-----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, MPY4DqTz8p7Z10v6kzkKp96gQeNHm9Qtk4+Fu6WC2XvI2H9696KuptlcpxOB3jAx HUbck3HP/hmAxidx6OcFIw== 0000799166-97-000002.txt : 19970815 0000799166-97-000002.hdr.sgml : 19970815 ACCESSION NUMBER: 0000799166-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 1934 Act SEC FILE NUMBER: 000-15137 FILM NUMBER: 97660954 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, 1997 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: (617) 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, 1997: 2,685,789 shares. MASSBANK CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page ITEM 1. Financial Statements Consolidated Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996 3 Consolidated Statements of Income (unaudited) for the three months ended June 30, 1997 and 1996 4 and for the six months ended June 30, 1997 and 1996 5 Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 6 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1997 and 1996 7 - 8 Condensed Notes to the Consolidated Financial Statements 9 - 10 Average Consolidated Balance Sheets for the three months ended June 30, 1997 and 1996 and for the six months ended June 30, 1997 and 1996 11 - 14 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 31 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 32 ITEM 2. Changes in Securities 32 ITEM 3. Defaults Upon Senior Securities 32 ITEM 4. Submission of Matters to a Vote of Security Holders 32 ITEM 5. Other Information 32 ITEM 6. Exhibits and Reports on Form 8-K 32 Signature Page 33 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share data)
June 30, December 31, 1997 1996 (unaudited) Assets: Cash and due from banks $ 7,560 $ 6,612 Short-term investments (Note 4) 125,122 134,310 ______________________________________________________________________________ Total cash and cash equivalents 132,682 140,922 Term federal funds sold 10,000 10,000 Interest-bearing deposits in banks 2,011 1,751 Securities held to maturity, at amortized cost (market value of $381 in 1997 and $160 in 1996) 381 160 Securities available for sale, at market value (amortized cost of $473,202 in 1997 and $464,857 in 1996) 481,730 471,752 Trading securities, at market value 13,283 4,672 Loans: (Note 5) Mortgage loans 231,440 224,139 Other loans 24,365 25,522 Less: allowance for loan losses (2,235) (2,237) ______________________________________________________________________________ Net loans 253,570 247,424 Premises and equipment 4,243 4,095 Real estate acquired through foreclosure 324 503 Accrued interest receivable 5,764 5,647 Other assets 1,429 1,311 ______________________________________________________________________________ Total assets $905,417 $888,237 Liabilities and Stockholders' Equity: Deposits $798,504 $788,350 Escrow deposits of borrowers 1,377 1,271 Employee stock ownership plan liability 937 937 Accrued income taxes payable 405 805 Deferred income taxes payable, net 2,406 1,789 Other liabilities 5,477 2,835 ______________________________________________________________________________ Total liabilities 809,106 795,987 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, 5,486,575 and 5,476,125 shares issued, respectively 5,487 5,476 Additional paid-in capital 58,118 57,858 Retained earnings 69,253 65,756 ______________________________________________________________________________ 132,858 129,090 Treasury stock at cost, 2,805,411 and 2,789,411 shares, respectively (40,560) (39,904) Net unrealized gains on securities available for sale, net of tax effect 4,950 4,001 Common stock acquired by ESOP (937) (937) ______________________________________________________________________________ Total stockholders' equity 96,311 92,250 ______________________________________________________________________________ Total liabilities and stockholders' equity $905,417 $888,237 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) 1997 1996 _______________________________________________________________________________ Interest and dividend income: Mortgage Loans $ 4,320 $ 4,273 Other loans 560 619 Securities available for sale: Mortgage-backed securities 5,647 4,740 Other securities 2,664 3,154 Trading securities 241 195 Federal funds sold 1,223 1,073 Other investments 362 336 ________________________________________________________________________________ Total interest and dividend income 15,017 14,390 ________________________________________________________________________________ Interest expense: Deposits 8,555 8,139 ________________________________________________________________________________ Total interest expense 8,555 8,139 ________________________________________________________________________________ Net interest income 6,462 6,251 Provision for loan losses 52 35 ________________________________________________________________________________ Net interest income after provision for loan losses 6,410 6,216 ________________________________________________________________________________ Non-interest income: Deposit account service fees 226 238 Gains on securities, net 610 211 Other 300 275 ________________________________________________________________________________ Total non-interest income 1,136 724 ________________________________________________________________________________ Non-interest expense: Salaries and employee benefits 1,955 1,792 Occupancy and equipment 516 484 Data processing 156 152 Professional services 90 97 Merger and acquisition related expense 100 -- Advertising and marketing 36 61 Amortization of intangibles 57 58 Contributions 644 10 Other 370 376 ________________________________________________________________________________ Total non-interest expense 3,924 3,030 ________________________________________________________________________________ Income before income taxes 3,622 3,910 Income tax expense 1,173 1,540 ________________________________________________________________________________ Net income $ 2,449 $ 2,370 ________________________________________________________________________________ Weighted average common shares outstanding: Primary 2,739,449 2,754,461 Fully diluted 2,752,672 2,754,461 ________________________________________________________________________________ Earnings per share (in dollars): Primary $ 0.90 $ 0.86 Fully diluted 0.89 0.86 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) 1997 1996 ________________________________________________________________________________ Interest and dividend income: Mortgage Loans $ 8,557 $ 8,472 Other loans 1,120 1,265 Securities available for sale: Mortgage-backed securities 11,012 8,670 Other securities 5,346 6,481 Trading securities 336 395 Federal funds sold 2,705 2,652 Other investments 701 579 ________________________________________________________________________________ Total interest and dividend income 29,777 28,514 ________________________________________________________________________________ Interest expense: Deposits 16,904 16,148 ________________________________________________________________________________ Total interest expense 16,904 16,148 ________________________________________________________________________________ Net interest income 12,873 12,366 Provision for loan losses 120 65 ________________________________________________________________________________ Net interest income after provision for loan losses 12,753 12,301 ________________________________________________________________________________ Non-interest income: Deposit account service fees 448 456 Gains on securities, net 1,078 418 Other 504 467 ________________________________________________________________________________ Total non-interest income 2,030 1,341 ________________________________________________________________________________ Non-interest expense: Salaries and employee benefits 3,824 3,564 Occupancy and equipment 1,019 1,001 Data processing 301 305 Professional services 227 206 Merger and acquisition related expense 140 -- Advertising and marketing 92 115 Amortization of intangibles 115 115 Contributions 656 34 Other 745 746 ________________________________________________________________________________ Total non-interest expense 7,119 6,086 ________________________________________________________________________________ Income before income taxes 7,664 7,556 Income tax expense 2,742 2,963 ________________________________________________________________________________ Net income $ 4,922 $ 4,593 ________________________________________________________________________________ Weighted average common shares outstanding: Primary 2,737,313 2,768,944 Fully diluted 2,744,740 2,769,458 ________________________________________________________________________________ Earnings per share (in dollars): Primary $ 1.80 $ 1.66 Fully diluted 1.79 1.66 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, 1997 (unaudited) and the Year Ended December 31, 1996 (In thousands except share data)
NET UNREALIZED GAINS (LOSSES) ON SECURITIES COMMON ADDITIONAL AVAILABLE FOR STOCK COMMON PAID-IN RETAINED TREASURY SALE, NET OF ACQUIRED STOCK CAPITAL EARNINGS STOCK TAX EFFECT BY ESOP TOTAL ________ __________ _________ __________ __________ ________ ________ Balance at December 31, 1995 $ 5,425 $56,842 $58,773 $(36,370) $ 7,240 $(1,093) $90,817 Net income -- -- 9,427 -- -- -- 9,427 Cash dividends declared and paid ($0.92 per share) -- -- (2,459) -- -- -- ( 2,459) 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 -- 63 -- -- -- -- 63 Purchase of treasury stock -- -- -- (3,534) -- -- (3,534) Exercise of stock options and related tax benefits 51 953 -- -- -- -- 1,004 Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- -- -- -- (3,239) -- (3,239) ____________________________________________________________________________________________________________________ Balance at December 31, 1996 5,476 57,858 65,756 (39,904) 4,001 (937) 92,250 Net Income -- -- 4,922 -- -- -- 4,922 Cash dividends declared and paid ($0.54 per share) -- -- (1,432) -- -- -- (1,432) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 7 7 Purchase of treasury stock -- -- -- (656) -- -- (656) Exercise of stock options and related tax benefits 11 260 -- -- -- -- 271 Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- -- -- -- 949 -- 949 _____________________________________________________________________________________________________________________ Balance at June 30, 1997 $ 5,487 $58,118 $69,253 $(40,560) $ 4,950 $ (937) $96,311 _____________________________________________________________________________________________________________________ See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 1997 1996 ____ ____ (In thousands) Cash flows from operating activities: Net income $ 4,922 $ 4,593 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 250 215 Amortization of deposit acquisition premium 115 115 Amortization of loan valuation premium 32 32 Contribution of appreciated stock to MASSBANK Charitable Foundation 622 -- (Increase) decrease in accrued interest receivable (117) 242 Increase in other liabilities 648 872 Decrease in current income taxes payable (400) (945) Accretion of discounts on securities, net of amortization of premiums (554) (501) Net trading securities activity (8,549) 10 Gains on securities available for sale (1,016) (611) (Gains) Losses on trading securities (62) 193 Increase in deferred mortgage loan origination fees, net of amortization 80 113 Deferred income tax expense (benefit) (67) 236 Increase in other assets (148) (103) Loans originated for sale (200) (145) Loans sold 200 208 Provision for loan losses 120 65 Provisions for losses and writedowns on real estate acquired through foreclosure -- 40 Gains on sales of real estate acquired through foreclosure (15) -- Increase in escrow deposits of borrowers 106 (38) ______________________________________________________________________________ Net cash used in operating activities (4,033) 4,591 ______________________________________________________________________________ Cash flows from investing activities: Purchases of term federal funds (5,000) -- Proceeds from maturities of term federal funds 5,000 5,000 Purchases of bank certificates of deposit (260) (753) Proceeds from sales of investment securities available for sale 30,157 14,250 Proceeds from maturities of investment securities held to maturity and available for sale 31,000 51,225 Purchases of investment securities available for sale (46,958) (24,637) Purchases of mortgage-backed securities (38,638) (100,708) Principal repayments of mortgage-backed securities 18,835 18,242 Principal repayments of tax-exempt bonds 9 8 Loans originated (28,257) (33,286) Loan principal payments received 21,557 24,006 Purchases of premises & equipment (398) (108) Proceeds from sales of real estate acquired through foreclosure 520 149 Net advances on real estate required through foreclosure (4) -- ______________________________________________________________________________ Net cash used in investing activities (12,437) (46,612) ______________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
Six Months Ended June 30, 1997 1996 ____ ____ (In thousands) Cash flows from financing activities: Net increase in deposits 10,039 24,634 Payments to acquire treasury stock (656) (2,022) Issuance of common stock under stock option plan 199 480 Tax benefit resulting from stock options exercised 72 214 Dividends paid on common stock (1,431) (1,188) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 7 -- ______________________________________________________________________________ Net cash provided by financing activities 8,230 22,118 ______________________________________________________________________________ Net decrease in cash and cash equivalents (8,240) (19,903) Cash and cash equivalents at beginning of period 140,922 125,655 ______________________________________________________________________________ Cash and cash equivalents at end of period $132,682 $105,752 ______________________________________________________________________________ Supplemental cash flow disclosures: Cash transactions: Cash paid during the period for interest $ 16,887 $ 16,139 Cash paid during the period for taxes, net of refunds 3,130 3,458 Purchase of securities incomplete (not settled) at beginning of period which settled during the period -- 138 Sales of securities incomplete (not settled) at beginning of period which settled during the period 30 -- Non-cash transactions: SFAS 115: Decrease in stockholders' equity (949) (6,697) Decrease in deferred tax liabilities 684 (4,759) Transfers from loans to real estate acquired through foreclosure 322 160 Purchases of securities incomplete (not settled) at end of period 1,994 10,000 Sales of securities incomplete (not settled) at end of period -- 73 Cost of securities contributed to MASSBANK Charitable Foundation 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, 1997 and December 31, 1996, and its operating results for the three and six months ended June 30, 1997 and 1996. 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 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, 1996. (2) Earnings Per Common Share The computation of earnings per common share for the three and six months ended June 30, 1997 and 1996 is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Stock options, when dilutive are included as common stock equivalents using the Treasury stock method. For earnings per share computations, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are not considered outstanding. (3) 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. (4) Short-Term Investments Short-term investments consist of the following:
________________________________________________________________________________ At At (In thousands) June 30, 1997 December 31, 1996 ________________________________________________________________________________ Federal funds sold (overnight) $100,279 $109,902 Money market funds 24,843 24,408 ________________________________________________________________________________ Total short-term investments $125,122 $134,310 ________________________________________________________________________________ The investments above are stated at cost which approximates market value and have original maturities of 90 days or less.
Notes to the Consolidated Financial Statements (continued) (5) Commitments At June 30, 1997, the Company had outstanding commitments to originate mortgage loans and to advance funds for construction loans amounting to $3,878,000 and commitments under existing home equity lines of credit and other loans of approximately $18,288,000 which are not reflected on the consolidated balance sheet. In addition, as of June 30, 1997, the Company had a performance standby letter of credit conveyed to others in the amount of $937,000 which is also not reflected on the consolidated balance sheet. AVERAGE BALANCE SHEETS
Three Months Ended June 30, 1997 1996 ______________ ______________ 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 $ 89,153 $ 1,223 5.50% $ 80,960 $ 1,073 5.33% Short-term investments (2) 26,051 358 5.51 25,051 334 5.36 Investment securities 171,062 2,706 6.33 197,888 3,192 6.45 Mortgage-backed securities 321,987 5,647 7.02 270,862 4,740 7.00 Trading securities 16,622 241 5.80 13,908 195 5.61 Mortgage loans (1) 229,663 4,320 7.52 227,401 4,273 7.52 Other loans (1) 24,600 560 9.11 27,268 619 9.08 __________________________________________________ ________________ Total earning assets 879,138 $15,055 6.85% 843,338 $14,426 6.84% Allowance for loan losses 2,222 2,455 __________________________________________________________________________________________ Total earning assets less allowance for loan losses 876,916 840,883 Other assets 18,948 20,427 __________________________________________________________________________________________ Total assets $895,864 $861,310 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - Continued
Three Months Ended June 30, 1997 1996 ______________ ______________ 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 $ 64,630 $ 132 0.82% $ 64,753 $ 143 0.89% Savings 351,946 3,044 3.47 358,885 3,038 3.40 Time certificates of deposit 380,134 5,379 5.68 347,166 4,958 5.74 __________________________________________________ ________________ Total deposits 796,710 8,555 4.31 770,804 8,139 4.25 Other liabilities 6,193 4,494 __________________________________________________________________________________________ Total liabilities 802,903 775,298 Stockholders' Equity 92,961 86,012 __________________________________________________________________________________________ Total liabilities and stockholders' equity $895,864 $861,310 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 6,500 6,287 Less adjustment of tax-exempt interest income 38 36 __________________________________________________________________________________________ Net interest income $ 6,462 $ 6,251 __________________________________________________________________________________________ Interest rate spread 2.54% 2.59% __________________________________________________________________________________________ Net interest margin (3) 2.96% 2.98% __________________________________________________________________________________________ (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.
AVERAGE BALANCE SHEETS
Six Months Ended June 30, 1997 1996 ______________ ______________ 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 $100,999 $ 2,705 5.40% $ 99,363 $ 2,652 5.37% Short-term investments (2) 25,860 694 5.41 21,527 574 5.36 Investment securities 170,840 5,430 6.36 205,228 6,558 6.39 Mortgage-backed securities 315,277 11,012 6.99 249,539 8,670 6.95 Trading securities 11,577 336 5.85 14,115 395 5.62 Mortgage loans (1) 227,667 8,557 7.52 224,208 8,472 7.56 Other loans (1) 24,915 1,120 8.99 27,720 1,265 9.13 __________________________________________________ ________________ Total earning assets 877,135 $29,854 6.81% 841,700 $28,586 6.79% Allowance for loan losses 2,211 2,497 __________________________________________________________________________________________ Total earning assets less allowance for loan losses 874,924 839,203 Other assets 18,380 19,572 __________________________________________________________________________________________ Total assets $893,304 $858,775 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - Continued
Six Months Ended June 30, 1997 1996 ______________ ______________ 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 $ 63,998 $ 260 0.82% $ 64,554 $ 298 0.93% Savings 354,507 6,097 3.47 357,951 6,053 3.40 Time certificates of deposit 375,677 10,547 5.66 341,498 9,797 5.77 __________________________________________________ ________________ Total deposits 794,182 16,904 4.29 764,003 16,148 4.25 Other liabilities 5,988 6,109 __________________________________________________________________________________________ Total liabilities 800,170 770,112 Stockholders' Equity 93,134 88,663 __________________________________________________________________________________________ Total liabilities and stockholders' equity $893,304 $858,775 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 12,950 12,438 Less adjustment of tax-exempt interest income 77 72 __________________________________________________________________________________________ Net interest income $12,873 $12,366 __________________________________________________________________________________________ Interest rate spread 2.52% 2.54% __________________________________________________________________________________________ Net interest margin (3) 2.95% 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.
MASSBANK CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1997 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, 1997 General For the quarter ended June 30, 1997, MASSBANK Corp. reported consolidated net income of $2,449,000 or $0.90 per share ($0.89 per share on a fully- diluted basis), compared to $2,370,000 or $0.86 per share for the same quarter of 1996. The Company's positive earnings performance in the recent quarter reflects an improvement in net interest income due to continued growth in the Company's average earning assets. Average earning assets for the second quarter of 1997, as shown in the tables appearing on pages 11 and 12 of this Form 10-Q, increased to $879.1 million, up $35.8 million from the corresponding quarter in 1996. Results for the quarter ended June 30, 1997 were also influenced by several other factors. During the 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 stock to the Foundation valued at $622,000, which is reflected in the Company's non-interest expense. By contributing appreciated stock, the Bank obtained a tax benefit of approximately $260,000. The Bank was also able to fully offset the contribution with the resulting $620,000 gain which it recorded on the donated securities. In the recent quarter, the Bank also incurred nonrecurring merger and acquisition related expenses of $100,000 in conjunction with its acquisition of the Glendale Co-operative Bank ("Glendale"), Everett, Massachusetts. The merger of Glendale with and into MASSBANK has been completed. The Glendale Co-operative Bank became a branch office of MASSBANK effective July 21, 1997. Non-interest expenses in the recent quarter also reflect approximately $50,000 in expenses incurred in conjunction with a computer conversion which the Bank implemented over the July 4th weekend. The Bank made this change to its computer systems to enhance its technological capabilities in order to better serve its customers and continue to provide increased efficiencies throughout the Bank. Net Interest Income Net interest income was $6.462 million for the second quarter of 1997 as compared to $6.251 million for the same period in 1996. This increase resulted from the growth in the Company's interest-earning assets partially offset by a modest decrease in net interest margin. The net interest margin for the three months ended June 30, 1997 and 1996 was 2.96% and 2.98%, respectively. The Company's interest rate spread increased to 2.54% for the second quarter of 1997, from 2.49% in the first quarter. This compares to a net interest spread of 2.59% for the second quarter of 1996. The yield on the Company's average earning assets in the second quarter of 1997 increased by 1 basis point to 6.85% from 6.84% in the corresponding quarter of 1996. This improvement was offset by an increase of 6 basis points in the Company's average cost of funds, from 4.25% in the second quarter of 1996 to 4.31% in the recent quarter. 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 1997 was $52,000 versus $35,000 for the comparable period in 1996. This increase was due to the higher level of loan charge-offs which the Bank experienced in prior quarters. However, this past quarter, loan charge-offs net of recoveries declined to $27,000 from $119,000 for the same quarter last year. The reserve coverage as a percentage of the Bank's nonaccrual loans showed improvement in the recent quarter. At June 30, 1997, MASSBANK's allowance for loan losses totalled $2.235 million representing 191% of nonaccrual loans compared to $2.420 million representing 102% of nonaccrual loans at the end of the second quarter in 1996. 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 1997 totalled $1,136,000, up $412,000 or approximately 57% from the $724,000 reported in the corresponding quarter last year. This increase is principally due to net gains on securities of $610,000 reported in the recent quarter versus $211,000 reported in the second quarter of 1996. The Company continues to benefit from the stock market's strong performance. The Company's equity portfolio has yielded substantial realized and unrealized gains. Net unrealized gains in the equity securities portfolio totalled $6.6 million at June 30, 1997. Non-Interest Expense Non-interest expenses increased by $894,000, or 29.5% to $3,924,000 in the second quarter of 1997 from $3,030,000 in the second quarter of 1996. Salaries and employee benefits, the largest component of non-interest expense, increased $163,000 or 9.1% from $1,792,000 in the second quarter of 1996 to $1,955,000 in the recent quarter. This increase is due principally to salary increases and an increase in the Company's employee stock ownership plan (ESOP) and directors deferred compensation plan expense. The expense related to these plans 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 recent quarter, from $41.00 per share at March 31, 1997 to $47.75 per share at June 30, 1997, significantly increased the expense for both plans. Occupancy and equipment expenses increased from $484,000 in the second quarter of 1996 to $516,000 in the second quarter of 1997, due largely to an increase in depreciation expense resulting from the Bank's recent investment in new computer systems. As previously noted, the Bank implemented a computer conversion over the July 4th weekend. The Bank made this change to enhance its technological capabilities in order to better serve its customers and continue to provide increased efficiencies throughout the Bank. Data processing expenses increased slightly from $152,000 for the quarter ended June 30, 1996 to $156,000 for the quarter ended June 30, 1997 due largely to expenses incurred in conjunction with the Bank's computer conversion over the July 4th weekend. Professional fees decreased from $97,000 in the first quarter 1996 to $90,000 in the recent quarter due primarily to a decrease in consultant fees. Merger and acquisition related expenses incurred in connection with the acquisition of the Glendale Co-operative Bank totalled $100,000 in the second quarter of 1997. On February 26, 1997, MASSBANK, (the "Bank") announced that it had signed a definitive merger agreement under which it would acquire all of the outstanding shares of Glendale Co-operative Bank ("Glendale") of Everett, Massachusetts. The acquisition was completed on July 21, 1997. The transaction will be accounted for as a purchase. Bank contributions in the recent quarter were $644,000 compared to $10,000 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 stock to the Foundation valued at $622,000 which is included in the Bank's contributions expenses. Advertising and marketing, amortization of intangibles and other expenses combined totalled $463,000 in the recent quarter versus $495,000 for the same quarter a year ago. Income Tax Expense The Company, the Bank and its subsidiaries file consolidated federal income tax returns on an October 31, year-end. 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. Income Tax Expense (continued) The provision for federal and state income taxes decreased to $1,173,000 for the three months ended June 30, 1997 from $1,540,000 for the same period in 1996. The decrease is due principally to the tax benefit, approximately $260,000, which the Bank obtained by contributing appreciated stock to the MASSBANK Charitable Foundation, as previously noted. Results of Operations for the six months ended June 30, 1997 General For the six months ended June 30, 1997, the Company reported consolidated net income of $4,922,000 or $1.80 per share, ($1.79 per share on a fully-diluted basis) up from $4,593,000 or $1.66 per share earned in the first six months of 1996. The Company's financial performance in the first six months of 1997 reflects an improvement in net interest income due to continued growth in the Company's average earning assets. Average earning assets for the first half of 1997 increased to $877.1 million, up $35.4 million from the corresponding period in 1996. Net interest income for the six months ended June 30, 1997 was $12,873,000, up $507,000 when compared to the same period in 1996. The Company's earnings results for the six months ended June 30, 1997 were also impacted by the following factors: a) MASSBANK contributed appreciated stock to the MASSBANK Charitable Foundation valued at $622,000. By contributing appreciated stock, the Bank also obtained a tax benefit of approximately $260,000. b) In the first six months of 1997 the Bank incurred non-recurring merger and acquisition related expenses of $140,000 in conjunction with its acquisition of the Glendale Co-operative Bank. c) Non-interest expenses in the first half of 1997 also reflect approximately $50,000 in expenses incurred in conjunction with a computer conversion which the Bank implemented over the July 4th weekend. Net Interest Income Net interest income was $12.873 million for the six months ended June 30, 1997 up $507,000 from $12.366 million for the same period in 1996. This increase resulted from the growth in the Company's interest-earning assets partially offset by a modest decrease in net interest margin. The net interest margin for the six months ended June 30, 1997 and 1996 was 2.95% and 2.96%, respectively. The Company's interest rate spread decreased slightly to 2.52% for the first six months of 1997, from 2.54% in the first six months of last year. The yield on the Company's average earning assets in the first half of 1997 increased by 2 basis points to 6.81% from 6.79% in the corresponding period of 1996. This improvement was offset by an increase of 4 basis points in the Company's average cost of funds, from 4.25% for the six months ended June 30, 1996 to 4.29% for the same period this year. The provision for loan losses for the first half of 1997 was $120,000 versus $65,000 for the comparable period in 1996. This increase was due to the higher level of loan charge-offs which the Bank experienced in prior periods. For the six months ended June 30, 1997, loan charge-offs net of recoveries declined to $122,000 from $174,000 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 1997 totalled $2,030,000, up $689,000 or approximately 51% from the $1,341,000 reported in the corresponding period last year. This increase is principally due to net gains on securities of $1,078,000 reported for the six months ended June 30, 1997 versus $418,000 reported for the same period last year. The Company continues to benefit from the stock market's strong performance. The Company's equity portfolio has yielded substantial realized and unrealized gains. Net unrealized gains in the equity securities portfolio totalled $6.6 million at June 30, 1997. Non-Interest Expense Non-interest expenses increased by $1,033,000, or 17.0% to $7,119,000 in the first six months of 1997 from $6,086,000 in the first six months of 1996. Salaries and employee benefits, the largest component of non-interest expense, increased $260,000 or 7.3% from $3,564,000 in the first half of 1996 to $3,824,000 in the first half of 1997. This increase is due principally to salary increases, an increase in employee health insurance expense, and an increase in the Company's employee stock ownership plan (ESOP) and directors deferred compensation plan expense. The expense related to these plans 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 in the last six months, from $38.125 per share at December 31, 1996 to $47.75 per share at June 30, 1997, significantly increased the expense for both plans. In the first quarter, last year, MASSBANK received a one-time reduction in employee health insurance premium equal to one full month's expense. There was no such reduction in 1997. These increases are partially offset by a reduction in employee retirement expense. Occupancy and equipment expenses increased from $1,001,000 in the first half of 1996 to $1,019,000 in the first half of 1997, due largely to an increase in depreciation expense resulting from the Bank's recent investment in new computer systems. As previously noted, the Bank implemented a computer conversion over the July 4th weekend. The Bank made this change to enhance its technological capabilities in order to better serve its customers and continue to provide increased efficiencies throughout the Bank. This increase was partially offset by a reduction in snow removal expense of approximately $16,000, when compared to the prior year, the results of a milder winter. Merger and acquisition related expenses incurred in connection with the acquisition of the Glendale Co-operative Bank totalled $140,000 in the first six months of 1997. The acquisition was completed on July 21, 1997. The transaction will be accounted for as a purchase. Bank contributions for the first six months of this year were $656,000 compared to $34,000 for the same period 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 stock to the Foundation valued at $622,000 which is included in the Bank's contribution expenses. Data processing, professional services, advertising and marketing, amortization of intangibles and other expenses combined totalled $1,480,000 for the six months ended June 30, 1997 compared to $1,487,000 for the same period a year ago. Income Tax Expense The provision for federal and state income taxes decreased to $2,742,000 for the six months ended June 30, 1997 from $2,963,000 for the same period in 1996. The decrease is due principally to the tax benefit, approximately $260,000, which the Bank obtained by contributing appreciated stock to the MASSBANK Charitable Foundation, as previously noted. The Company's combined effective income tax rate for the first six months of 1997 is 35.8% as compared to 39.2% for the same period a year ago. Federal Taxation General The Company, the Bank and its subsidiaries will report their income on a (October 31) fiscal year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank and its subsidiaries or the Company. Bad Debt Reserve In August, 1996, the provisions repealing the current thrift bad debt rules were passed by Congress as part of "The Small Business Job Protection Act of 1996." The new rules eliminate the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also require that all thrift institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). The Bank has previously recorded a deferred tax liability equal to the bad debt recapture and as such, the new rules will have no effect on net income or federal income tax expense. The unrecaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continue to be subject to provision of present law referred to below that require recapture in the case of certain excess distributions to shareholders. The tax effect of pre-1988 bad debt reserves subject to recapture in the case of certain excess distributions is approximately $7.3 million. Distributions To the extent that the Bank makes "non-dividend distributions" to the Company that are considered as made (i) from the reserve for losses on qualifying real property loans or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created form an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. If the Bank makes a "non-dividend distribution," then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 35% corporate income tax rate (exclusive of state and local taxes). The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserve. Financial Condition The Company's total assets increased by $17.2 million in the last six months from $888.2 million at December 31, 1996 to $905.4 million at June 30, 1997. Most of this growth is attributable to an increase in deposits and retained earnings. Total stockholder's equity was $96.3 million at June 30, 1997, up $4.1 million from $92.2 million at December 31, 1996. The increase in stockholders' equity resulted primarily from the Company's net income of $4.9 million in the first half of 1997 and an increase in the net unrealized gains on investment securities available for sale, net of tax effect, of approximately $0.9 million. These were partially offset by the payment of $1.4 million in dividends to stockholders and the cost of additional shares of treasury stock repurchased during the last six months of approximately $0.7 million. Favorable earnings in 1997 and a strong capital position have permitted the Company to continue to reward its stockholders through the payment of higher quarterly dividends. Cash dividends paid to stockholders in the first half of 1997 were $0.54 per share. This represents an increase of 22.7% over the $0.44 per share paid in the same period the prior year. Additionally, on July 17, 1997 the Company announced that the Board of Directors had voted a dividend of $0.32 per share, a $0.05 or 18.5% increase from the dividend paid in the previous quarter. This increase will raise the annualized dividend from $1.08 to $1.28 per share. The Company's book value per share at June 30, 1997 was $35.92 up from $34.34 at December 31, 1996. Investments Total investments consisting of investment securities and other short-term investments, including term federal funds sold and interest-bearing bank deposits, increased from $622.6 million at year end 1996 to $632.5 million at June 30, 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 $16.2 million as of June 30, 1997, which has yielded substantial realized and unrealized gains. The majority of the Bank's investment securities, $495.4 million at June 30, 1997, are classified as either 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 $317.4 million at June 30, 1997 versus $306.6 million at year end 1996. The Bank also maintains a portfolio of trading securities which consisted of the following as of the dates shown: June 31, December 31, (In thousands) 1997 1996 _________ ____________ U.S. Treasury bills $10,605 $ -- Investment in mutual funds 2,678 4,672 _______ _______ Total $13,283 $ 4,672 FINANCIAL CONDITION Investment Securities The amortized cost and estimated market value of investment securities at June 30, 1997 and December 31, 1996 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________ Gross Gross (In thousands) At June 30, 1997 Amortized Unrealized Unrealized Market Cost Gains Losses Value __________________________________________________________________________________________ Securities held to maturity: Other bonds and obligations $ 381 $ -- $ -- $ 381 __________________________________________________________________________________________ Total securities held to maturity $ 381 $ -- $ -- $ 381 __________________________________________________________________________________________ Securities available for sale: Debt securities: U.S. Treasury obligations $139,175 $ 1,063 $ (4) $140,234 U.S. Government agency obligations 7,899 18 (47) 7,870 __________________________________________________________________________________________ Total 147,074 1,081 (51) 148,104 __________________________________________________________________________________________ Mortgage-backed securities: Government National Mortgage Association 65,205 810 (487) 65,528 Federal Home Loan Mortgage Corporation 242,810 1,827 (1,594) 243,043 Federal National Mortgage Association 8,171 274 -- 8,445 Other 388 19 -- 407 __________________________________________________________________________________________ Total mortgage-backed securities 316,574 2,930 (2,081) 317,423 __________________________________________________________________________________________ Total debt securities 463,648 4,011 (2,132) 465,527 __________________________________________________________________________________________ Equity securities 9,554 6,662 (13) 16,203 __________________________________________________________________________________________ Total securities available for sale 473,202 $ 10,673 $ (2,145) $481,730 __________________________________________________________________________________________ Net unrealized gains on securities available for sale 8,528 __________________________________________________________________________________________ Total securities available for sale, net $481,730 __________________________________________________________________________________________ Trading securities $ 13,346 $ 13,283 __________________________________________________________________________________________
Investment Securities (continued)
__________________________________________________________________________________________ Gross Gross (In thousands) At December 31, 1996 Amortized Unrealized Unrealized Market Cost Gains Losses Value __________________________________________________________________________________________ Securities held to maturity: Other bonds and obligations $ 160 $ -- $ -- $ 160 __________________________________________________________________________________________ Total securities held to maturity $ 160 $ -- $ -- $ 160 __________________________________________________________________________________________ Securities available for sale: Debt securities: U.S. Treasury obligations $139,197 $ 1,509 $ -- $140,706 U.S. Government agency obligations 7,899 31 (53) 7,877 Other bonds and obligations 1,000 -- -- 1,000 __________________________________________________________________________________________ Total 148,096 1,540 (53) 149,583 __________________________________________________________________________________________ Mortgage-backed securities: Government National Mortgage Association 69,903 987 (480) 70,410 Federal Home Loan Mortgage Corporation 226,130 1,878 (1,920) 226,088 Federal National Mortgage Association 9,261 356 -- 9,617 Other 453 27 -- 480 __________________________________________________________________________________________ Total mortgage-backed securities 305,747 3,248 (2,400) 306,595 __________________________________________________________________________________________ Total debt securities 453,843 4,788 (2,453) 456,178 __________________________________________________________________________________________ Equity securities 11,014 4,624 (64) 15,574 __________________________________________________________________________________________ Total securities available for sale 464,857 $ 9,412 $ (2,517) $471,752 __________________________________________________________________________________________ Net unrealized gains on securities available for sale 6,895 __________________________________________________________________________________________ Total securities available for sale, net $471,752 __________________________________________________________________________________________ Trading securities $ 4,790 $ 4,672 __________________________________________________________________________________________
Investment Securities (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, 1997 and December 31, 1996 are as follows:
June 30, 1997 ____________________________________________ Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 46,867 $ 47,107 $ -- $ -- After 1 year through 5 years 96,219 97,023 230 230 After 5 years through 10 years 3,988 3,974 104 104 After 10 years through 15 years -- -- 47 47 ________ _______ ________ _______ 147,074 148,104 381 381 Mortgage-backed securities 316,574 317,423 -- -- ________ _______ ________ _______ $463,648 $465,527 $ 381 $ 381
December 31, 1996 ____________________________________________ Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 56,820 $ 57,120 $ -- $ -- After 1 year through 5 years 87,289 88,470 -- -- After 5 years through 10 years 3,987 3,993 111 111 After 10 years through 15 years -- -- 49 49 ________ _______ ______ ______ 148,096 149,583 160 160 Mortgage-backed securities 305,747 306,595 -- -- ________ _______ ______ ______ $453,843 $456,178 $ 160 $ 160
Loans The composition of the Bank's loan portfolio is summarized as follows:
_______________________________________________________________________________________ At At (In thousands June 30, 1997 December 31, 1996 _______________________________________________________________________________________ Mortgage loans: Residential $228,291 $219,347 Commercial 3,102 4,121 Construction 877 1,388 _______________________________________________________________________________________ 232,270 224,856 Add: Premium on loans 293 325 Less: deferred mortgage loan origination fees (1,123) (1,042) _______________________________________________________________________________________ Total mortgage loans 231,440 224,139 Other loans: Consumer: Installment 2,144 1,967 Guaranteed education 9,283 9,729 Other secured 1,527 1,611 Home equity lines of credit 10,639 11,316 Unsecured 284 271 _______________________________________________________________________________________ Total consumer loans 23,877 24,894 Commercial 488 628 _______________________________________________________________________________________ Total other loans 24,365 25,522 _______________________________________________________________________________________ Total loans $255,805 $249,661 _______________________________________________________________________________________ The Bank's loan portfolio increased during the first half of 1997, from $249.7 million at December 31, 1996 to $255.8 million at June 30, 1997. All of the increase was in residential 1-4 family category as loan originations during this period exceeded loan amortization and payoffs. Loan originations, which are sensitive to interest rates, decreased in the first half of 1997 compared to the first half of 1996 as higher interest rates in 1997 affected both the mortgage refinance and home purchase markets and also reduced the demand for consumer and other loans. Loan originations totalled $15.7 million for the three months ended June 30, 1997 compared to $21.0 million for the second quarter of last year. For the first half of 1997 loan originations were $28.5 million compared to $33.4 million for the same period in 1996.
Non-Performing Assets The following table shows the composition of the Bank's non-performing assets at June 30, 1997 and 1996, and December 31, 1996:
June 30, December 31, June 30, (In thousands) 1997 1996 1996 ______________________________________________________________________________ Non-Performing Assets: Non-accrual loans $ 1,168 $ 1,601 $ 2,362 Real estate acquired through foreclosure 324 503 226 ______________________________________________________________________________ Total non-performing assets $ 1,492 $ 2,104 $ 2,588 ______________________________________________________________________________ Allowance for possible loan losses $ 2,235 $ 2,237 $ 2,420 Allowance as percent of non-accrual loans 191.4 % 139.7 % 102.5 % Non-accrual loans as percent of total loans 0.46% 0.64% 0.92% Non-performing assets as percent of total assets 0.16% 0.24% 0.29% ______________________________________________________________________________ The Bank 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 nonaccural 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, 1996 to June 30, 1997 as noted in the table above. The principal balance of non-accrual loans was $1.2 million, or less than 1/2 of 1% of total loans and real estate acquired through foreclosure was $324 thousand at June 30, 1997. 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, 1997.
Allowance For Loan Losses An analysis of the activity in the allowance for possible loan losses is as follows:
Six Months Ended June 30, 1997 1996 _______________________________________________________________________________ (In thousands) Balance at beginning of period $ 2,237 $ 2,529 Provision for loan losses 120 65 Recoveries of loans previously charged-off 35 5 Less: Charge-offs (157) (179) _________________________________________________________________________________ Balance at end of period $ 2,235 $ 2,420 _________________________________________________________________________________
Potential losses on loans are provided for under the allowance method of accounting. The allowance 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 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 possible 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, 1997 the balance of the allowance for possible loan losses was $2,235,000 representing 191.4% of total non-performing loans. Management believes that the allowance for possible 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 $10.1 million to $798.5 million at June 30, 1997 from $788.4 million at December 31, 1996. Deposits (continued) The composition of the Bank's total deposits at the dates shown are summarized as follows:
June 30, December 31, 1997 1996 ______________________________________________________________________________ (In thousands) Demand and NOW $ 62,868 $ 62,734 Savings and money market accounts 350,045 357,658 Time certificates of deposit 386,657 369,139 Deposit acquisition premium, net of amortization (1,066) (1,181) ________________________________________________________________________________ Total deposits $798,504 $788,350 ________________________________________________________________________________
Recent Accounting Developments "Earnings Per Share" In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock, (that is, securities such as options, warrants or convertible securities). This Statement simplifies the standards for computing earnings per share previously found in Accounting Principles Board ("APB") Opinion No. 15, "Earnings per Share". It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. "Reporting Comprehensive Income" In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Recent Accounting Developments (continued) Statement 130 is applicable to all entities that provide a full set of financial statements consisting of a statement of financial position, earnings (net income), cash flows and changes in equity. FASB Concepts Statement No. 6 defines comprehensive income as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." The term "comprehensive income" is used in the Statement to describe the total of all components of comprehensive income including net income. Prior to the issuance of Statement No. 130, the FASB did not require an enterprise to report comprehensive income or recommend a format for displaying comprehensive income. Various formats for reporting comprehensive income are illustrated in Statement 130. Statement 130 is effective for interim and annual periods beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect application of the provisions of the Statement. 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, 1997 the Bank had $100.3 million or 11.1% of total assets and $158.7 million or 17.5% 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, 1997, the Bank had a leverage Tier I capital to total assets ratio of 9.77%, a Tier I capital to risk- weighted assets ratio of 33.56% and a total capital to risk-weighted assets ratio of 32.42%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to total assets of 10.06%, Tier I capital to risk-weighted assets of 34.59% and total capital to risk-weighted assets of 35.44% at June 30, 1997. 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. 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, 1997, 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 22, 1997, stockholders voted affirmatively on the following proposal: To elect one Director to serve until the 1999 Annual Meeting of Stockholders and four Directors to serve until the 2000 Annual Meeting of Stockholders. Elected at Meeting Term: Alexander S. Costello Two Years Mathias B. Bedell Three Years Robert S. Cummings Three Years Leonard Lapidus Three Years Herbert G. Schurian Three Years 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 13, 1997 /s/Gerard H. Brandi ___________________________ (Signature) Gerard H. Brandi President and CEO Date: August 13, 1997 /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 months and six months ended June 30, 1997 and 1996.
Three Months Ended Six Months Ended Calculation of Primary June 30, June 30, Earnings Per Share 1997 1996 1997 1996 ______________________________ ____ ____ ____ ____ Average common shares outstanding 2,686,150 2,726,564 2,686,541 2,737,785 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (39,600) (46,200) (39,600) (46,200) Shares assumed to be repurchased under treasury stock method for stock options 92,899 74,097 90,372 77,359 _______ _______ _______ _______ Total Shares 2,739,449 2,754,461 2,737,313 2,768,944 __________ __________ _________ _________ Net Income $2,449,000 $2,370,000 $4,922,000 $4,593,000 __________ __________ __________ __________ Per Share Amount $ 0.90 $ 0.86 $ 1.80 $ 1.66 __________ __________ __________ __________
Three Months Ended Six Months Ended Calculation of Fully Diluted June 30, June 30, Earnings Per Share 1997 1996 1997 1996 ______________________________ ____ ____ ____ ____ Average common shares outstanding 2,686,150 2,726,564 2,686,541 2,737,785 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (39,600) (46,200) (39,600) (46,200) Shares assumed to be repurchased under treasury stock method for stock options 106,122 74,097 97,799 77,873 ________ _______ _______ _______ Total Shares 2,752,672 2,754,461 2,744,740 2,769,458 _________ _________ _________ _________ Net Income $2,449,000 $2,370,000 $4,922,000 $4,593,000 __________ __________ __________ __________ Per Share Amount $ 0.89 $ 0.86 $ 1.79 $ 1.66
EX-27 3
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 5,487 0 0 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 1.80 1.79 2.95 1,168 0 0 1,168 2,237 (157) 35 2,235 1,856 0 379
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