-----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, DbOuLIG+VaHwQSaFOHfAzglMXhWPFJ3nR4M0/DipYwdoct7KgbcDnDoKANV1IQ98 WoVLuzOo7SpEhl9HUzi7/w== 0000799166-99-000002.txt : 19990816 0000799166-99-000002.hdr.sgml : 19990816 ACCESSION NUMBER: 0000799166-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99687312 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, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________to____________ Commission File Number 0-15137 MASSBANK Corp. (Exact name of registrant as specified in its charter) Delaware 04-2930382 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 123 HAVEN STREET Reading, Massachusetts 01867 (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (781) 662-0100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date is: Class: Common stock $1.00 per share. Outstanding at July 31, 1999: 3,397,875 shares. MASSBANK CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page ITEM 1. Financial Statements Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Income (unaudited) for the three months ended June 30, 1999 and 1998 4 and for the six months ended June 30, 1999 and 1998 5 Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 1999 (unaudited) and the year ended December 31, 1998 6 - 7 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1999 and 1998 8 - 9 Condensed Notes to the Consolidated Financial Statements 10 - 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 34 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 35 ITEM 2. Changes in Securities 35 ITEM 3. Defaults Upon Senior Securities 35 ITEM 4. Submission of Matters to a Vote of Security Holders 35 ITEM 5. Other Information 35 ITEM 6. Exhibits and Reports on Form 8-K 35 Signature Page 36 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share data)
June 30, December 31, 1999 1998 (unaudited) Assets: Cash and due from banks $ 6,992 $ 7,038 Short-term investments (Note 3) 140,878 147,776 ________________________________________________________________________________ Total cash and cash equivalents 147,870 154,814 Term federal funds sold -- 25,000 Interest-bearing deposits in banks 3,549 2,033 Securities held to maturity, at amortized cost (market value of $230 in 1999 and $354 in 1998) 230 354 Securities available for sale, at market value (amortized cost of $437,325 in 1999 and $398,343 in 1998) 446,372 418,126 Trading securities, at market value 5,980 30,793 Loans: (Note 4) Mortgage loans 295,540 283,654 Other loans 36,256 21,335 Less: allowance for loan losses (2,558) (2,450) ________________________________________________________________________________ Net loans 329,238 302,539 Premises and equipment 4,309 4,320 Real estate acquired through foreclosure -- 86 Accrued interest receivable 5,031 5,058 Goodwill 1,338 1,387 Accrued income tax asset, net 221 -- Other assets 1,878 2,115 ________________________________________________________________________________ Total assets $946,016 $946,625 Liabilities and Stockholders' Equity: Deposits $829,290 $824,031 Escrow deposits of borrowers 1,350 1,438 Employee stock ownership plan liability 625 625 Accrued income taxes payable -- 723 Deferred income taxes payable 2,341 6,761 Other liabilities 8,058 2,558 ________________________________________________________________________________ Total liabilities 841,664 836,136 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, 7,391,082 and 7,384,332 shares issued, respectively 7,391 7,384 Additional paid-in capital 60,240 60,003 Retained earnings 82,243 78,308 ________________________________________________________________________________ 149,874 145,695 Accumulated other comprehensive income: (Note 5) Net unrealized gains on securities available for sale, net of tax effect 5,280 11,691 Treasury stock at cost, 3,988,707 and 3,885,222 shares, respectively (50,177) (46,272) Common stock acquired by ESOP ( 625) ( 625) ________________________________________________________________________________ Total stockholders' equity 104,352 110,489 ________________________________________________________________________________ Total liabilities and stockholders' equity $946,016 $946,625 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) 1999 1998 ______________________________________________________________________________ Interest and dividend income: Mortgage Loans $ 5,138 $ 4,774 Other loans 486 511 Securities available for sale: Mortgage-backed securities 4,360 5,293 Other securities 2,258 2,167 Trading securities 75 157 Federal funds sold 1,704 1,749 Other investments 324 374 ______________________________________________________________________________ Total interest and dividend income 14,345 15,025 ______________________________________________________________________________ Interest expense: Deposits 8,215 8,562 ______________________________________________________________________________ Total interest expense 8,215 8,562 ______________________________________________________________________________ Net interest income 6,130 6,463 Provision for loan losses 60 45 ______________________________________________________________________________ Net interest income after provision for loan losses 6,070 6,418 ______________________________________________________________________________ Non-interest income: Deposit account service fees 178 210 Gains on securities, net 1,131 616 Other 269 275 ______________________________________________________________________________ Total non-interest income 1,578 1,101 ______________________________________________________________________________ Non-interest expense: Salaries and employee benefits 1,893 1,874 Occupancy and equipment 512 472 Data processing 116 123 Professional services 106 119 Advertising and marketing 47 54 Amortization of intangibles 83 68 Other 365 409 ______________________________________________________________________________ Total non-interest expense 3,122 3,119 ______________________________________________________________________________ Income before income taxes 4,526 4,400 Income tax expense 1,660 1,694 ______________________________________________________________________________ Net income $ 2,866 $ 2,706 ______________________________________________________________________________ Weighted average common shares outstanding: Basic 3,379,796 3,546,194 Diluted 3,495,618 3,708,701 Earnings per share (in dollars): Basic $ 0.85 $ 0.76 Diluted 0.82 0.73 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) 1999 1998 ______________________________________________________________________________ Interest and dividend income: Mortgage Loans $10,263 $ 9,424 Other loans 921 1,036 Securities available for sale: Mortgage-backed securities 8,815 10,854 Other securities 4,365 4,355 Trading securities 345 453 Federal funds sold 3,367 3,252 Other investments 642 744 ______________________________________________________________________________ Total interest and dividend income 28,718 30,118 ______________________________________________________________________________ Interest expense: Deposits 16,448 17,083 ______________________________________________________________________________ Total interest expense 16,448 17,083 ______________________________________________________________________________ Net interest income 12,270 13,035 Provision for loan losses 110 90 ______________________________________________________________________________ Net interest income after provision for loan losses 12,160 12,945 ______________________________________________________________________________ Non-interest income: Deposit account service fees 356 421 Gains on securities, net 2,509 1,428 Other 454 498 ______________________________________________________________________________ Total non-interest income 3,319 2,347 ______________________________________________________________________________ Non-interest expense: Salaries and employee benefits 3,762 3,847 Occupancy and equipment 1,059 1,027 Data processing 241 253 Professional services 220 240 Advertising and marketing 95 97 Amortization of intangibles 163 137 Other 750 774 ______________________________________________________________________________ Total non-interest expense 6,290 6,375 ______________________________________________________________________________ Income before income taxes 9,189 8,917 Income tax expense 3,410 3,377 ______________________________________________________________________________ Net income $ 5,779 $ 5,540 ______________________________________________________________________________ Weighted average common shares outstanding: Basic 3,415,146 3,540,456 Diluted 3,531,267 3,702,676 Earnings per share (in dollars): Basic $ 1.69 $ 1.56 Diluted 1.64 1.50 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, 1999 (unaudited) (In thousands except share data)
ACCUMULATED COMMON ADDITIONAL OTHER STOCK COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL ________ __________ _________ __________ __________ _________ ________ Balance at December 31, 1998 $7,384 $60,003 $78,308 $(46,272) $11,691 $(625) $110,489 Net Income -- -- 5 ,779 -- -- -- 5,779 Other comprehensive income or (loss), net of tax: Unrealized losses on securities, net of reclassification adjustment (Note 5) -- -- -- -- (6,411) -- (6,411) _____ Comprehensive (loss) (632) Cash dividends declared and paid ($0.54 per share) -- -- (1,850) -- -- -- (1,850) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 6 -- -- -- 6 Amortization of ESOP shares committed to be released -- 88 -- -- -- -- 88 Purchase of treasury stock -- -- -- (3,905) -- -- (3,905) Exercise of stock options and related tax benefits 7 149 -- -- -- -- 156 ___________________________________________________________________________________________________________________________ Balance at June 30, 1999 $7,391 $60,240 $82,243 $(50,177) $ 5,280 $(625) $104,352 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Year Ended December 31, 1998 (unaudited) (In thousands except share data)
ACCUMULATED COMMON ADDITIONAL OTHER STOCK COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL ________ __________ _________ __________ __________ _________ ________ Balance at December 31, 1997 $7,337 $58,737 $70,984 $(41,569) $ 9,071 $(781) $103,779 Net income -- -- 10,914 -- -- -- 10,914 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (Note 5) -- -- -- -- 2,620 -- 2,620 ______ Comprehensive income 13,534 Cash dividends declared and paid ($1.02 per share) -- -- (3,605) -- -- -- (3,605) 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 -- 243 -- -- -- -- 243 Purchase of treasury stock -- -- -- (4,703) -- -- (4,703) Exercise of stock options and related tax benefits 47 1,023 -- -- -- -- 1,070 __________________________________________________________________________________________________________________________ Balance at December 31, 1998 $7,384 $60,003 $78,308 $(46,272) $11,691 $(625) $110,489 See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, 1999 1998 ____ ____ (In thousands) Cash flows from operating activities: Net income $ 5,779 $ 5,540 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 469 453 Loan interest capitalized (21) (40) Amortization of ESOP shares committed to be released 88 139 Decrease in accrued interest receivable 27 44 Increase in other liabilities 217 562 Increase (decrease) in current income taxes payable (944) (1,809) Accretion of discounts on securities, net of amortization of premiums (547) (596) Net trading securities activity 25,180 17,424 Gains on securities available for sale (2,486) (1,389) Gains on trading securities (23) (38) Increase in deferred mortgage loan origination fees, net of amortization 53 130 Deferred income tax (benefit) expense (94) 49 Increase in other assets (217) (11) Loans originated for sale -- (129) Loans sold -- 129 Provision for loan losses 110 90 Gains on sales of real estate acquired through foreclosure -- (3) Decrease in escrow deposits of borrowers (88) (168) Gains on sales of premises and equipment (2) -- __________________________________________________________________________________________ Net cash provided by operating activities 27,501 20,377 __________________________________________________________________________________________ Cash flows from investing activities: Purchases of term federal funds -- (10,000) Proceeds from maturities of term federal funds 25,000 20,000 Increase in interest bearing bank deposits (2,825) (513) Proceeds from maturities of interest bearing bank deposits 1,309 -- Proceeds from sales of investment securities available for sale 41,968 10,847 Proceeds from maturities of investment securities available for sale 42,800 25,750 Purchases of investment securities available for sale (109,866) (29,957) Purchases of mortgage-backed securities (46,659) -- Principal repayments of mortgage-backed securities 41,159 32,963 Principal repayments of securities held to maturity 124 9 Principal repayments of securities available for sale 41 1 Loans originated (61,042) (49,545) Loan principal payments received 34,514 33,514 Loans purchased (345) -- Purchases of premises & equipment (264) (154) Proceeds from sales of real estate acquired through foreclosure 86 191 Proceeds from sales of premises and equipment 2 -- Net advances on real estate acquired through foreclosure -- (9) __________________________________________________________________________________________ Net cash (used in) provided by investing activities (33,998) 33,097 __________________________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited)
Six Months Ended June 30, 1999 1998 ____ ____ (In thousands) Cash flows from financing activities: Net increase (decrease) in deposits 5,146 (1,231) Payments to acquire treasury stock (3,905) -- Issuance of common stock under stock option plan 112 373 Tax benefit resulting from stock options exercised 44 136 Dividends paid on common stock (1,850) (1,771) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 6 7 __________________________________________________________________________________________ Net cash used in financing activities (447) (2,486) __________________________________________________________________________________________ Net (decrease) increase in cash and cash equivalents (6,944) 50,988 Cash and cash equivalents at beginning of period 154,814 116,563 _________________________________________________________________________________________ Cash and cash equivalents at end of period $147,870 $167,551 _________________________________________________________________________________________ Supplemental cash flow disclosures: Cash transactions: Cash paid during the period for interest $16,454 $17,091 Cash paid during the period for taxes, net of refunds 4,402 4,669 Purchases of securities incomplete (not settled) at beginning of period which settled during the period 129 32 Sales of securities incomplete (not settled) at beginning of period which settled during the period 583 -- Non-cash transactions: SFAS 115: (Decrease) increase in accumulated other comprehensive income (6,411) 1,165 (Decrease) increase in deferred tax liabilities (4,326) 653 Securities reclassified from available for sale to trading securities -- 1,111 Transfers from loans to real estate acquired through foreclosure -- 250 Transfers from premises and equipment to other assets -- 9 Purchases of securities incomplete (not settled) at end of period 6,038 -- Sales of securities incomplete (not settled) at end of period 755 -- _________________________________________________________________________________________ See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation The financial condition and results of operations of MASSBANK Corp. (the "Company") essentially reflect the operations of its subsidiary, MASSBANK (the "Bank"). All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles, and in the opinion of management, include all adjustments of a normal recurring nature necessary for the fair presentation of the financial condition of the Company as of June 30, 1999 and December 31, 1998, and its operating results for the three and six months ended June 30, 1999 and 1998. 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, 1998. (2) Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents consist of cash and due from banks, and short-term investments with original maturities of less than 90 days. (3) Short-Term Investments Short-term investments consist of the following: ________________________________________________________________________________ At At (In thousands) June 30, 1999 December 31, 1998 ________________________________________________________________________________ Federal funds sold (overnight) $116,235 $123,207 Money market funds 24,643 24,569 ________________________________________________________________________________ Total short-term investments $140,878 $147,776 ________________________________________________________________________________ The investments above are stated at cost which approximates market value and have original maturities of 90 days or less. (4) Commitments At June 30, 1999, the Company had outstanding commitments to originate mortgage loans and to advance funds for construction loans amounting to $4,618,000 and commitments under existing home equity lines of credit and other loans of approximately $31,730,000 which are not reflected on the consolidated balance sheet. In addition, as of June 30, 1999, the Company had a performance standby letter of credit conveyed to others in the amount of $625,000 which is also not reflected on the consolidated balance sheet. CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) (5) Reporting Comprehensive Income The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement establishes standards for the reporting and displaying of comprehensive income. Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." It includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. The term "comprehensive income", is used in the Statement to describe the total of all components of comprehensive income including net income. The Company's other comprehensive income and related tax effect for the six months ended June 30, 1999 and the year ended December 31, 1998 is as follows:
For the Six Months Ended June 30, 1999 ____________________________________________________________________________________ Tax Before-Tax (Expense) Net-of-Tax (In thousands) Amount or Benefit Amount ______ __________ ______ Unrealized losses on securities: Unrealized holding losses arising during period $ (8,251) $3,270 $(4,981) Less: reclassification adjustment for gains realized in net income (2,486) 1,056 (1,430) ______ ________ ______ Net unrealized losses (10,737) 4,326 (6,411) ______ ________ ______ Other comprehensive loss $(10,737) $4,326 $(6,411) ______ ________ _____
For the Year Ended December 31, 1998 ____________________________________________________________________________________ Tax Before-Tax (Expense) Net-of-Tax (In thousands) Amount or Benefit Amount ______ __________ ______ Unrealized gains on securities: Unrealized holding gains arising during period $ 7,106 $(2,864) $4,242 Less: reclassification adjustment for gains realized in net income (2,798) 1,176 (1,622) ______ ________ ______ Net unrealized gains 4,308 (1,688) 2,620 ______ ________ ______ Other comprehensive income $ 4,308 $(1,688) $2,620 ______ ________ ______
MASSBANK CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1999 Cautionary Statement. Certain statements contained in this report or incorporated herein by reference are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume" and other similar expressions which predict or indicate future events and trends and which do not relate to historical matters. In addition, information concerning the costs, timing and effectiveness of Year 2000 compliance, are forward-looking statements. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: fluctuations in interest rates, price volatility in the stock and bond markets, inflation, government regulations and economic conditions and competition in the geographic and business areas in which the Company conducts its operations; and the Company and its customers and suppliers may experience unanticipated delays or expenses in achieving Year 2000 compliance. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Results of Operations for the three months ended June 30, 1999 GENERAL For the quarter ended June 30, 1999, MASSBANK Corp. reported consolidated net income of $2,866,000 or $0.85 in basic earnings per share compared to net income of $2,706,000, or $0.76 in basic earnings per share in the second quarter of 1998. Diluted earnings per share increased to $0.82 per share from $0.73 per share in the second quarter of last year, representing an increase of 12.3%. The Company's favorable earnings results for the recent quarter can be attributed primarily to an increase of $515,000 in securities gains, reflecting the favorable performance of the Bank's equity securities portfolio, and a decrease in income tax expense due to a lower effective income tax rate. These improvements were partially offset by a decrease in net interest income resulting from a decline in net interest margin, partially offset by an increase in average earning assets. The second quarter earnings results also reflect modest reductions in deposit account service fees and other non- interest income, and a modest increase in the Bank's provision for loan losses.
AVERAGE BALANCE SHEETS Three Months Ended June 30, 1999 1998 ______________ ______________ 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 $146,374 $ 1,704 4.67% $128,599 $ 1,749 5.46% Short-term investments (2) 27,183 318 4.70 27,177 369 5.44 Investment securities 170,281 2,291 5.38 150,873 2,203 5.84 Mortgage-backed securities 258,589 4,360 6.74 307,654 5,293 6.88 Trading securities 5,967 75 5.05 11,472 157 5.48 Mortgage loans (1) 294,180 5,138 6.99 260,478 4,774 7.33 Other loans (1) 23,984 486 8.12 22,303 511 9.19 __________________________________________________ ________________ Total earning assets 926,558 $14,372 6.20% 908,556 $15,056 6.62% Allowance for loan losses (2,502) (2,367) __________________________________________________________________________________________ Total earning assets less allowance for loan losses 924,056 906,189 Other assets 19,963 19,951 __________________________________________________________________________________________ Total assets $944,019 $926,140 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued) Three Months Ended June 30, 1999 1998 ______________ ______________ 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 $ 76,086 $ 123 0.65% $ 69,516 $ 140 0.81% Savings 352,506 2,991 3.40 351,040 3,000 3.43 Time certificates of deposit 400,042 5,101 5.11 387,536 5,422 5.61 __________________________________________________ ________________ Total deposits 828,634 8,215 3.98 808,092 8,562 4.25 Other liabilities 8,117 9,790 __________________________________________________________________________________________ Total liabilities 836,751 817,882 Stockholders' equity 107,268 108,258 __________________________________________________________________________________________ Total liabilities and stockholders' equity $944,019 $926,140 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 6,157 6,494 Less adjustment of tax-exempt interest income 27 31 __________________________________________________________________________________________ Net interest income $ 6,130 $ 6,463 __________________________________________________________________________________________ Interest rate spread 2.22% 2.37% __________________________________________________________________________________________ Net interest margin (3) 2.66% 2.86% __________________________________________________________________________________________ (1) Loans on non-accrual status are included in the average balance. (2) Short-term investments consist of interest-bearing deposits in banks and investments in money market funds. (3) Net interest income (tax equivalent basis) before provision for loan losses divided by average interest-earning assets. (4) Includes the effects of SFAS No. 115.
Net Interest Income The Company's net interest income was $6,130,000 for the second quarter of 1999, a decrease of $333,000 from the same quarter a year ago. This decrease is the result of a lower net interest margin, partially offset by the positive effect of growth in the Company's average earning assets. The Company's net interest margin for the second quarter of 1999 was 2.66% down from 2.86% for the same quarter of the prior year. Average earning assets for the second quarter of 1999 increased to $926.6 million, up $18.0 million from the corresponding quarter in 1998. MASSBANK's net interest margin over the last twelve months has been negatively impacted by reductions in the Federal Funds rate, an overall decline in market interest rates, and the slope of the yield curve. As market interest rates declined and as the yield curve flattened in 1998, MASSBANK's interest-earning asset yields decreased faster than did its interest-bearing liability rates. The interest rate spread contracted because interest-earning asset yields decreased 15 basis points more than did interest-bearing liability rates, as shown on pages 13 and 14 of this Form 10-Q. Interest and Dividend Income Interest and dividend income on a fully taxable equivalent basis for the three months ended June 30, 1999, decreased to $14,372,000 from $15,056,000 for the three months ended June 30, 1998. The average total earning assets of the Company increased by $18.0 million, as noted above. The increase in interest income resulting from the growth in earning assets in the recent quarter, however, was more than offset by a decline in yield on earning assets. As reflected in the table on page 13, yield declines in each of the Bank's categories of earning assets resulted in an overall decline in yield on the Company's total average earning assets of 42 basis points. The weighted average yield on earning assets for the second quarter of 1999 was 6.20% compared to 6.62% in the same quarter of the prior year. Interest Expense Total interest expense for the three months ended June 30, 1999 was $8,215,000, down from $8,562,000 for the same quarter last year. The Company's average deposits, as shown in the table on page 14, increased $20.5 million or 2.5% to $828.6 million in the second quarter of 1999, from $808.1 million in the second quarter of 1998. The decrease in interest expense resulted from a decrease in average cost of funds partially offset by the additional interest expense resulting from the higher deposit volume. The Company's average cost of funds for the three months ended June 30, 1999 was 3.98%, down from 4.25% for the comparable period in 1998. 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. Provision for Loan Losses (continued) The provision for loan losses for the second quarter of 1999 was $60,000 versus $45,000 for the comparable period in 1998. This increase is essentially due to the growth in the Bank's loan portfolio. In the recent quarter, the Bank's loan charge-offs net of recoveries were $2,000, down from $17,000 for same quarter last year. The reserve coverage as a percentage of the Bank's non-performing assets increased in the recent quarter. At June 30, 1999, MASSBANK's allowance for loan losses totaled $2,558,000 representing 267% of non-accrual loans compared to $2,405,000 representing 137% of non-accrual loans at the end of the second quarter 1998. Non-Interest Income Non-interest income consists of deposit account service fees, net gains on securities and other non-interest income. Non-interest income increased to $1,578,000 for the quarter ended June 30, 1999, from $1,101,000 for the comparable quarter of the prior year. This improvement is due to an increase in securities gains in 1999. Net gains on securities totaled $1,131,000 in the second quarter of this year compared to $616,000 in the second quarter of the prior year. The Bank's equity securities portfolio continues to provide the Bank with favorable returns. Realized gains on the sale of equity securities totaled $1,343,000 for the three months ended June 30, 1999. These gains, however, were partially offset by net losses realized on the sale of debt securities of $189,000. The Bank also recorded a mark-to-market loss of $23,000 on its trading account during this same period. The Bank's deposit account service fees and other non-interest income totaled $178,000 and $269,000, respectively, in the second quarter of 1999 compared to $210,000 and $275,000, respectively, in the second quarter of 1998. Non-Interest Expense Non-interest expense was $3,122,000 for the second quarter 1999, essentially unchanged from the second quarter 1998 total of $3,119,000. Salaries and employee benefits, the largest component of non-interest expense, increased by a modest $19,000 or 1.0% in the second quarter of 1999 to $1,893,000. The increase is due essentially to an increase in employee benefits expenses (higher profit sharing and incentive compensation bonus plan and executive supplemental retirement plan expenses, partially offset by a decrease in the Bank's employee stock ownership Plan expense). Occupancy and equipment expense increased by $40,000 to $512,000 in the recent quarter from $472,000 in the second quarter of 1998. This increase is due primarily to real estate tax abatements for 1998 and prior years that the Bank received in 1998. All other expenses combined, consisting of data processing, professional services, advertising and marketing, amortization of intangibles and other expenses, decreased by $56,000 from $773,000 for the three months ended June 30, 1998 to $717,000 for the three months ended June 30, 1999. This was due partly to lower expenses on foreclosed real estate in 1999. Income Tax Expense The Company, the Bank and its subsidiaries file a consolidated federal income tax return. The Parent Company is subject to a State of Delaware Franchise Tax and a State of Massachusetts Bank Excise Tax and the Bank's subsidiaries are subject to a State of Massachusetts Corporate Excise Tax. The provision for federal and state income taxes decreased to $1,660,000 for the three months ended June 30, 1999 from $1,694,000 for the same period in 1998. This decrease is due to a reduction in the Company's effective income tax rate, partly offset by an increase in income taxes due to the higher income before income taxes in the recent quarter. The Company's combined effective income tax rate for the second quarter of 1999 is 36.7% compared to 38.5% for the same quarter a year ago. Results of Operations for the six months ended June 30, 1999 For the six months ended June 30, 1999, the Company reported consolidated net income of $5,779,000 or $1.69 in basic earnings per share ($1.64 per share on a diluted basis) compared to net income of $5,540,000 or $1.56 in basic earnings per share ($1.50 per share on a diluted basis) earned in the first half of 1998. The Company's positive financial performance in the first six months of 1999 reflects an increase in securities gains of $1,081,000 due to the favorable performance of the Bank's equity securities portfolio, partially offset by a decrease in net interest income of $765,000. The lower net interest income results from a decline in net interest margin, partially offset by modest growth in the Company's average earning assets. Average earning assets for the first half of 1999 increased to $925.9 million, up $18.1 million from the corresponding period in 1998. The Company's earnings results for the six months ended June 30, 1999 were also impacted by a modest increase in the provision for loan losses and income tax expense, and modest reductions in deposit account service fees, other non- interest income, and total non-interest expense.
AVERAGE BALANCE SHEETS Six Months Ended June 30, 1999 1998 ______________ ______________ 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 $144,699 $ 3,367 4.69% $119,575 $ 3,252 5.48% Short-term investments (2) 26,720 632 4.77 27,092 734 5.46 Investment securities 164,552 4,436 5.39 150,390 4,427 5.88 Mortgage-backed securities 260,488 8,815 6.77 316,130 10,854 6.87 Trading securities 15,570 345 4.47 16,684 453 5.42 Mortgage loans (1) 291,214 10,263 7.05 255,181 9,424 7.39 Other loans (1) 22,662 921 8.18 22,777 1,036 9.17 __________________________________________________ ________________ Total earning assets 925,905 $28,779 6.22% 907,829 $30,180 6.65% Allowance for loan losses (2,479) (2,353) __________________________________________________________________________________________ Total earning assets less allowance for loan losses 923,426 905,476 Other assets 19,827 19,500 __________________________________________________________________________________________ Total assets $943,253 $924,976 __________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued) Six Months Ended June 30, 1999 1998 ______________ ______________ 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 $ 74,804 $ 261 0.70% $ 68,290 $ 273 0.81% Savings 350,098 5,905 3.40 352,271 5,982 3.42 Time certificates of deposit 400,189 10,282 5.18 387,191 10,828 5.64 __________________________________________________ ________________ Total deposits 825,091 16,448 4.02 807,752 17,083 4.26 Other liabilities 9,251 10,126 __________________________________________________________________________________________ Total liabilities 834,342 817,878 Stockholders' equity 108,911 107,098 __________________________________________________________________________________________ Total liabilities and stockholders' equity $943,253 $924,976 __________________________________________________________________________________________ Net interest income (tax-equivalent basis) 12,331 13,097 Less adjustment of tax-exempt interest income 61 62 __________________________________________________________________________________________ Net interest income $12,270 $13,035 __________________________________________________________________________________________ Interest rate spread 2.20% 2.39% __________________________________________________________________________________________ Net interest margin (3) 2.66% 2.89% __________________________________________________________________________________________ (1) Loans on non-accrual status are included in the average balance. (2) Short-term investments consist of interest-bearing deposits in banks and investments in money market funds. (3) Net interest income (tax equivalent basis) before provision for loan losses divided by average interest-earning assets. (4) Includes the effects of SFAS No. 115.
Net Interest Income Net interest income was $12,270,000 for the six months ended June 30, 1999, reflecting a decrease of $765,000 from the same period a year ago. This decrease is the result of a lower net interest margin, partially offset by modest growth in the Company's average earning assets. The Company's net interest margin for the first half of 1999 was 2.66%, down from 2.89% for the comparable period in 1998. Average earning assets for the six months ended June 30, 1999 increased $18.1 million or 2.0% to $925.9 million from $907.8 million for the corresponding period in 1998. The Company's interest rate spread decreased to 2.20% for the first six months of 1999, from 2.39% in the first six months of last year. The yield on the Company's average earning assets in the first half of 1999 decreased by 43 basis points to 6.22% from 6.65% in the corresponding period of 1998. This decrease was partially offset by a decrease of 24 basis points in the Company's average cost of funds, from 4.26% for the six months ended June 30, 1998 to 4.02% for the same period this year. Provision for Loan Losses The provision for loan losses for the first half of 1999 was $110,000 versus $90,000 for the comparable period in 1998. This increase is essentially due to the growth in the Bank's loan portfolio during the last twelve months. Loan charge-offs net of recoveries for the six months ended June 30, 1999 declined to $2,000 from $19,000 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 1999 totaled $3,319,000, up $972,000 or approximately 41% from $2,347,000 reported in the corresponding period last year. This increase is due to net gains on securities of $2,509,000 reported for the six months ended June 30, 1999 versus $1,428,000 reported for the same period last year. The Company continues to benefit from the strong performance of its stock portfolio. Deposit account service fees and other non- interest income combined decreased $109,000 to $810,000 in the first half of 1999 from $919,000 in the first half of 1998. Non-Interest Expense Non-interest expense decreased by $85,000, or 1.3% to $6,290,000 in the first six months of 1999 from $6,375,000 in the first six months of 1998. This was due primarily to a decrease in salaries and employee benefits expenses. Salaries and employee benefits, the largest component of non-interest expense, decreased by $85,000 or just over 2% from $3,847,000 in the first half of 1998 to $3,762,000 in the first half of this year. This reduction is due primarily to a decrease of $90,000 in compensation and benefits expenses which are tied to the Company's stock performance. Also contributing to the reduction in salaries and employee benefits expenses was an increase of $46,000 in loan origination related salary expenses (which are amortized over the life of the loan) being deferred. These reductions were partially offset by an increase of $50,000 in the Company's profit sharing and incentive compensation bonus plan expense for the first six months of 1999. Non-Interest Expense (continued) All other expenses combined, consisting of occupancy and equipment, data processing, professional services, advertising and marketing, amortization of intangibles and other expenses totaled $2,528,000 for the first half of 1999, unchanged from the first half of 1998. Income Tax Expense The provision for federal and state income taxes increased to $3,410,000 for the six months ended June 30, 1999 from $3,377,000 for the same period in 1998. This increase is due primarily to an increase in income before taxes in the first half of 1999, partly offset by a reduction in the Company's effective income tax rate. The Company's combined effective income tax rate for the first half of 1999 is 37.1% compared to 37.9% for the same period a year ago. The Company's income tax expense for the first six months of 1998 includes a state income tax refund, net of federal tax, of approximately $44,000 which the Company received in 1998, representing the financial settlement of a state income tax issue for prior years. Financial Condition Total assets at June 30, 1999 were $946.0 million, a decrease of $0.6 million from $946.6 million at December 31, 1998. While total assets as of June 30, 1999 are essentially unchanged from year-end 1998 the Company's balance sheet does reflect some changes in asset mix. The Company's investment portfolio decreased by $27.1 million during the six months ended June 30, 1999. This decrease, however, is offset by an increase of $26.7 million in net loans. Other assets decreased by $0.2 million in the first half of 1999. Total investments consisting of investment securities and other short-term investments, including term federal funds sold and interest-bearing bank deposits, decreased from $624.1 million at December 31, 1998 to $597.0 million at June 30, 1999. The decrease is mainly attributable to the Bank's trading securities portfolio, term federal funds sold and short-term investments which declined $24.8 million, $25.0 million and $6.9 million respectively, during the first half of 1999. These reductions were partially offset by an increase in the Bank's investment in debt and equity securities available for sale which grew by $28.2 million during this same period. MASSBANK's net loan portfolio increased to $329.2 million at June 30, 1999 reflecting a net increase in loans of $26.7 million in the first six months of 1999. This improvement results from an increase in loan originations. Loan originations totaled $61.0 million in the six months ended June 30, 1999, up approximately 23%, or $11.3 million from $49.7 million in the first six months of 1998. Total deposits were $829.3 million at June 30, 1999 reflecting an increase of $5.3 million from $824.0 million at year-end 1998. Total stockholders' equity declined to $104.4 million at June 30, 1999 from $110.5 million at December 31, 1998. The decrease results primarily from a reduction in net unrealized gains, net of tax effect, on the Company's available for sale securities in the amount of $6.4 million, and the cost of the 103,485 shares of (MASSBANK Corp.) treasury stock that the Company repurchased during the first half of 1999 for a total amount of $3.9 million. These decreases were partially offset by an increase of $3.9 million in the Company's retained earnings in the six months ended June 30, 1999. As a result, the Company's book value per share decreased to $30.67 per share, from $31.58 per share at year-end 1998. Investments As previously noted, total investments consisting of investment securities, short-term investments, term federal funds sold and interest-bearing bank deposits equalled $597.0 million at June 30, 1999, down $27.1 million from $624.1 million at year end 1998. These investments are principally in federal funds sold, short-term U.S. Treasury and government agency obligations and government agency fifteen year mortgage-backed securities. The Bank also maintains an equity securities portfolio, valued at $21.7 million as of June 30, 1999, that has yielded substantial realized and unrealized gains. Nearly all of the Bank's investment securities are classified as available for sale or trading securities. Management evaluates its investment alternatives in order to properly manage the mix of assets on its balance sheet. Investment securities available for sale and trading securities provide liquidity, facilitate interest rate sensitivity management and enhance the Bank's ability to respond to customers' needs should loan demand increase and/or deposits decline. The Bank continues to maintain a large proportion of its securities portfolio in government agency mortgage-backed securities. These represent an attractive investment with minimal credit risk, no servicing responsibilities, and no delinquencies. The Bank's investment in mortgage-backed securities totaled $277.6 million at June 30, 1999 versus $272.6 million at year end 1998. The Bank also maintains a portfolio of trading securities which consisted of the following as of the dates shown: June 30, December 31, (In thousands) 1999 1998 _____________ ____________ U.S. Treasury bills $ 4,842 $29,707 Investment in mutual funds 1,101 1,086 Equity securities 37 -- _______ _______ Total $ 5,980 $30,793 FINANCIAL CONDITION INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities at June 30, 1999 with gross unrealized gains and losses, follows: __________________________________________________________________________________________ Gross Gross Amortized Unrealized Unrealized Market (In thousands) At June 30, 1999 Cost Gains Losses Value __________________________________________________________________________________________ Securities held to maturity: Other bonds and obligations $ 230 $ -- $ -- $ 230 __________________________________________________________________________________________ Total securities held to maturity $ 230 $ -- $ -- $ 230 __________________________________________________________________________________________ Securities available for sale: Debt securities: U.S. Treasury obligations $130,717 $ 701 $ (399) $131,019 U.S. Government agency obligations 16,135 1 (106) 16,030 __________________________________________________________________________________________ Total 146,852 702 (505) 147,049 __________________________________________________________________________________________ Mortgage-backed securities: Government National Mortgage Association 42,491 656 (198) 42,949 Federal Home Loan Mortgage Corporation 224,670 1,356 (1,784) 224,242 Federal National Mortgage Association 4,905 129 (33) 5,001 Collateralized mortgage obligations 5,256 36 (4) 5,288 Other 151 7 -- 158 __________________________________________________________________________________________ Total mortgage-backed securities 277,473 2,184 (2,019) 277,638 __________________________________________________________________________________________ Total debt securities 424,325 2,886 (2,524) 424,687 __________________________________________________________________________________________ Equity securities 13,000 8,870 (185) 21,685 __________________________________________________________________________________________ Total securities available for sale 437,325 $ 11,756 $ (2,709) $446,372 __________________________________________________________________________________________ Net unrealized gains on securities available for sale 9,047 __________________________________________________________________________________________ Total securities available for sale, net $446,372 __________________________________________________________________________________________ Total investment securities, net $446,602 __________________________________________________________________________________________ Trading securities $ 5,992 $ 5,980 __________________________________________________________________________________________
FINANCIAL CONDITION INVESTMENT SECURITIES (continued) The amortized cost and estimated market value of investment securities at December 31, 1998 with gross unrealized gains and losses, follows: __________________________________________________________________________________________ Gross Gross Amortized Unrealized Unrealized Market (In thousands) At December 31, 1998 Cost Gains Losses Value __________________________________________________________________________________________ Securities held to maturity: Other bonds and obligations $ 354 $ -- $ -- $ 354 __________________________________________________________________________________________ Total securities held to maturity $ 354 $ -- $ -- $ 354 __________________________________________________________________________________________ Securities available for sale: Debt securities: U.S. Treasury obligations $112,627 $ 2,354 $ -- $114,981 U.S. Government agency obligations 8,966 26 -- 8,992 __________________________________________________________________________________________ Total 121,593 2,380 -- 123,973 __________________________________________________________________________________________ Mortgage-backed securities: Government National Mortgage Association 48,347 1,517 -- 49,864 Federal Home Loan Mortgage Corporation 205,949 5,116 (6) 211,059 Federal National Mortgage Association 4,984 181 -- 5,165 Collateralized mortgage obligations 6,193 60 (3) 6,250 Other 223 12 -- 235 __________________________________________________________________________________________ Total mortgage-backed securities 265,696 6,886 (9) 272,573 __________________________________________________________________________________________ Total debt securities 387,289 9,266 (9) 396,546 __________________________________________________________________________________________ Equity securities 11,054 10,579 (53) 21,580 __________________________________________________________________________________________ Total securities available for sale 398,343 $ 19,845 $ (62) $418,126 __________________________________________________________________________________________ Net unrealized gains on securities available for sale 19,783 __________________________________________________________________________________________ Total securities available for sale, net $418,126 __________________________________________________________________________________________ Total investment securities, net $418,480 __________________________________________________________________________________________ Trading securities $ 30,802 $ 30,793 __________________________________________________________________________________________
Investments (continued) The amortized cost and estimated market value of debt securities held to maturity and debt securities available for sale by contractual maturity at June 30, 1999 and December 31, 1998 are as follows: June 30, 1999 ____________________________________________ Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 47,929 $ 48,135 $ -- $ -- After 1 year but within 5 years 95,806 95,812 230 230 After 5 years but within 10 years 2,963 2,954 -- -- After 15 years 154 148 -- -- ________ _______ ______ ______ 146,852 147,049 230 230 Mortgage-backed securities 277,473 277,638 -- -- ________ _______ ______ ______ $424,325 $424,687 $ 230 $ 230 December 31, 1998 ____________________________________________ Available for Sale Held to Maturity Amortized Market Amortized Market Maturing: Cost Value Cost Value (In thousands) Within 1 year $ 52,876 $ 53,266 $ -- $ -- After 1 year but within 5 years 65,561 67,345 230 230 After 5 years but within 10 years 2,961 3,164 82 82 After 15 years 195 198 42 42 ________ _______ ______ ______ 121,593 123,973 354 354 Mortgage-backed securities 265,696 272,573 -- -- ________ _______ ______ ______ $387,289 $396,546 $ 354 $ 354
LOANS The composition of the Bank's loan portfolio is summarized as follows: _______________________________________________________________________________________ At At (In thousands) June 30, 1999 December 31, 1998 _______________________________________________________________________________________ Mortgage loans: Residential $294,046 $281,862 Commercial 2,600 2,257 Construction 175 730 _______________________________________________________________________________________ 296,821 284,849 Add: Premium on loans 225 259 Less: deferred mortgage loan origination fees (1,506) (1,454) _______________________________________________________________________________________ Total mortgage loans 295,540 283,654 Other loans: Consumer: Installment 1,293 1,547 Guaranteed education 7,381 7,967 Other secured 1,305 1,366 Home equity lines of credit 11,038 10,159 Unsecured 220 235 _______________________________________________________________________________________ Total consumer loans 21,237 21,274 Commercial 15,019 61 _______________________________________________________________________________________ Total other loans 36,256 21,335 _______________________________________________________________________________________ Total loans $331,796 $304,989 _______________________________________________________________________________________ The Bank's loan portfolio increased $26.8 million during the first six months of 1999, from $305.0 million at December 31, 1998 to $331.8 million at June 30, 1999. The increase was primarily in the commercial loan and residential 1-4 family mortgage loan categories. Loan originations increased to $61.0 million in the first six months of 1999 compared to $49.7 million in the first six months of last year, an increase of $11.3 million or 23%.
NON-PERFORMING ASSETS The following table shows the composition of the Bank's non-performing assets at June 30, 1999 and 1998, and December 31, 1998: At At At June 30, December 31, June 30, (In thousands) 1999 1998 1998 ____________________________________________________________________________________ Non-Performing Assets: Non-accrual loans $ 959 $ 1,004 $ 1,752 Real estate acquired through foreclosure -- 86 71 ____________________________________________________________________________________ Total non-performing assets $ 959 $ 1,090 $ 1,823 ____________________________________________________________________________________ Allowance for loan losses $ 2,558 $ 2,450 $ 2,405 Allowance as percent of non-performing assets 266.7 % 224.8 % 131.9 % Non-accrual loans as percent of total loans 0.29% 0.33% 0.61% Non-performing assets as percent of total assets 0.10% 0.12% 0.20% ____________________________________________________________________________________ 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, 1998 to June 30, 1999 as noted in the table above. The principal balance of non-accrual loans was down to $959,000, or approximately one-quarter of 1% of total loans at June 30, 1999. The Bank did not have any real estate acquired through foreclosure or impaired loans as of June 30, 1999.
ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows: Six Months Ended June 30, 1999 1998 _______________________________________________________________________________ (In thousands) Balance at beginning of period $ 2,450 $ 2,334 Provision for loan losses 110 90 Recoveries of loans previously charged-off 3 7 Less: Charge-offs (5) (26) ________________________________________________________________________________ Balance at end of period $ 2,558 $ 2,405 ________________________________________________________________________________ The allowance for loan losses is established through a provision for loan losses charged to operations based on management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may effect the borrowers ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the information available in establishing the allowance for losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. At June 30, 1999 the balance of the allowance for loan losses was $2,558,000 representing 266.7% of non-accrual loans. Management believes that the allowance for loan losses is adequate to cover the risks inherent in the portfolio under current conditions. DEPOSITS Deposit accounts of all types have traditionally been the primary source of funds for the Bank's lending and investment activities. The Bank's deposit flows are influenced by prevailing interest rates, competition and other market conditions. The Bank's management attempts to manage its deposits through selective pricing and marketing. The Bank's total deposits increased by $5.3 million to $829.3 million at June 30, 1999 from $824.0 million at December 31, 1998. The composition of the Bank's total deposits as of the dates shown are summarized as follows: June 30, December 31, 1999 1998 ______________________________________________________________________________ (In thousands) Demand and NOW $ 73,599 $ 76,173 Savings and money market accounts 353,918 348,049 Time certificates of deposit 402,375 400,524 Deposit acquisition premium, net of amortization (602) (715) ________________________________________________________________________________ Total deposits $829,290 $824,031 ________________________________________________________________________________ Recent Accounting Developments "Accounting for Derivative Instruments and Hedging Activities" In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair market value. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. In June 1999, FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of Statement No. 133" which defers the effective date of Statement No. 133. Statement No. 133 is now effective for all fiscal quarters of fiscal years beginning after June 15, 2000. This Statement is not expected to have a material effect on the Company's consolidated financial statements. Liquidity and Capital Resources The Bank must maintain a sufficient amount of cash and assets which can readily be converted into cash in order to meet cash outflows from normal depositor requirements and loan demands. The Bank's primary sources of funds are deposits, loan amortization and prepayments, sales or maturities of investment securities and income on earning assets. In addition to loan payments and maturing investment securities, which are relatively predictable sources of funds, the Bank maintains a high percentage of its assets invested in overnight federal funds sold, which can be immediately converted into cash and United States Treasury and Government agency securities, which can be sold or pledged to raise funds. At June 30, 1999 the Bank had $116.2 million or 12.3% of total assets and $151.9 million or 16.1% 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 CAMELS 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 and up to 45 percent of the pre-tax net unrealized holding gains on certain available for sale equity securities. 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, 1999, the Bank had a leverage Tier I capital to total assets ratio of 10.31%, a Tier I capital to risk- weighted assets ratio of 30.14% and a total capital to risk-weighted assets ratio of 32.15%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to total assets of 10.37%, Tier I capital to risk-weighted assets of 30.30% and total capital to risk-weighted assets of 32.31% at June 30, 1999. Year 2000 Issue As we near the 21st century, MASSBANK is taking important steps to tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or Millennium Bug. The problem originated from software designers' attempt to save memory by recording years in a two-digit format - "98" instead of "1998" for example - but didn't take into account that the year 2000, or "00" could also be interpreted, by any system that has time sensitive software, as the year 1900 rather than the year 2000. This could result in a system failure or in miscalculations. In May 1997, the Company organized a Year 2000 project team to address the Y2K critical issues in order to resolve its Year 2000 computer problems. The project team provides direct oversight of the Year 2000 initiative. The Company's Board of Directors receives project updates on a quarterly basis and the Bank's Board of Directors receives a monthly project update. The project team has completed its assessment of the Company's technology and non-information technology systems, such as vault doors, elevators, and security systems, to identify the systems that could be affected by the Year 2000 issue and has developed a plan to address this issue. The project plan, which incorporates the Federal Financial Institutions Examination Council ("FFIEC") recommended guidelines, encompasses a service bureau for systems that are outsourced, in-house systems, vendors, customers and suppliers (including correspondent banks). In addition to addressing the Company's technology issues, the project plan includes a customer awareness program designed to keep the Bank's customers informed about the Year 2000 issue and the Company's state of readiness. The Company has incurred and will continue to incur expenses in connection with the testing and upgrading of its computer systems to prepare for the Year 2000. Year 2000 project expenditures to-date approximate $236,000. Expenditures for the first half of 1999 totaled $182,000. Approximately $27,000 of the current year's expenditures were expensed as incurred, while the cost of new hardware and software of approximately $155,000 was capitalized and will be amortized over the software and hardware's useful life in accordance with the Company's standard accounting practices. The capitalized expenditures represent the payment on new check processing equipment and the replacement of some personal computers and VCRs that were not Year 2000 ready. Expenses for the remainder of the Year 2000 project are not expected to exceed $100,000. The Company relies on a third party service bureau for its primary business processes (e.g., loans and deposits applications). It has worked closely with the service bureau to monitor the progress of their Year 2000 efforts. The service bureau's Y2K remediation efforts are also being monitored by the federal banking regulators. The service bureau has substantially completed the remediation and testing of all its applications and the Company has successfully completed testing with the service bureau. Year 2000 (continued) The Company has made significant progress in testing, upgrading, and/or replacing its information systems to assure Y2K compliance. The testing of all of the Company's computer hardware and mission critical internal information systems has been substantially completed. Most of the Company's other date sensitive systems operate on software supported by outside vendors. The Company continues to monitor the progress of their Year 2000 efforts and is seeking to receive written verification from these vendors as to their Year 2000 readiness. Testing of the Company's non-mission critical internal information systems and interfaces has also been substantially completed. Examination of the Company's non-information technology systems indicated that no significant replacements are required for Year 2000 readiness. While the Company continues to receive written verification from its service bureau and vendors as to their Year 2000 compliance, and has tested some of their systems, there is no guarantee that these systems will not fail in the Year 2000. Also, there can be no assurance that the systems of other companies, banks, government agencies, etc. that interface with the Company will be timely remediated. If they are not successful, the Year 2000 problem could have a material effect on the Company's operations. The Company, therefore, has developed a business resumption contingency plan for its primary lines of business. The Plan, which addresses various potential Year 2000 scenarios, was completed in the second quarter 1999 and continues to be enhanced. The expenditures of the project are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. Management presently does not believe that the Year 2000 issue will result in significant operational problems for the Company. Management believes that the Company is now ready for the year 2000. Impact Of Inflation And Changing Prices MASSBANK Corp.'s financial statements presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time, due to the fact that substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Sensitivity and Liquidity See discussion and analysis of interest rate sensitivity and liquidity provided in the Corporation's Annual Report on Form 10-K for the year ended December 31, 1998. There have been no material changes in reported market risks faced by the Corporation since the filing of the Corporation's 1998 Annual Report on Form 10-K. PART II - OTHER INFORMATION Item 1. Legal Proceedings From time to time, MASSBANK Corp. and/or the Bank are involved as a plaintiff or defendant in various legal actions incident to their business. As of June 30, 1999, 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 20, 1999, stockholders voted affirmatively on the following proposal: 1.) To elect four Directors to serve until the 2002 Annual Meeting of Stockholders. Elected At Meeting Term: Alexander S. Costello 3 Years Stephen E. Marshall 3 Years Nancy L. Pettinelli 3 Years Dr. Donald B. Stackhouse 3 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, 1999 /s/Gerard H. Brandi ___________________________ (Signature) Gerard H. Brandi President and CEO Date: August 13, 1999 /s/Reginald E. Cormier ___________________________ (Signature) Reginald E. Cormier V.P., Treasurer and CFO EX-1 2
EXHIBIT 11.1 MASSBANK CORP. Earnings Per Share The following is a calculation of earnings per share for the three and six months ended June 30, 1999 and 1998. Three Months Ended Six Months Ended Calculation of Basic June 30, June 30, Earnings Per Share 1999 1998 1999 1998 ______________________________ ____ ____ ____ ____ Net Income $2,866,000 $2,706,000 $5,779,000 $5,540,000 _________ _________ _________ _________ Average common shares outstanding 3,414,996 3,590,194 3,450,346 3,584,456 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (35,200) (44,000) (35,200) (44,000) __________ _________ __________ ________ Weighted average shares outstanding 3,379,796 3,546,194 3,415,146 3,540,456 _________ _________ _________ _________ Earnings per share (in dollars) $ 0.85 $ 0.76 $ 1.69 $ 1.56 _________ _________ _________ _________
Three Months Ended Six Months Ended Calculation of Diluted June 30, June 30, Earnings Per Share 1999 1998 1999 1998 ______________________________ ____ ____ ____ ____ Net Income $2,866,000 $2,706,000 $5,779,000 $5,540,000 _________ _________ _________ _________ Average common shares outstanding 3,414,996 3,590,194 3,450,346 3,584,456 Less: Unallocated Employee Stock Ownership Plan (ESOP) shares not committed to be released (35,200) (44,000) (35,200) (44,000) Diluted stock options 115,822 162,507 116,121 162,220 _________ _________ _________ _______ Weighted average shares outstanding 3,495,618 3,708,701 3,531,267 3,702,676 _________ _________ _________ _________ Earnings per share (in dollars) $ 0.82 $ 0.73 $ 1.64 $ 1.50 _________ __________ __________ __________
EX-27 3
9 0000799166 MASSBANK CORP. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 6,992 3,549 116,235 5,980 446,372 230 230 331,796 (2,558) 946,016 829,290 1,350 10,399 625 0 0 7,391 96,961 946,016 11,184 13,525 4,009 28,718 16,448 16,448 12,270 110 2,509 6,290 9,189 9,189 0 0 5,779 1.69 1.64 2.66 959 0 0 959 2,450 (5) 3 2,558 2,471 0 87
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