 105 Provision for loan losses 105 165 Recoveries of loans previously charged-off 18 35 Less: Charge-offs (32) (288) _________________________________________________________________________________ Balance at end of period $ 2,425 $ 2,254 _________________________________________________________________________________ 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 September 30, 1998 the balance of the allowance for loan losses was $2,425,000 representing 172.5% 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 increased by $1.8 million to $811.7 million at September 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:
September 30, December 31, 1998 1997 ______________________________________________________________________________ (In thousands) Demand and NOW $ 68,075 $ 66,859 Savings and money market accounts 345,574 352,875 Time certificates of deposit 398,790 391,034 Deposit acquisition premium, net of amortization (773) (918) ________________________________________________________________________________ Total deposits $811,666 $809,850 ________________________________________________________________________________
Recent Accounting Developments "Disclosures about Segments of an Enterprise and Related Information" In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("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. "Employers' Disclosures about Pensions and Other Postretirement Benefits" Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment of SFAS Nos. 87, 88 and 106". SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures required by SFAS Nos. 87, 88 and 106. The adoption of this pronouncement also requires restatement of disclosures for earlier periods. Recent Accounting Developments (continued) "Accounting for Derivative Instruments and Hedging Activities" 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 September 30, 1998 the Bank had $145.0 million or 15.5% of total assets and $119.9 million or 12.8% 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 September 30, 1998, the Bank had a leverage Tier I capital to total assets ratio of 10.16%, a Tier I capital to risk- weighted assets ratio of 30.91% and a total capital to risk-weighted assets ratio of 32.72%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to total assets of 10.60%, Tier I capital to risk-weighted assets of 32.27% and total capital to risk-weighted assets of 34.08% at September 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 and environmental systems (e.g., security systems, vaults, etc.) 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 completed testing of the Company's existing computer hardware and has begun testing all of the Company's software applications and plans to substantially complete testing of the Company's mission critical internal information systems by December 31, 1998, with the exception of its trust and items processing department systems. The hardware components for these systems is being replaced with Year 2000 compliant equipment. Delivery is expected in January 1999, and testing of these systems is expected to be substantially completed by March 31, 1999. Testing of the Company's mission critical external information systems and non-mission critical systems are expected to be substantially completed by March 31, 1999, and June 30, 1999, respectively. 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. Expenses to date total approximately $20,000. Expenses for the remainder of the Year 2000 project are estimated at $306,000. This includes an estimated $200,000 to upgrade the Bank's check processing equipment. Since the majority of these expenditures will be to replace or upgrade existing hardware and software, the majority of these expenditures will be capitalized and amortized in accordance with the Company's existing accounting policy. The expenditures of the project and the date on which the Bank plans to complete Year 2000 testing are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. 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. The data center's Y2K remediation efforts are also being monitored by the federal banking regulators. The data center's remediation progress to date is 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. Year 2000 (continued) Since there is no guarantee that the Company's data center or outside vendors will become Y2K compliant, the Company is developing a contingency plan. The Company has drafted a contingency and business resumption plan that outlines procedures to be followed in the event of the Year 2000 failure of mission critical systems, including the possibility of obtaining alternative vendors or replacement systems. This plan will be finalized in 1999. 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. In addition, the Company's efforts to address the Year 2000 issue are being monitored by its federal banking regulators. Failure to be Year 2000 compliant on a timely basis could subject the Company to formal supervisory or enforcement actions. 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 September 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 None. 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: November 13, 1998 /s/Gerard H. Brandi ___________________________ (Signature) Gerard H. Brandi President and CEO Date: November 13, 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 nine months ended September 30, 1998 and 1997. Three Months Ended Nine Months Ended Calculation of Basic September 30, September 30, Earnings Per Share 1998 1997 1998 1997 ______________________________ ____ ____ ____ ____ Net Income $2,695,000 $2,589,000 $8,235,000 $7,511,000 _________ _________ _________ _________ Average common shares outstanding 3,592,156 3,572,418 3,587,051 3,578,807 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 3,548,156 3,519,618 3,543,051 3,526,007 _________ _________ _________ _________ Earnings per share (in dollars) $ 0.76 $ 0.74 $ 2.32 $ 2.13 _________ _________ _________ _________
Three Months Ended Nine Months Ended Calculation of Diluted September 30, September 30, Earnings Per Share 1998 1997 1998 1997 ______________________________ ____ ____ ____ ____ Net Income $2,695,000 $2,589,000 $8,235,000 $7,511,000 _________ _________ _________ _________ Average common shares outstanding 3,592,156 3,572,418 3,587,051 3,578,807 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (44,000) (52,800) (44,000) (52,800) Diluted stock options 144,113 150,952 156,118 130,747 _________ _________ _________ _______ Weighted average shares outstanding 3,692,269 3,670,570 3,699,169 3,656,754 _________ _________ _________ _________ Earnings per share (in dollars) $ 0.73 $ 0.70 $ 2.23 $ 2.05 _________ __________ __________ __________
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9 0000799166 MASSBANK CORP. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 7,473 1,848 164,958 1,129 426,539 358 358 296,949 (2,425) 934,458 811,666 1,522 10,121 781 0 0 7,371 102,997 934,458 15,880 22,719 6,514 45,113 25,786 25,786 19,327 105 1,858 9,246 13,119 13,119 0 0 8,235 2.32 2.23 2.85 1,406 0 0 1,406 2,334 (32) 18 2,425 2,119 0 306
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9 0000799166 MASSBANK CORP. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 5,160 2,554 117,180 12,510 490,967 377 377 268,538 (2,254) 932,757 820,934 1,608 8,708 937 0 0 7,322 93,248 932,757 14,769 25,037 5,431 45,237 25,841 25,841 19,396 165 1,501 10,310 11,837 11,837 0 0 7,511 2.13 2.05 2.93 1,163 527 0 1,690 2,237 (288) 35 2,254 1,825 0 429
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