-----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, HMNCdzt+9yKuF2D01ZbSsD0L5+g2Spf3vXKEjMyZmnNbIAHye3XMJu6U++q5BqgD UuQEVn4eHZp+KDZiGoUAPA== 0000799166-97-000003.txt : 19971117 0000799166-97-000003.hdr.sgml : 19971117 ACCESSION NUMBER: 0000799166-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASSBANK CORP CENTRAL INDEX KEY: 0000799166 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042930382 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15137 FILM NUMBER: 97718717 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, 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: (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, 1997: 3,571,578 shares. MASSBANK CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page ITEM 1. Financial Statements Consolidated Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 3 Consolidated Statements of Income (unaudited) for the three months ended September 30, 1997 and 1996 4 and for the nine months ended September 30, 1997 and 1996 5 Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 1997 (unaudited) and the year ended December 31, 1996 6 Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 1997 and 1996 7 - 8 Condensed Notes to the Consolidated Financial Statements 9 - 10 Average Consolidated Balance Sheets for the three months ended September 30, 1997 and 1996 and the nine months ended September 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)
September 30, December 31, 1997 1996 ____ ____ (unaudited) Assets: Cash and due from banks $ 5,160 $ 6,612 Short-term investments (Note 4) 141,361 134,310 ______________________________________________________________________________ Total cash and cash equivalents 146,521 140,922 Term federal funds sold -- 10,000 Interest-bearing deposits in banks 2,554 1,751 Securities held to maturity, at amortized cost (market value of $377 in 1997 and $160 in 1996) 377 160 Securities available for sale, at market value (amortized cost of $477,243 in 1997 and $464,857 in 1996) 490,967 471,752 Trading securities, at market value 12,510 4,672 Loans: (Note 5) Mortgage loans 244,257 224,139 Other loans 24,281 25,522 Less: allowance for loan losses (2,254) (2,237) ______________________________________________________________________________ Net loans 266,284 247,424 Premises and equipment 4,475 4,095 Real estate acquired through foreclosure 290 503 Accrued interest receivable 5,479 5,647 Goodwill 1,511 -- Other assets 1,789 1,311 ______________________________________________________________________________ Total assets $932,757 $888,237 Liabilities and Stockholders' Equity: Deposits $820,934 $788,350 Escrow deposits of borrowers 1,608 1,271 Employee stock ownership plan liability 937 937 Accrued income taxes payable 488 805 Deferred income taxes payable, net 4,253 1,789 Other liabilities 3,967 2,835 ______________________________________________________________________________ Total liabilities 832,187 795,987 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, 7,321,600 and 5,473,375 shares issued, respectively 7,322 5,476 Additional paid-in capital 58,361 57,858 Retained earnings 69,174 65,756 ______________________________________________________________________________ 134,857 129,090 Treasury stock at cost, 3,761,022 and 2,789,411 shares, respectively (41,351) (39,904) Net unrealized gains on securities available for sale, net of tax effect 8,001 4,001 Common stock acquired by ESOP ( 937) ( 937) ______________________________________________________________________________ Total stockholders' equity 100,570 92,250 ______________________________________________________________________________ Total liabilities and stockholders' equity $932,757 $888,237 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) 1997 1996 ________________________________________________________________________________ Interest and dividend income: Mortgage Loans $ 4,535 $ 4,295 Other loans 557 629 Securities available for sale: Mortgage-backed securities 5,625 5,341 Other securities 2,536 3,053 Trading securities 182 95 Federal funds sold 1,625 1,011 Other investments 400 343 ________________________________________________________________________________ Total interest and dividend income 15,460 14,767 ________________________________________________________________________________ Interest expense: Deposits 8,937 8,441 ________________________________________________________________________________ Total interest expense 8,937 8,441 ________________________________________________________________________________ Net interest income 6,523 6,326 Provision for loan losses 45 85 ________________________________________________________________________________ Net interest income after provision for loan losses 6,478 6,241 ________________________________________________________________________________ Non-interest income: Deposit account service fees 242 243 Gains on securities, net 423 262 Other 221 198 ________________________________________________________________________________ Total non-interest income 886 703 ________________________________________________________________________________ Non-interest expense: Salaries and employee benefits 1,983 1,779 Occupancy and equipment 527 472 Data processing 71 149 Professional services 81 70 Merger and acquisition related expense 16 -- Advertising and marketing 39 64 Amortization of intangibles 68 58 Contributions 6 8 Other 400 321 ________________________________________________________________________________ Total non-interest expense 3,191 2,921 ________________________________________________________________________________ Income before income taxes 4,173 4,023 Income tax expense 1,584 1,579 ________________________________________________________________________________ Net income $ 2,589 $ 2,444 ________________________________________________________________________________ Weighted average common shares outstanding: Primary 3,670,581 3,621,485 Fully diluted 3,690,257 3,622,312 ________________________________________________________________________________ Earnings per share (in dollars): Primary $ 0.70 $ 0.67 Fully diluted 0.70 0.67 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) 1997 1996 ________________________________________________________________________________ Interest and dividend income: Mortgage Loans $13,092 $12,767 Other loans 1,677 1,894 Securities available for sale: Mortgage-backed securities 16,637 14,011 Other securities 7,882 9,534 Trading securities 518 490 Federal funds sold 4,330 3,663 Other investments 1,101 922 ________________________________________________________________________________ Total interest and dividend income 45,237 43,281 ________________________________________________________________________________ Interest expense: Deposits 25,841 24,589 ________________________________________________________________________________ Total interest expense 25,841 24,589 ________________________________________________________________________________ Net interest income 19,396 18,692 Provision for loan losses 165 150 ________________________________________________________________________________ Net interest income after provision for loan losses 19,231 18,542 ________________________________________________________________________________ Non-interest income: Deposit account service fees 690 699 Gains on securities, net 1,501 680 Other 725 665 ________________________________________________________________________________ Total non-interest income 2,916 2,044 ________________________________________________________________________________ Non-interest expense: Salaries and employee benefits 5,807 5,343 Occupancy and equipment 1,546 1,473 Data processing 372 454 Professional services 308 276 Merger and acquisition related expense 156 -- Advertising and marketing 131 179 Amortization of intangibles 183 173 Contributions 662 42 Other 1,145 1,067 ________________________________________________________________________________ Total non-interest expense 10,310 9,007 ________________________________________________________________________________ Income before income taxes 11,837 11,579 Income tax expense 4,326 4,542 ________________________________________________________________________________ Net income $ 7,511 $ 7,037 ________________________________________________________________________________ Weighted average common shares outstanding: Primary 3,656,771 3,668,273 Fully diluted 3,669,966 3,669,007 ________________________________________________________________________________ Earnings per share (in dollars): Primary $ 2.05 $ 1.92 Fully diluted 2.05 1.92 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, 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 ($0.69 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 -- -- 7,511 -- -- -- 7,511 Cash dividends declared and paid ($0.645 per share) -- -- (2,278) -- -- -- (2,278) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 16 -- -- -- 16 Amortization of ESOP shares committed to be released -- 131 -- -- -- -- 131 Purchase of treasury stock -- -- -- (1,447) -- -- (1,447) Exercise of stock options and related tax benefits 15 372 -- -- -- -- 387 Transfer resulting from four-for-three stock split 1,831 -- (1,831) -- -- -- -- Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- -- -- -- 4,000 -- 4,000 ___________________________________________________________________________________________________________________________ Balance at September 30, 1997 $ 7,322 $58,361 $69,174 $(41,351) $ 8,001 $ (937) $100,570 ___________________________________________________________________________________________________________________________ See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30, 1997 1996 ____ ____ (In thousands) Cash flows from operating activities: Net income $ 7,511 $ 7,037 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 390 325 Amortization of deposit acquisition premium 173 173 Accretion of discounts on deposits - Glendale acquisition (9) -- Amortization of loan valuation premium 48 47 Amortization of goodwill 19 -- Amortization of ESOP shares committed to be released 131 -- Contribution of appreciated securities to MASSBANK Charitable Foundation 622 -- Decrease in accrued interest receivable 168 1,513 Increase in other liabilities 1,132 897 Increase (decrease) in current income taxes payable (318) 223 Accretion of discounts on securities, net of amortization of premiums (859) (777) Net trading securities activity (7,734) 2,059 Gains on securities available for sale (1,398) (802) (Gains) losses on trading securities (104) 122 Increase in deferred mortgage loan origination fees, net of amortization 126 102 Deferred income tax expense (benefit) (364) 214 Increase in other assets (315) (135) Loans originated for sale (335) (215) Loans sold 335 308 Provision for loan losses 165 150 Provision for losses and writedowns on real estate acquired through foreclosure -- 42 Gains on sales of real estate acquired through foreclosure (16) (25) Gains on sales of premises and equipment (1) -- Increase in escrow deposits of borrowers 337 230 __________________________________________________________________________________________ Net cash provided by (used) operating activities (296) 11,488 __________________________________________________________________________________________ Cash flows from investing activities: Purchases of term federal funds (5,000) -- Proceeds from maturities of term federal funds 15,000 5,000 Purchases of interest bearing bank deposits (803) (782) Proceeds from sales of investment securities available for sale 33,086 31,877 Proceeds from maturities of investment securities held to maturity and available for sale 41,250 73,225 Purchases of investment securities held to maturity and available for sale (54,914) (53,209) Purchases of mortgage-backed securities (43,601) (126,868) Securities available for sale acquired - Glendale acquisition (5,268) -- Mortgage-backed securities acquired - Glendale acquisition (10,890) -- Principal repayments of mortgage-backed securities 29,191 27,404 Principal repayments of tax exempt bonds and other debt securities 14 13 Loans originated (39,952) (40,923)
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited)
Nine Months Ended September 30, 1997 1996 ____ ____ (In thousands) Cash flows from investing activities: (Continued) Loan principal payments received 34,375 38,123 Loans acquired, net - Glendale acquisition (13,997) -- Purchases of premises & equipment (447) (192) Premises and equipment acquired - Glendale acquisition (331) -- Goodwill - Glendale acquisition (1,530) -- Proceeds from sales of real estate acquired through foreclosure 633 476 Proceeds from sale of premises and equipment 9 -- Net advances on real estate acquired through foreclosure (28) -- __________________________________________________________________________________________ Net cash used in investing activities (23,203) (45,856) __________________________________________________________________________________________ Cash flows from financing activities: Net increase in deposits 2,700 29,569 Deposits acquired, net of acquisition discount - Glendale acquisition 29,720 -- Payments to acquire treasury stock (1,447) (3,534) Issuance of common stock under stock option plan 284 695 Tax benefit resulting from stock options exercised 103 252 Dividends paid on common stock (2,278) (1,824) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 16 -- __________________________________________________________________________________________ Net cash provided by financing activities 29,098 25,158 __________________________________________________________________________________________ Net increase (decrease) in cash and cash equivalents 5,599 (9,210) Cash and cash equivalents at beginning of period 140,922 125,655 _________________________________________________________________________________________ Cash and cash equivalents at end of period $146,521 $116,445 _________________________________________________________________________________________ Supplemental cash flow disclosures: Cash transactions: Cash paid during the period for interest $25,828 $24,566 Cash paid during the period for taxes, net of refunds 4,446 3,852 Sales of securities incomplete (not settled) at beginning of period which settled during the period 30 -- Non-cash transactions: SFAS 115: Increase (decrease) in stockholders' equity 4,000 (5,971) Increase (decrease) in deferred tax liabilities 2,829 (4,255) Transfers from loans to real estate acquired through foreclosure 376 654 Purchases of securities incomplete (not settled) at end of period -- 993 Sales of securities incomplete (not settled) at end of period 192 271 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 September 30, 1997 and December 31, 1996, and its operating results for the three and nine months ended September 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 Company's per share information reported for the current and 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, 1996. (2) Earnings Per Common Share The computation of earnings per common share for the three and nine months ended September 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) September 30, 1997 December 31, 1996 ________________________________________________________________________________ Federal funds sold (overnight) $117,180 $109,902 Money market funds 24,181 24,408 ________________________________________________________________________________ Total short-term investments $141,361 $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 September 30, 1997, the Company had outstanding commitments to originate mortgage loans and to advance funds for construction loans amounting to $4,464,000 and commitments under existing home equity lines of credit and other loans of approximately $17,754,000 which are not reflected on the consolidated balance sheet. In addition, as of September 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 September 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 $116,775 $ 1,625 5.52% $ 76,020 $ 1,011 5.29% Short-term investments (2) 27,219 395 5.75 25,591 340 5.27 Investment securities 165,324 2,580 6.24 190,210 3,096 6.51 Mortgage-backed securities 323,672 5,625 6.95 303,879 5,341 7.03 Trading securities 12,461 182 5.84 6,057 95 6.24 Mortgage loans (1) 240,639 4,535 7.54 227,613 4,295 7.55 Other loans (1) 24,643 557 8.99 26,658 629 9.39 __________________________________________________ ________________ Total earning assets 910,733 $15,499 6.79% 856,028 $14,807 6.90% Allowance for loan losses 2,281 2,359 __________________________________________________________________________________________ Total earning assets less allowance for loan losses 908,452 853,669 Other assets 19,654 19,304 __________________________________________________________________________________________ Total assets $928,106 $872,973 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - Continued Three Months Ended September 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 $ 66,951 $ 137 0.81% $ 63,253 $ 141 0.89% Savings 356,728 3,068 3.41 358,798 3,103 3.44 Time certificates of deposit 398,118 5,732 5.71 359,568 5,197 5.75 __________________________________________________ ________________ Total deposits 821,797 8,937 4.31 781,620 8,441 4.30 Other liabilities 8,007 6,024 __________________________________________________________________________________________ Total liabilities 829,804 787,644 Stockholders' Equity 98,302 85,329 __________________________________________________________________________________________ Total liabilities and stockholders' equity $928,106 $872,973 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 6,562 6,366 Less adjustment of tax-exempt interest income 39 40 __________________________________________________________________________________________ Net interest income $ 6,523 $ 6,326 __________________________________________________________________________________________ Interest rate spread 2.48% 2.60% __________________________________________________________________________________________ Net interest margin (3) 2.88% 2.97% __________________________________________________________________________________________ (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 Nine Months Ended September 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 $106,315 $ 4,330 5.45% $ 91,525 $ 3,663 5.35% Short-term investments (2) 26,318 1,088 5.53 22,892 914 5.32 Investment securities 168,981 8,010 6.32 200,186 9,654 6.43 Mortgage-backed securities 318,106 16,637 6.97 267,784 14,011 6.98 Trading securities 11,875 518 5.85 11,409 490 5.73 Mortgage loans (1) 232,039 13,092 7.52 225,351 12,767 7.55 Other loans (1) 24,823 1,677 9.02 27,364 1,894 9.22 __________________________________________________ ________________ Total earning assets 888,457 $45,352 6.80% 846,511 $43,393 6.83% Allowance for loan losses 2,235 2,451 __________________________________________________________________________________________ Total earning assets less allowance for loan losses 886,222 844,060 Other assets 18,810 19,483 __________________________________________________________________________________________ Total assets $905,032 $863,543 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - Continued Nine Months Ended September 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 $ 64,994 $ 398 0.82% $ 64,118 $ 440 0.92% Savings 355,256 9,165 3.45 358,236 9,156 3.41 Time certificates of deposit 383,239 16,278 5.68 347,565 14,993 5.76 __________________________________________________ ________________ Total deposits 803,489 25,841 4.30 769,919 24,589 4.27 Other liabilities 6,667 6,080 __________________________________________________________________________________________ Total liabilities 810,156 775,999 Stockholders' Equity 94,876 87,544 __________________________________________________________________________________________ Total liabilities and stockholders' equity $905,032 $863,543 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 19,511 18,804 Less adjustment of tax-exempt interest income 115 112 __________________________________________________________________________________________ Net interest income $19,396 $18,692 __________________________________________________________________________________________ Interest rate spread 2.50% 2.56% __________________________________________________________________________________________ Net interest margin (3) 2.93% 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 September 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 September 30, 1997 GENERAL For the quarter ended September 30, 1997, MASSBANK Corp. reported consolidated net income of $2,589,000 or $0.70 per share compared to $2,444,000 or $0.67 per share for the same quarter of 1996. 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 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 third quarter of 1997, as shown in the tables appearing on pages 11 and 12 of this Form 10-Q, increased to $910.7 million, up $54.7 million from the corresponding quarter in 1996. The increase is partly attributable to the acquisition of the Glendale Co-operative Bank on July 21, 1997. Net interest income for the recent quarter was $6,523,000, up $197,000 over the same quarter last year. Results for the quarter ended September 30, 1997 were also influenced by the following: (a) The third quarter provision for loan losses was $45,000 compared to $85,000 in the prior year's third quarter. (b) Non-interest income in the third quarter totalled $886,000, an increase of $183,000 or 26% from the same period in 1996. (c) Non-interest expense in the third quarter of 1997 totalled $3,191,000 compared to $2,921,000 during the third quarter of 1996. Net Interest Income Net interest income was $6.523 million for the third quarter of 1997 as compared to $6.326 million for the same period in 1996. This increase resulted from the growth in the Company's interest-earning assets partially offset by a decrease in net interest margin. The net interest margin for the three months ended September 30, 1997 and 1996 was 2.88% and 2.97%, respectively. The Company's interest rate spread decreased to 2.48% for the third quarter of 1997, from 2.54% in the prior quarter. This compares to a net interest spread of 2.60% for the third quarter of 1996. The yield on the Company's average earning assets in the third quarter of 1997 decreased by 11 basis points to 6.79% from 6.90% in the corresponding quarter of 1996. The Company's average cost of funds in the recent quarter increased 1 basis point, from 4.30% to 4.31%, when compared to the same quarter last year. 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 third quarter of 1997 was $45,000 versus $85,000 for the comparable period in 1996. This decrease was due to the lower level of non-accrual loans and loan charge-offs which the Bank has experienced in 1997 compared to 1996. Net charge-offs for the third quarter of 1997 amounted to $131,000 compared to $156,000 in the same quarter of last year. The reserve coverage as a percentage of the Bank's non-accrual loans showed improvement in the recent quarter. At September 30, 1997, MASSBANK's allowance for loan losses totalled $2.254 million representing 194% of non-accrual loans compared to $2.349 million representing 122% of non-accrual loans at the end of the third 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 third quarter of 1997 totalled $886,000, up $183,000 or approximately 26% from the $703,000 reported in the corresponding quarter last year. This growth is primarily attributable to an increase in net securities gains. The Company has benefited from the stock market's favorable performance through September 30, 1997. The Company's equity portfolio has yielded substantial realized and unrealized gains. Net unrealized gains in the equity securities portfolio totalled $8.1 million at September 30, 1997. The Company reported net securities gains of $423,000 for the recent quarter compared to $262,000 for the same quarter last year. Non-Interest Expense Non-interest expenses increased by $270,000, or 9.2% to $3,191,000 in the third quarter of 1997 from $2,921,000 in the third quarter of 1996. Salaries and employee benefits, the largest component of non-interest expense, increased $204,000 or 11.5% from $1,779,000 in the third quarter of 1996 to $1,983,000 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 market value of the Company's common stock during the recent quarter increased from $35.8125 per share at June 30, 1997 to $47.50 per share at September 30, 1997. This increased the expense for both plans combined by $130,000 for the recent quarter compared to the same quarter last year. These increases were partially offset by a reduction in employee retirement and health and dental insurance expenses. Occupancy and equipment expenses increased from $472,000 in the third quarter of 1996 to $527,000 in the third quarter of 1997. The increase is due largely to increases in heat, light and power expenses and higher depreciation expense resulting from building and leasehold improvements and the Bank's recent investment in new computer systems. Data processing expenses decreased from $149,000 for the quarter ended September 30, 1996 to $71,000 for the quarter ended September 30, 1997. In the recent quarter, the Bank transferred its data processing to a different data center. The decrease in data processing expenses reflects one half of the $150,000 in total credits which the Bank negotiated as part of its initial contract with the new data center. The balance of the credits will be reflected in the fourth quarter 1997. Professional fees increased from $70,000 in the third quarter 1996 to $81,000 in the recent quarter. This was due, in large part, to an increase in tax and audit service fees. Merger and acquisition related expenses incurred in connection with the acquisition of the Glendale Co-operative Bank totalled $16,000 in the third 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 was accounted for as a purchase. Advertising and marketing, amortization of intangibles, bank contributions and other expenses combined totalled $513,000 in the recent quarter versus $451,000 for the same quarter a year ago. The increase is due to increases in deposit insurance premiums of $26,000, amortization of intangibles of $10,000 and a net increase of $26,000 for all other expenses. 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 increased to $1,584,000 for the nine months ended September 30, 1997 from $1,579,000 for the same period in 1996. The Company's combined effective income tax rate for the third quarter of 1997 is 38.0% as compared to 39.2% for the same quarter a year ago. Results of Operations for the nine months ended September 30, 1997 General For the nine months ended September 30, 1997, the Company reported consolidated net income of $7,511,000 or $2.05 per share, up from $7,037,000 or $1.92 per share earned in the first nine months of 1996. The Company's financial performance in the first nine 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 nine months of 1997, as shown in the tables appearing on pages 13 and 14 of this Form 10-Q, increased to $888.5 million, up $41.9 million from the corresponding period in 1996. Net interest income for the nine months ended September 30, 1997 was $19,396,000 up $704,000 when compared to the same period in 1996. The Company's earnings results for the nine months ended September 30, 1997 were also impacted by the following: (a) The provision for loan losses for the nine months ended September 30, 1997 was $165,000 compared to $150,000 for the same period last year. (b) Non-interest income for the first nine months of 1997 totalled $2,916,000, an increase of $872,000 or 43% from the same period in 1996. (c) Non-interest expense for the nine months ended September 30, 1997 totalled $10,310,000 compared to $9,007,000 for the same period in 1996. (d) MASSBANK contributed appreciated stock to the MASSBANK Charitable Foundation, a tax exempt private foundation, which it established and endowed in the second quarter 1997. By contributing appreciated stock the Bank obtained a tax benefit of approximately $260,000. Net Interest Income Net interest income was $19.396 million for the nine months ended September 30, 1997 up $704,000 from $18.692 million for the same period in 1996. This increase resulted from the growth in the Company's interest-earning assets partially offset by a decrease in net interest margin. The net interest margin for the nine months ended September 30, 1997 and 1996 was 2.93% and 2.96%, respectively. The Company's interest rate spread decreased to 2.50% for the first nine months of 1997, from 2.56% in the first nine months of last year. The yield on the Company's average earning assets in the first nine months of 1997 decreased by 3 basis points to 6.80% from 6.83% in the corresponding period of 1996. The Company's average cost of funds in the first nine months of 1997 increased 3 basis points from 4.27% to 4.30%, when compared to the same period in 1996. Net Interest Income (Continued) The provision for loan losses for the first nine months of 1997 was $165,000 versus $150,000 for the comparable period in 1996. For the nine months ended September 30, 1997, loan charge-offs net of recoveries declined to $253,000 from $330,000 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 1997 totalled $2,916,000, up $872,000 or approximately 43% from the $2,044,000 reported in the corresponding period last year. This increase is principally due to net gains on securities of $1,501,000 reported for the nine months ended September 30, 1997 versus $680,000 reported for the same period in 1996. The Company has benefited from the stock market's favorable performance through September 30, 1997. The Company's equity portfolio has yielded substantial realized and unrealized gains. Net unrealized gains in the equity portfolio totalled $8.1 million at September 30, 1997. Non-Interest Expense Non-interest expenses increased by $1,303,000, or 14.5% to $10,310,000 in the first nine months of 1997 from $9,007,000 in the first nine months of 1996. Salaries and employee benefits, the largest component of non-interest expense, increased $464,000 or 8.7% from $5,343,000 in the first nine months of 1996 to $5,807,000 in the first nine months of 1997. 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 market value of the Company's common stock in the last nine months increased from $28.59 per share at December 31, 1996 to $47.50 per share at September 30, 1997. This significantly increased the expense for both plans. These increases are partially offset by a reduction in employee retirement expense. Occupancy and equipment expenses increased from $1,473,000 in the first nine months of 1996 to $1,546,000 in the first nine months of 1997, due largely to an increase in depreciation expense resulting from building and leasehold improvements and the Bank's recent investment in new computer systems. Data processing expenses decreased from $454,000 for the nine months ended September 30, 1996 to $372,000 for the same period this year. In the third quarter of 1997, as previously noted, the Bank transferred its data processing to a different data center. The decrease in data processing expenses reflects one half of the $150,000 in total credits which the Bank negotiated as part of its initial contract with the new data center. The balance of the credits will be reflected in the fourth quarter 1997. Merger and acquisition related expenses incurred in connection with the acquisition of the Glendale Co-operative Bank totalled $156,000 in the first nine months of 1997. The acquisition was completed on July 21, 1997. The transaction was accounted for as a purchase. Bank contributions for the first nine months of this year were $662,000 compared to $42,000 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 expense. Professional services, advertising and marketing, amortization of intangibles and other expenses combined totalled $1,767,000 for the nine months ended September 30, 1997 compared to $1,695,000 for the same period a year ago. This increase is due primarily to an increase in deposit insurance premiums of $77,000. All other expense increases were fully offset by a reduction in advertising and marketing expenses. Income Tax Expense The provision for federal and state income taxes decreased to $4,326,000 for the nine months ended September 30, 1997 from $4,542,000 for the same period in 1996. The decrease is due principally to the tax benefit of approximately $260,000 which the Bank obtained by contributing appreciated stock to the MASSBANK Charitable Foundation. The Company's combined effective income tax rate for the first nine months of 1997 is 36.5% 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 dept 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 incredible in gross income for federal income tax purposes, assuming a 35% corporate income tax rate (exclusive of 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 $44.5 million in the last nine months, from $888.2 million at December 31, 1996 to $932.7 million at September 30, 1997. The increase is largely attributable to the Glendale Co-operative Bank acquisition in July. Glendale, as of the acquisition date, had total assets of approximately $35.9 million. Most of the growth in the Company's total assets is in loans and securities available for sale. Since year end 1996, the Bank has increased its loan portfolio by $19.2 million and its securities available portfolio by $18.9 million. The Bank's deposits increased by $32.6 million or 4.1% during the nine months ended September 30, 1997, from $788.3 million at year end 1996 to $820.9 million at September 30, 1997. The growth in deposits is primarily attributable to the Glendale acquisition. As of the acquisition date, Glendale had total deposits of approximately $29.8 million. Total stockholder's equity reached $100.6 million at September 30, 1997, up $8.3 million from $92.3 million at December 31, 1996. The increase in stockholders' equity resulted primarily from the Company's net income of $7.5 million in the first nine months of 1997 and an increase in the net unrealized gains on investment securities available for sale, net of tax effect, of approximately $4.0 million. These were partially offset by the payment of $2.3 million in dividends to stockholders and the cost of additional shares of treasury stock repurchased during the last nine months of approximately $1.4 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 nine months of 1997 were $0.645 per share. This represents an increase of 26.5% over the $0.51 per share paid in the same period the prior year. The Company's book value per share at September 30, 1997 was $28.25 up from $25.76 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 $647.8 million at September 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 $17.1 million as of September 30, 1997, which 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 $326.3 million at September 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: September 30, December 31, (In thousands) 1997 1996 _____________ ____________ U.S. Treasury bills $ 9,760 $ -- Investment in mutual funds 2,706 4,672 Equity securities 44 -- _______ _______ Total $12,510 $ 4,672 FINANCIAL CONDITION INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities at September 30, 1997 and December 31, 1996 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________ Gross Gross (In thousands) At September 30, 1997 Amortized Unrealized Unrealized Market Cost Gains Losses Value __________________________________________________________________________________________ Securities held to maturity: Other bonds and obligations $ 377 $ -- $ -- $ 377 __________________________________________________________________________________________ Total securities held to maturity $ 377 $ -- $ -- $ 377 __________________________________________________________________________________________ Securities available for sale: Debt securities: U.S. Treasury obligations $134,289 $ 1,537 $ -- $135,826 U.S. Government agency obligations 10,628 31 (10) 10,649 __________________________________________________________________________________________ Total $144,917 1,568 (10) 146,475 __________________________________________________________________________________________ Mortgage-backed securities: Collateralized mortgage obligations: Federal Home Loan Mortgage Corporation 4,328 26 -- 4,354 Federal National Mortgage Association 3,740 17 (1) 3,756 Other: Government National Mortgage Association 63,208 1,154 (136) 64,226 Federal Home Loan Mortgage Corporation 242,303 3,233 (574) 244,962 Federal National Mortgage Association 8,319 293 -- 8,612 Other 326 16 -- 342 __________________________________________________________________________________________ Total mortgage-backed securities 322,224 4,739 (711) 326,252 __________________________________________________________________________________________ Total debt securities 467,141 6,307 (721) 472,727 __________________________________________________________________________________________ Mutual funds 1,110 2 -- 1,112 Equity securities 8,992 8,138 (2) 17,128 __________________________________________________________________________________________ Total securities available for sale 477,243 $ 14,447 $ (723) $490,967 __________________________________________________________________________________________ Net unrealized gains on securities available for sale 13,724 __________________________________________________________________________________________ Total securities available for sale, net $490,967 __________________________________________________________________________________________ Trading securities $ 12,538 $ 12,510 __________________________________________________________________________________________
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 September 30, 1997 and December 31, 1996 are as follows:
September 30, 1997 ____________________________________________ Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 47,125 $ 47,336 $ -- $ -- After 1 year through 5 years 96,509 97,860 230 230 After 5 years through 10 years 1,000 994 101 101 After 10 years through 15 years -- -- 46 46 After 15 years 283 285 -- -- ________ _______ ________ _______ 144,917 146,475 377 377 Mortgage-backed securities 322,224 326,252 -- -- ________ _______ ________ _______ $467,141 $472,727 $ 377 $ 377
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) September 30, 1997 December 31, 1996 _______________________________________________________________________________________ Mortgage loans: Residential $239,176 $219,347 Commercial 4,769 4,121 Construction 1,121 1,388 _______________________________________________________________________________________ 245,066 224,856 Add: Premium on loans 359 325 Less: deferred mortgage loan origination fees (1,168) (1,042) _______________________________________________________________________________________ Total mortgage loans 244,257 224,139 Other loans: Consumer: Installment 2,240 1,967 Guaranteed education 9,112 9,729 Other secured 1,624 1,611 Home equity lines of credit 11,006 11,316 Unsecured 264 271 _______________________________________________________________________________________ Total consumer loans 24,246 24,894 Commercial 35 628 _______________________________________________________________________________________ Total other loans 24,281 25,522 _______________________________________________________________________________________ Total loans $268,538 $249,661 _______________________________________________________________________________________ The Bank's loan portfolio increased $18.9 million during the first nine months of 1997, from $249.7 million at December 31, 1996 to $268.5 million at September 30, 1997. Most of the increase was in the residential 1-4 family category. Approximately $14.1 million of the increase is attributable to the Glendale acquisition in July. The remainder was due to loan originations during the period exceeding loan amortization and payoffs. Loan originations decreased slightly in the first nine months of 1997 compared to the first nine months of 1996. Loan originations totalled $11.8 million for the three months ended September 30, 1997 compared to $7.7 million for the third quarter of last year. For the nine months ended September 30, 1997 loan originations were $40.3 million compared to $41.1 million for the same period in 1996.
NON-PERFORMING ASSETS The following table shows the composition of the Bank's non-performing assets at September 30, 1997 and 1996, and December 31, 1996:
At At At September 30, December 31, September 30, (In thousands) 1997 1996 1996 ____________________________________________________________________________________ Non-Performing Assets: Non-accrual loans $ 1,163 $ 1,601 $ 1,925 Real estate acquired through foreclosure 290 503 417 ____________________________________________________________________________________ Total non-performing assets $ 1,453 $ 2,104 $ 2,342 ____________________________________________________________________________________ Allowance for possible loan losses $ 2,254 $ 2,237 $ 2,349 Allowance as percent of non-accrual loans 193.8 % 139.7 % 122.0 % Non-accrual loans as percent of total loans 0.43% 0.64% 0.77% Non-performing assets as percent of total assets 0.16% 0.24% 0.27% ____________________________________________________________________________________ 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, 1996 to September 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 down to $290 thousand at September 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 September 30, 1997.
ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows:
Nine Months Ended September 30, 1997 1996 _______________________________________________________________________________ (In thousands) Balance at beginning of period $ 2,237 $ 2,529 Glendale Co-operative acquisition 105 -- Provision for loan losses 165 150 Recoveries of loans previously charged-off 35 40 Less: Charge-offs (288) (370) ________________________________________________________________________________ Balance at end of period $ 2,254 $ 2,349 ________________________________________________________________________________
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 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, 1997 the balance of the allowance for loan losses was $2,254,000 representing 193.8% of total 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 approximately $32.6 million to $820.9 million at September 30, 1997 from $788.3 million at December 31, 1996. The composition of the Bank's total deposits at the dates shown are summarized as follows:
September 30, December 31, 1997 1996 ______________________________________________________________________________ (In thousands) Demand and NOW $ 65,362 $ 62,734 Savings and money market accounts 355,854 357,658 Time certificates of deposit 400,680 369,139 Deposit acquisition premium, net of amortization (962) (1,181) ________________________________________________________________________________ Total deposits $820,934 $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. The adoption of this pronouncement is not expected to have a material impact on the Company's computation of earnings per share. Recent Accounting Developments (continued) "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. 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. "Disclosure of Information about Capital Structure" In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about Capital Structure". This Statement establishes standards for disclosing information about an entity's capital structure. It applies to all entities and is effective for reporting periods ending after December 15, 1997. The Company's disclosures currently comply with these new requirements. "Disclosures about Segments of an Enterprise and Related Information" In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This Statement establishes standards for reporting information about operating segments. An operating segment is defined as a component of an enterprise for which separate financial information is available and reviewed regularly by the enterprise's chief operating decision maker in order to make decisions about resources to be allocated to the segment and also to evaluate the segment's performance. SFAS No. 131 requires a company to disclose certain balance sheet and income statement information by operating segment, as well as provide a reconciliation of operating segment information to the company's consolidated balances. This Statement is effective for reporting periods beginning after December 15, 1997. 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, 1997 the Bank had $117.2 million or 12.6% of total assets and $156.2 million or 16.8% 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, 1997, the Bank had a leverage Tier I capital to total assets ratio of 9.51%, a Tier I capital to risk- weighted assets ratio of 32.20% and a total capital to risk-weighted assets ratio of 33.03%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to total assets of 9.81%, Tier I capital to risk-weighted assets of 33.21% and total capital to risk-weighted assets of 34.04% at September 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 September 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 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, 1997 /s/Gerard H. Brandi ___________________________ (Signature) Gerard H. Brandi President and CEO Date November 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 nine months ended September 30, 1997 and 1996.
Three Months Ended Nine Months Ended Calculation of Primary September 30, September 30, Earnings Per Share 1997 1996 1997 1996 ______________________________ ____ ____ ____ ____ Average common shares outstanding 3,572,418 3,587,247 3,578,807 3,629,181 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (52,800) (61,600) (52,800) (61,600) Shares assumed to be repurchased under treasury stock method for stock options 150,963 95,838 130,764 100,692 _______ _______ _______ _______ Total Shares 3,670,581 3,621,485 3,656,771 3,668,273 __________ __________ _________ _________ Net Income $2,589,000 $2,444,000 $7,511,000 $7,037,000 __________ __________ __________ __________ Per Share Amount $ 0.70 $ 0.67 $ 2.05 $ 1.92 __________ __________ __________ __________
Three Months Ended Nine Months Ended Calculation of Fully Diluted September 30, September 30, Earnings Per Share 1997 1996 1997 1996 ______________________________ ____ ____ ____ ____ Average common shares outstanding 3,572,418 3,587,247 3,578,807 3,629,181 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (52,800) (61,600) (52,800) (61,600) Shares assumed to be repurchased under treasury stock method for stock options 170,639 96,665 143,959 101,426 ________ _______ _______ _______ Total Shares 3,690,257 3,622,312 3,669,966 3,669,007 _________ _________ _________ _________ Net Income $2,589,000 $2,444,000 $7,511,000 $7,037,000 __________ __________ __________ __________ Per Share Amount $ 0.70 $ 0.67 $ 2.05 $ 1.92
EX-27 3
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 7,322 0 0 93,248 932,757 14,769 25,037 5,431 45,237 25,841 25,841 19,396 170 1,501 10,310 11,837 11,837 0 0 7,511 2.05 2.05 2.93 1,163 527 0 1,690 2,237 (288) 35 2,254 1,825 0 429
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