-----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, JTlA1XPlB/cYB0+koNdyFUMskxQnphaVKCtgEk6Qv1xfYOXVPZj20LjUob2D1Lob G/+lkfiyUU8/UzS1YGK44Q== 0000950135-96-001585.txt : 19960402 0000950135-96-001585.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950135-96-001585 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15137 FILM NUMBER: 96542379 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-K 1 MASSBANK CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K /x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) 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) (Zip Code) Registrant's telephone number, including area code: (617) 662-0100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share (Title of Class) 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.____ The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price for the registrant's common stock on March 11, 1996 as reported by NASDAQ, was $85,077,696. As of March 11, 1996, there were 2,738,562 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1995 Annual Report to Stockholders are incorporated by reference in Parts I, II, III and IV of this Form 10-K. Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. 2 PART I Item 1. Business Business of MASSBANK Corp. General MASSBANK Corp. (the "Company") is a general business corporation incorporated under the laws of the State of Delaware on August 11, 1986. MASSBANK Corp. was organized for the purpose of becoming the holding company for MASSBANK for Savings (the "Bank"). The Company is a one-bank holding company registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. As of and since December 2, 1986, the effective date of the reorganization whereby MASSBANK Corp. became the holding company for the Bank, the Bank has been a wholly-owned subsidiary of MASSBANK Corp. The only office of MASSBANK Corp., and its principal place of business, is located at the main office of the Bank at 123 Haven Street, Reading, Massachusetts 01867. MASSBANK Corp. currently has no material assets other than its investment in the Bank. The Company's primary business, therefore, is managing its investment in the stock of the Bank. MASSBANK Corp. is classified by the Commonwealth of Massachusetts as a securities corporation for tax purposes which restricts its business to buying, selling, dealing in, or holding securities on its own behalf. In the future, MASSBANK Corp. may become an operating company or acquire banks or companies engaged in bank-related activities. MASSBANK Corp.'s principal sources of revenues on an unconsolidated basis, which are used for the payment of dividends to stockholders and other purposes, are dividends from MASSBANK for Savings and, to a lesser extent, interest income received from its interest-bearing bank deposits. MASSBANK Corp.'s assets on an unconsolidated basis at December 31, 1995 were represented by its investment in the Bank of $91.0 million and other assets of $1.1 million. The Company's liabilities consisted of loan indebtedness of $1.1 million and other liabilities of $0.1 million. The proceeds of the loan were used to fund stock purchases through the Employee Stock Ownership Plan ("ESOP"). See Note 16 to the Consolidated Financial Statements for parent company only financial information. At December 31, 1995 MASSBANK Corp. on a consolidated basis had total assets of $854.5 million, deposits of $753.7 million, and stockholders' equity of $90.8 million which represents 10.63% of total assets. Book value per share at December 31, 1995 was $33.13. The Company does not own or lease any real or personal property. Instead it intends to utilize during the immediate future the premises, equipment and furniture of the Bank without the direct payment of rental fees to the Bank. Competition The primary business of MASSBANK Corp. currently is the ongoing business of the Bank. Therefore, the competitive conditions faced by MASSBANK Corp. currently are the same as those faced by the Bank. See "Business of MASSBANK for Savings - Competition." In addition, many banks and financial institutions have formed holding companies. It is likely that these holding companies will attempt to acquire commercial banks, thrift institutions or companies engaged in bank-related activities. MASSBANK Corp. would face competition in undertaking any such acquisitions and in operating any such entity subsequent to its acquisition. 3 Employees MASSBANK Corp. does not employ any persons; its management also serves as management of, and is paid by, the Bank. See "Item 10 - Directors and Executive Officers of the Registrant." MASSBANK Corp. utilizes the support staff of the Bank from time to time and does not pay any separate salaries or expenses in connection therewith. Dividends MASSBANK Corp. paid total cash dividends of $0.73 per share in 1995 compared to $0.60 per share in 1994 and $0.4533 per share in 1993. The Company's dividend payout ratios (cash dividends paid divided by net income) for 1995, 1994 and 1993 were 23%, 21% and 20%, respectively. Stock Repurchase Program In October 1995, MASSBANK Corp. announced that its Board of Directors had approved the repurchase of an additional 100,000 shares of its outstanding common stock. Repurchases are expected to be made in the open market or in private transactions over the next year. At December 31, 1995, the Company had repurchased 5,000 shares at a total cost of $153,750. Preferred Stock Purchase Rights In January 1990, the Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right for each outstanding share of MASSBANK Corp. common stock. These Rights, which expire in January 2000, entitle their holders to purchase from the Company one one-hundreth of a share (a "unit") of Series A Junior Participating Cumulative Preferred Stock, par value $1.00 per share ("preferred stock") at a cash exercise price of $70.00 per unit, subject to adjustment. The Rights will trade separately from the common stock and will become exercisable when a person or group has acquired 15% or more of the outstanding common stock, upon a tender offer that would result in a person or group acquiring 15% or more of the outstanding common stock, or upon the declaration by the Board of Directors that any person holding 10% or more of the outstanding shares of common stock is an "adverse person". In the event a person or group acquires 15% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person", each Right would entitle its holder (except if the holder is a person or group described above) to receive upon exercise sufficient units of preferred stock to equal a value of two times the exercise price of the Right. In the event the Company is acquired in a merger or other business combination transaction or if 50% or more of the Company's assets or earning power is sold, each holder may receive upon exercise common stock of the acquiring company having a market value equal to two times the exercise price of the Right. The Rights are redeemable in whole, but not in part, by the Board of Directors at a price of $.01 1/3 per Right any time before a person or group acquires 15% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person". 4 Business of MASSBANK for Savings General MASSBANK for Savings is a Massachusetts-chartered savings bank founded in 1872 as the Melrose Savings Bank. In 1983, the Reading Savings Bank was merged into the Melrose Savings Bank and the name of the resulting institution was changed to MASSBANK for Savings. In 1986, the Bank converted from mutual to stock form of ownership. The Bank is primarily engaged in the business of attracting deposits from the general public through its fourteen full service banking offices in Reading, Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford, Dracut and Lowell, and originating residential and commercial real estate mortgages, construction, and a variety of consumer loans. The Bank also invests a significant portion of its funds in U.S. Treasury and Government agency securities, mortgage-backed securities, federal funds sold, and other authorized investments. The Bank's earnings depend largely upon net interest income, which is the difference between the interest and dividend income derived by the Bank from its loans and investments and the interest paid by the Bank on its deposits and borrowed funds. The Bank's deposits are insured to applicable limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC") and excess deposit accounts are insured by the Depositors Insurance Fund ("DIF"), a private industry-sponsored deposit insurer. The Bank recognizes that loan and investment opportunities change over time and that yields derived from such opportunities can vary significantly even when the risks associated with those opportunities are comparable. By developing a relatively liquid loan and investment portfolio, the Bank has attempted to position itself so as to be able to take advantage of these changing opportunities. Consequently, the Bank expects that the relative mix of its loan and investment portfolios will change over time in response to changing market conditions. Acquisitions In February 1992, the Bank acquired approximately $336 million in federally insured deposits and other liabilities and certain assets of The Central Savings Bank of Lowell, Massachusetts from the FDIC for a bid price of $2.2 million. Net loans acquired totaled $147.9 million. The Bank also acquired Central Savings' trust department and safe deposit operations. In September 1991, the Bank acquired from the Resolution Trust Corporation the insured deposits and branch operations of the former branches of ComFed Savings Bank located in Tewksbury and Chelmsford, MA. In connection with the transaction, the Bank paid a premium of $59,800 and received approximately $45.6 million in insured deposits. 5 Market Area The Bank is headquartered in Reading, Massachusetts, which is located approximately 15 miles north of Boston. The Bank's market area includes a significant portion of eastern Massachusetts and is served by a network of 14 branch offices located on a broad arc stretching from Melrose and Medford in the south, Dracut in the north, and Westford in the west. The Bank's general market area consists of the municipalities in which it operates banking offices and all of the contiguous cities and towns. The Bank currently operates banking offices in the municipalities of Chelmsford, Dracut, Lowell, Medford, Melrose, Reading, Stoneham, Tewksbury, Westford and Wilmington. Lending Activities The Bank's net loan portfolio totaled $246.7 million at December 31, 1995. The following table sets forth information concerning the Bank's loan portfolio by type of loan at the dates shown:
- ------------------------------------------------------------------------------------------- (In thousands) At December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------- Mortgage loans: Residential: Conventional $209,408 $207,772 $204,096 $201,331 $ 63,686 FHA and VA 3,244 4,158 5,166 6,985 4,670 Commercial 6,975 8,155 9,654 10,878 9,855 Construction 1,516 603 474 355 -- - ------------------------------------------------------------------------------------------- Total mortgage loans 221,143 220,688 219,390 219,549 78,211 Add: premium on loans 388 452 813 912 -- Less: deferred mortgage loan origination fees (928) (871) (856) (529) (147) - ------------------------------------------------------------------------------------------- Mortgage loans, net 220,603 220,269 219,347 219,932 78,064 - ------------------------------------------------------------------------------------------- Other loans: Consumer: Installment 1,988 1,972 2,474 4,259 1,923 Guaranteed education 10,420 10,152 9,131 8,237 6,140 Other secured 2,012 2,598 1,735 2,406 1,108 Home equity lines of credit 13,144 14,674 15,744 18,440 10,629 Unsecured 265 269 277 333 207 - ------------------------------------------------------------------------------------------- Total consumer loans 27,829 29,665 29,361 33,675 20,007 Commercial 753 882 338 149 53 - ------------------------------------------------------------------------------------------- Other loans, net 28,582 30,547 29,699 33,824 20,060 - ------------------------------------------------------------------------------------------- Total loans 249,185 250,816 249,046 253,756 98,124 Less: Allowance for possible loan losses (2,529) (2,566) (2,261) (2,056) (375) - ------------------------------------------------------------------------------------------- Net loans $246,656 $248,250 $246,785 $251,700 $ 97,749 - -------------------------------------------------------------------------------------------
The increase in total loans from December 31, 1991 to December 31, 1992 was primarily attributable to loans acquired as part of the acquisition of The Central Savings Bank in 1992. 6 The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 1995:
Maturity/Scheduled Payments (1) Within One to Five to After (In thousands) one year five years ten years ten years Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $ 857 $ 5,183 $ 45,119 $160,965 $212,124 Commercial & construction 1,842 4,095 1,485 1,057 8,479 - ------------------------------------------------------------------------------------------- Total mortgage loans 2,699 9,278 46,604 162,022 220,603 Other loans 2,438 3,042 10,243 12,859 28,582 - ------------------------------------------------------------------------------------------- Total loans $ 5,137 $12,320 $56,847 $174,881 $249,185 - -------------------------------------------------------------------------------------------
(1) Loan amounts are accumulated as if the entire balance came due on the last contractual payment date. Accordingly, the amounts do not reflect proceeds from contractual loan amortization or anticipated prepayments. The following table shows the amounts, included in the table above, which are due after one year and which have fixed or adjustable interest rates:
Total Due After One Year Fixed Adjustable (In thousands) Rate Rate Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $165,645 $ 45,622 $211,267 Commercial & construction 1,216 5,421 6,637 - ------------------------------------------------------------------------------------------- Total mortgage loans 166,861 51,043 217,904 Other loans 2,698 23,446 26,144 - ------------------------------------------------------------------------------------------- Total loans $169,559 $ 74,489 $244,048 - -------------------------------------------------------------------------------------------
Mortgage Lending. The Bank believes that the repayment periods of long-term first mortgage loans, the general resistance of the public to variable rate mortgage instruments and the highly competitive nature of the mortgage industry require a prudent approach to mortgage lending. Consequently, as part of its policy of generally attempting to match the maturities of its assets and its liabilities, the Bank, over several years, has kept its mortgage loan portfolio to a level at which the Bank believed there was an acceptable risk- to-reward ratio in light of opportunities in the marketplace and the Bank's long-term objectives. The Bank's net loan portfolio represented approximately 28.9% and 29.4% of the Company's total assets at December 31, 1995, and 1994, respectively. The Bank realizes that this low level of loans with respect to assets in relation to the securities portfolio results in a reduction in yield; however, the Bank believes that this reduction would be more than offset in risk and loss associated with lending during periods of economic decline. In today's economic climate, the Bank would prefer a more even mix of loans and securities. However, there remains a tremendous amount of competition for mortgages in the Bank's area, and developing a quality loan portfolio takes time. We anticipate that our loan portfolio will stay even or grow slowly over the next few years. 7 Mortgage Lending (continued) Loan originations come from a number of sources, including referrals from real estate brokers, walk-in customers, purchasers of property owned by existing customers and refinancing for existing customers. In addition to actively soliciting loan referrals, the Bank conducts an advertising and promotion program, directed both toward the general public and real estate professionals who might refer potential borrowers. Substantially all of the real estate loans originated by the Bank during 1995 were secured by real estate located in the Bank's primary lending area, reflecting the Bank's commitment to serve the credit needs of the local communities in which it operates banking offices. The Bank makes both conventional fixed and adjustable-rate loans on one-to-four family residential properties for a term of ten to thirty years. The Bank retains the 10, 12 or 15 year fixed rate mortgages and adjustable rate mortgages it originates for its own portfolio. All long-term fixed rate residential mortgages are generally sold in the secondary market. Adjustable- rate mortgage loans ("ARMs") have rates that are re-set at either 1, 3 or 5 year intervals and provide a margin over various mortgage indices. In 1994, the Bank instituted new loan programs which have been well received by customers. The first program features a 5/1 and 7/1 year ARM product with an initial fixed rate for 5 or 7 years and a 1 year adjustable rate thereafter. A special First Time Home Buyers Program has also been instituted featuring a discounted 7/1 ARM. This program is designed for first-time home buyers meeting certain income and property location restrictions. At December 31, 1995, 1-4 family residential mortgage loans totaled $212.1 million, or 85.1% of the total loan portfolio, compared to $211.5 million, or 84.3% of the total loan portfolio, at December 31, 1994. Residential mortgage loan originations amounted to $30.4 million during 1995, a decrease of 13.4% from $35.1 million in 1994. This decrease was attributable, in part, to decreased customer demand combined with increased competition for residential mortgage loans in the Bank's market area. Origination volumes have been affected by the interest rate environment which saw interest rates rise during 1994 and decline throughout 1995. This recent decrease in rates helped to fuel higher levels of residential loan refinancings in the last quarter of 1995. The Bank also originates mortgage loans secured by commercial or investment property such as multifamily housing, strip shopping centers, office buildings and retail buildings. At December 31, 1995, commercial and multifamily real estate mortgages and construction loans totaled approximately $8.5 million, or 3.4% of the total loan portfolio, compared to $8.8 million, or 3.5% of the total loan portfolio, at December 31, 1994. There were no commercial and multifamily real estate mortgages originated in 1995 and 1994. The total amount of first mortgage loans held by the Bank at December 31, 1995 was $220.6 million as indicated in the maturity distribution table appearing on the previous page. Of this amount, $52.7 million was subject to interest rate adjustments. The remaining $167.9 million in fixed rate mortgage loans represents 19.6% of the Company's total assets. 8 Mortgage Lending (continued) Fees received for originating loans and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. The Bank also receives fees and charges relating to existing loans, primarily late charges and prepayment penalties. Other Loans. The Bank makes a variety of consumer loans and had a consumer loan portfolio of approximately $27.8 million at December 31, 1995 representing 11.2% of the Bank's total loan portfolio. Of this amount $10.4 million or 4.2% of the total loan portfolio are education loans made under the Massachusetts Higher Education Assistance Corporation. The Bank may sell education loans in the future. The balance of the Bank's consumer loan portfolio consists of home equity lines of credit and installment consumer credit contracts such as automobile loans, home improvement loans and other secured and unsecured financings. These loans totaled $17.4 million at December 31, 1995, representing 7.0% of the Bank's total loan portfolio. At December 31, 1995, the Bank had only $753 thousand in outstanding loans to commercial enterprises not secured by real estate. Loan Approval. The Bank's loan approval process for all loans generally includes a review of an applicant's financial statements, credit history, banking history and verification of employment. For mortgage loans, the Bank generally obtains an independent appraisal of the subject property. The Bank has a formal lending policy approved by the Board of Directors of the Bank which delegates levels of loan approval authority to Bank personnel. All loans in excess of established limits require approval of the Bank's Board of Directors. The Bank issues commitments to prospective borrowers to make loans subject to certain conditions for generally up to 60 days. The interest rate applicable to the committed loans is usually the rate in effect at the time the application fee is paid. At December 31, 1995, the Bank had issued commitments on residential first mortgage loans totaling $3,466,000, and had commitments to advance funds on construction loans and unused credit lines, including unused portions of home equity lines of credit, of $444,000 and $20,714,000, respectively. Loan Delinquencies. It is the Bank's policy to manage its loan portfolio so as to recognize problem loans at an early stage and thereby minimize loan losses. Loans are considered delinquent when any payment of principal or interest is 30 days or more past due. The Bank generally commences collection procedures, however, when accounts are 15 days past due. It is the Bank's practice to discontinue accrual of interest on all loans for which payments are more than 90 days past due. Loans delinquent for 90 or more days, as shown in the table on the following page, totaled $2,428,000 at December 31, 1995. 9 Real Estate Acquired through Foreclosure. Real estate acquired through foreclosure is comprised of foreclosed properties where the Bank has actually received title and real estate substantially repossessed. 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 constructively or actually received, less estimated costs to sell the property following foreclosure. Operating expenses and any subsequent provisions to reduce the carrying value to fair value are charged to current period earnings. Gains or losses upon disposition are reflected in earnings as realized. Real estate acquired through foreclosure totaled $255,000 as of year-end 1995. Non-Performing Assets The following table sets forth information with respect to loans delinquent for 90 or more days and real estate acquired through foreclosure:
- ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------ Mortgages delinquent for 90 or more days: Conventional $2,016 $1,496 $1,048 $1,075 $ 618 FHA and VA 14 62 43 55 78 Commercial -- 152 -- 135 135 Other loans delinquent for 90 or more days: Consumer 398 388 178 241 212 - ------------------------------------------------------------------------------------------------ Total loans delinquent for 90 or more days 2,428 2,098 1,269 1,506 1,043 - ------------------------------------------------------------------------------------------------ Real estate acquired through foreclosure or substantively repossessed: Conventional 255 129 699 545 -- FHA and VA -- -- -- -- 21 Commercial -- -- -- -- 128 Land development -- -- -- 360 1,009 - ------------------------------------------------------------------------------------------------ Total real estate acquired through fore- closure or substantively repossessed 255 129 699 905 1,158 - ------------------------------------------------------------------------------------------------ Total non-performing assets 2,683 2,227 $1,968 $2,411 $2,201 - ------------------------------------------------------------------------------------------------ Non-performing loans as percent of total loans 0.97% 0.84% 0.51% 0.59% 1.06% Non-performing assets as percent of total assets 0.31% 0.26% 0.23% 0.29% 0.52%
The reduction in interest income for the periods indicated associated with nonaccrual loans (loans delinquent for 90 or more days) held at the end of such years, is as follows:
- ------------------------------------------------------------------------------------------------ (In thousands) Years Ended December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------ Income in accordance with original loan terms $204 $204 $105 $160 $109 - ------------------------------------------------------------------------------------------------ Income recognized 60 107 40 $ 80 58 - ------------------------------------------------------------------------------------------------ Foregone interest $144 $ 97 $ 65 $ 80 $ 51
10 Allowance for Possible Loan Losses. Possible 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 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 losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for possible loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. The following table sets forth the activity in the allowance for loan losses during the years indicated:
- ------------------------------------------------------------------------------------------------ (In thousands) Years ended December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------ Balance at beginning of year $2,566 $2,261 $2,056 $ 375 $ 308 - ------------------------------------------------------------------------------------------------ Loans charged-off: Residential real estate (124) (339) (305) (262) -- Commercial real estate -- -- (135) -- -- Consumer loans (30) (24) (17) (20 ) (18) Other loans (95) (63) (31) (24) (9) Recoveries: Residential real estate 41 23 20 1 3 Consumer loans 1 3 2 2 8 - ------------------------------------------------------------------------------------------------ Net (charge-offs) recoveries (207) (400) (466) (303) (16) Central Savings acquisition -- -- -- 1,100 -- Provision for loan losses, charged to operations 170 705 671 884 83 - ------------------------------------------------------------------------------------------------ Allowance for loan losses, end of year $2,529 $2,566 $2,261 $2,056 $ 375 - ------------------------------------------------------------------------------------------------ Net loans charged off as a percent of average loans outstanding during the period 0.08% 0.16% 0.19% 0.13% 0.02% Allowance for possible loan losses as a percent of total loans outstanding at year-end 1.01% 1.02% 0.91% 0.81% 0.38% Allowance for possible loan losses as a percent of non-performing loans 104.2 % 122.3 % 178.2 % 136.5 % 36.0 % - ------------------------------------------------------------------------------------------------
11 Investment Activities The Bank believes that investment opportunities in United States Government, corporate and other securities are at times more attractive than the opportunities present in the loan market. As compared to loans, these investments of the Bank are generally shorter-term and hence more liquid, are subject to lower risk of loss, and present an opportunity for appreciation. In addition, these investments often permit the Bank to better match the maturities of its assets and its liabilities. The Bank's investment portfolio is managed by its officers in accordance with an investment policy approved by the Bank's Board of Directors. The objectives of that policy are to provide a level of liquidity, earnings and diversification consistent with the exercise of prudent investment judgment. The policy authorizes the senior management of the Bank to make and execute investment decisions and requires that those persons report all investment transactions to the Bank's Board of Directors at each of its regular meetings. In addition, management is required to report all gains or losses on all securities transactions at each meeting of the Bank's Board of Directors. Purchases and sales of securities by the Bank are generally required to be made on a competitive basis and all investments must be permitted by applicable law. The Bank invests in a wide variety of securities and obligations, including: Federal funds sold (which are sold only to institutions included on the Bank's internally-prepared approved list of adequately capitalized institutions); commercial paper and bankers' acceptances; United States Treasury and Government agency obligations; United States agency guaranteed and other mortgage-backed securities; investment grade corporate debt securities (generally limited to those rated A or better by Standard & Poor's); mutual funds; and equity securities traded on a national securities exchange or quoted on the NASDAQ System. At December 31, 1993, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Under this method, the Company records investment securities available for sale at aggregate market value with the net unrealized holding gains or losses reported, net of tax effect, as a separate component of stockholders' equity until realized. As of December 31, 1995, stockholders' equity included approximately $7.2 million, representing the net unrealized gains on securities available for sale, less applicable income taxes. Prior to December 31, 1993, the Company recorded its investment securities available for sale at the lower of aggregate cost or market value with the net unrealized losses reported in non-interest income as a component of "gains (losses) on securities." In the fourth quarter of 1995, the Company adopted the Financial Accounting Standards Board guidelines, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued on November 15, 1995. Under these guidelines, the Company was allowed a one-time opportunity to reassess the appropriateness of its FASB 115 investment classifications and reclassify securities from the held to maturity category to the available for sale category, or vice versa. As a result of this reassessment and after thoughtful consideration, the Company reclassified all of its mortgage-backed securities from the held to maturity category to the available for sale category in accordance with the FASB guidelines. The total amortized cost of the securities reclassified was $202.8 million. These securities had total unrealized gains of $3.7 million on the date they were reclassified. 12 Investment Activities (continued) Under the investment policy management determines the appropriate classification of securities at the time of purchase. Those securities that the Company has the intent and the ability to hold to maturity are classified as securities held to maturity and are carried at amortized historical cost adjusted for any premiums or discounts. Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital and other similar factors. Income on debt securities available for sale is accrued and included in interest and dividend income. The specific identification method is used to determine realized gains and losses on sales of securities available for sale which are also reported in non-interest income under the caption "gains (losses) on securities." When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings. Investments classified as trading securities are stated at market with unrealized gains or losses included in earnings. Income on debt trading securities is accrued and included in interest and dividend income. All of the Company's mortgage-backed securities are currently classified as available for sale. Prior to the fourth quarter of 1995, mortgage-backed securities were classified as securities held to maturity and stated at cost, which was adjusted for amortization of premiums and accretion of discounts by crediting or charging interest and dividend income over the life of the related securities using a method which approximated the level yield method. At times of low loan demand, short-term mortgage-backed securities may be used as substitutes for loans as certain of their financial characteristics are very similar to short-term mortgage loans. At December 31, 1995, the Company's investments, which consists of securities held to maturity, securities available for sale (including mortgage-backed securities), trading securities, short-term investments, term federal funds sold and interest-bearing deposits in banks totaled $586.8 million, representing 68.7% of the Company's total assets. 13 The following table sets forth the composition of the Company's investment portfolio as of the dates indicated: Investment Portfolio
- ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Federal funds sold: Overnight federal funds $100,245 $ 22,551 $ 21,498 Term federal funds 15,000 -- 5,000 - ------------------------------------------------------------------------------------------------ Total federal funds sold 115,245 22,551 26,498 Money market funds 7,260 -- 2,747 Interest-bearing deposits in banks 941 -- -- - ------------------------------------------------------------------------------------------------ Total federal funds sold and other short-term investments $123,446 $ 22,551 $ 29,245 - ------------------------------------------------------------------------------------------------ Percent of total assets 14.4% 2.7% 3.4% - ------------------------------------------------------------------------------------------------
(In thousands) At December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Securities held to maturity: (a) Other bonds and obligations $ 402 $ 567 $ 815 Mortgage-backed securities -- 172,263 115,353 Other securities -- -- 253 - ------------------------------------------------------------------------------------------------ Total securities held to maturity 402 172,830 116,421 Securities available for sale: (b) U.S. Treasury obligations 212,115 242,787 282,719 U.S. Government agency obligations 14,172 6,043 7,496 Other bonds and obligations 2,004 1,914 2,024 Marketable equity securities 11,290 6,900 8,592 Mortgage-backed securities 216,520 -- -- - ------------------------------------------------------------------------------------------------ Total securities available for sale 456,101 257,644 300,831 Trading securities: (b) U.S. Treasury obligations -- 112,166 132,819 Investments in mutual funds 6,819 3,444 10,350 - ------------------------------------------------------------------------------------------------ Total trading securities 6,819 115,610 143,169 - ------------------------------------------------------------------------------------------------ Total securities $463,322 $546,084 $560,421 - ------------------------------------------------------------------------------------------------ Percent of total assets 54.2% 64.7% 65.5% - ------------------------------------------------------------------------------------------------ Total investments $586,768 $568,635 $589,666 Total investments as a percent of total assets 68.7% 67.4% 68.9% - ------------------------------------------------------------------------------------------------
(a) At amortized cost. (b) At market value. 14 The following tables present the carrying value of debt securities held to maturity and available for sale at December 31, 1995 maturing within stated periods with the weighted average interest yield from securities falling within the range of maturities: Debt Securities Held to Maturity
Other bonds and (Dollars in thousands) obligations (1) Total - ----------------------------------------------------------------------------------------- Maturing within 1 year Amount $ 225 $ 225 Yield 6.02% 6.02% Maturing after 5 years but within 10 years Amount 124 124 Yield 6.47% 6.47% Maturing after 10 years but within 15 years Amount 53 53 Yield 10.98% 10.98% - ----------------------------------------------------------------------------------------- Total Amount $ 402 $ 402 Yield 6.81% 6.81% Average life in years 4.75 4.75
Debt Securities Available for Sale
U.S. Other Mortgage- U. S. Government bonds backed Treasury agency and securities (2) (Dollars in thousands) obligations obligations obligations Total - ------------------------------------------------------------------------------------------------ Maturing within 1 year Amount $ 75,948 $ 6,995 999 $ -- $ 83,942 Yield 5.82% 8.00% 4.97% 5.99% Maturing after 1 but within 5 years Amount 128,838 6,999 997 38 136,872 Yield 6.70% 6.46% 6.35% 5.30% 6.69% Maturing after 5 but within 10 years Amount 2,985 --- --- 21,967 24,952 Yield 6.47% 8.50% 8.26% Maturing after 10 but within 15 years Amount 189,518 189,518 Yield 6.92% 6.92% - ------------------------------------------------------------------------------------------------ Total Amount $207,771 $13,994 $ 1,996 $211,523 $435,284 Yield 6.37% 7.23% 5.66% 7.09% 6.74% - ------------------------------------------------------------------------------------------------ Average life in years 1.67 2.12 0.76 Average contractual maturity in years 12.63
15 (1) Yields on tax exempt obligations have been computed on a tax equivalent basis. (2) Mortgage-backed securities are shown at their contractual maturity, but are expected to have shorter lives due to scheduled payments and prepayments. At December 31, 1995, the Company did not have an investment in any issuer (other than securities of the U.S. government) in excess of 10% of stockholders equity. Asset/Liability Management Due to the volatility of interest rates, managing interest rate risk is important in determining the profitability of the Company. Interest rate risk arises from the difference in aggregate balances and repricing dates of interest-earning assets compared to interest-bearing liabilities. These differences, or repricing "gaps", provide an indication of the extent to which net interest income is vulnerable to interest rate fluctuations in future periods. The Company attempts to manage the net repricing gaps to maintain what it believes to be the most appropriate balance between earnings and exposure to interest rate fluctuations. It attempts to manage its interest rate gap primarily by lengthening or shortening the maturity structure of the Company's portfolio of securities and other investments. The Company closely monitors its one year "gap" position. One year "gap" is the difference between the amount of assets and liabilities repricing over the next twelve months. An institution with more assets maturing in one year than liabilities could experience a decline in net interest income if interest rates declined. Conversely, an institution with more liabilities repricing in one year than assets could experience a decline in net interest income if rates rose. At December 31, 1995, the one-year cumulative gap position was negative at $112.4 million, or approximately 13.2% of total assets. The table on the following page sets forth the Company's repricing "gaps" both in terms of dollar volume and as a percentage of total assets. 16 The following table details the projected amounts of the Company's interest-sensitive assets and liabilities at December 31, 1995 that are scheduled or assumed to mature or reprice during the time periods indicated. All assets and liabilities shown are at amortized cost or book value, exclusive of the effects of SFAS No. 115, with the exception of trading securities which are stated at market. Interest Rate Sensitivity Gap Analysis - At December 31, 1995
0 - 6 6 - 12 1 - 3 3 - 5 Over 5 Total (In thousands) Months Months Years Years Years Amount - --------------------------------------------------------------------------------------------- Interest sensitive assets: Mortgage loans (1) $ 6,912 $ 8,638 $ 32,243 $ 6,276 $166,534 $220,603 Other loans 24,523 1,360 914 513 1,272 28,582 - --------------------------------------------------------------------------------------------- Total loans 31,435 9,998 33,157 6,789 167,806 249,185 Securities held to maturity 402 --- --- --- --- 402 Securities available for sale: mortgage-backed securities (2) --- --- 38 --- 211,485 211,523 other 62,323 29,973 97,119 39,715 2,985 232,115 Trading securities 6,819 --- --- --- --- 6,819 Short term investments 117,505 --- --- --- --- 117,505 Federal funds sold 5,000 --- --- --- --- 5,000 Interest bearing deposits in banks --- --- 941 --- --- 941 - --------------------------------------------------------------------------------------------- Total interest sensitive assets 223,484 39,971 131,255 46,504 382,276 823,490 Non-interest earning assets --- --- --- --- 31,052 31,052 - --------------------------------------------------------------------------------------------- Total Assets $223,484 $ 39,971 $131,255 $ 46,504 $413,328 $854,542 - --------------------------------------------------------------------------------------------- Interest sensitive liabilities: NOW accounts $ 51,197 $ --- $ --- $ --- $ --- $ 51,197 Regular savings and special notice accounts (3) 32,892 30,220 80,000 45,000 142,118 330,230 Money market accounts 26,368 --- --- --- --- 26,368 Time certificates of deposit 127,848 106,385 90,615 6,558 651 332,057 Escrow deposits of borrowers 992 --- --- --- --- 992 - --------------------------------------------------------------------------------------------- Total rate sensitive liabilities 239,297 136,605 170,615 51,558 142,769 740,844 Non-interest bearing liabilities --- --- --- --- 22,881 22,881 Stockholders' equity --- --- --- --- 90,817 90,817 - --------------------------------------------------------------------------------------------- Total liabilities and Stockholder's equity $239,297 $136,297 $170,615 $ 51,558 $256,467 $854,542 - --------------------------------------------------------------------------------------------- Period Repricing Difference (Period Gap) (15,813) (96,634) (39,360) (5,054) 239,507 82,646 Cumulative Repricing Difference (Cumulative Gap) (15,813) (112,447) (151,807) (156,861) 82,646 Cumulative Gap as a Percentage of Total Assets -1.9% -13.2% -17.8% -18.4% 9.7% - ---------------------------------------------------------------------------------------------
(1) Fixed rate mortgage loan amounts are accumulated as if the entire balance came due on the last contractual payment date and adjustable rate mortgage loan amounts are accumulated as if the entire balance came due on the repricing date. Accordingly, these amounts do not reflect proceeds from contractual loan amortization or anticipated prepayments. (2) Based upon contractual maturity, but lives are expected to be shorter. Assumes no principal amortization or prepayments. (3) Based on an historical analysis of runoff of regular savings and special notice accounts (SNAs) at various levels at which short term rates exceed savings rates. This analysis anticipates moderate increases in short-term rates during 1996. 17 Deposits and Other Sources of Funds General. Deposits have been the primary source of funds of the Bank for making investments and loans. In addition to deposits, the Bank's other major sources of funds are derived from amortization and prepayment of loans and mortgage-backed securities, from sales or maturities of securities, and from operations. Deposit flows can vary significantly and are influenced by prevailing interest rates, money market conditions, economic conditions and competition. The Bank can respond to changing market conditions and competition through the pricing of its deposit accounts. Management can control the level of its deposits to a significant degree through its pricing policies. Another important factor in attracting deposits is convenience. In addition to the Bank's fourteen conveniently located banking offices, customers can access accounts through the Bank's ATM network. The Bank is a member of the Transaxion ("TX"), New York Cash Exchange ("NYCE") and CIRRUS System, Inc. ("CIRRUS") networks which allow access to ATMs in over 100,000 locations worldwide. Deposits. A substantial amount of the Bank's deposits are derived from customers who live or work within the Bank's market area. The Bank does not solicit deposits through any outside agents. The Bank's deposits consist of regular, silver and smart savings accounts, special notice accounts, NOW and Super NOW accounts, business checking accounts, money market deposit accounts, IRA and Keogh accounts, and term deposit accounts. The Bank's deposits declined by $6.0 million in the past year, from $759.7 million at December 31, 1994 to $753.7 million at December 31, 1995, a modest decline considering the performance of the financial markets and mutual funds which were fierce competitors for the savers' dollars. The composition of the Bank's deposits continued to shift in 1995, as it did in 1994, from savings to higher yielding time certificates of deposit. The Bank has maintained flat regular savings account deposit rates in 1995 and 1994 while selectively increasing rates on certificates of deposit. This strategy has helped to minimize the effect of rising interest rates on the Company's net interest margin. However, the strategy has also helped to encourage a shift from savings to time certificates of deposit during this period. During 1995, the Bank's total savings deposits, including money market accounts, declined $101.8 million, from $458.4 million at December 31, 1994 to $356.6 million at December 31, 1995, while its certificates of deposit increased $96.6 million, from $235.4 million at year end 1994 to $332.0 million at year end 1995. Borrowed Funds. From time to time the Bank has obtained funds through repurchase agreements with its customers and federal funds purchased. The Bank also has the ability, although it has never exercised it, to borrow from the Federal Reserve Bank and The Depositors Insurance Fund, Inc. The Company did not have any borrowed funds in 1995. Borrowed funds averaged $159,000, and $167,000 during the years ended December 31, 1994, and 1993, respectively. The highest month end balance of the Company's total borrowings during the years ended December 31, 1994, and 1993 were $228,000 and $245,000, respectively. 18 DEPOSITS The following table shows the composition of the deposits as of the dates indicated:
(In thousands) at December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Percent Percent Percent of of of Amount Deposits Amount Deposits Amount Deposits Demand and NOW NOW $ 51,197 6.79% $ 53,428 7.03% $ 52,385 6.84% Demand accounts (non interest-bearing) 15,216 2.02 14,068 1.85 12,215 1.59 ------- ----- ------ ----- ------- ----- Total demand and NOW 66,413 8.81 67,496 8.88 64,600 8.43 Savings: Regular savings and special notice accounts 330,230 43.82 430,143 56.62 500,158 65.26 Money market accounts 26,368 3.50 28,258 3.72 36,655 4.78 ------- ----- ------- ----- ------- ----- Total savings 356,598 47.32 458,401 60.34 536,813 70.04 Time Certificates of deposit: Fixed rate certificates 274,684 36.45 187,319 24.66 125,229 16.34 Variable rate certificates 57,373 7.61 48,102 6.33 41,593 5.43 ------- ----- ------- ----- ------- ----- Total time certificates of deposit 332,057 44.06 235,421 30.99 166,822 21.77 Deposit acquisition premium, net of amortization (1,411) (.19) (1,642) (.21) (1,872) (.24) ------- ----- ------- ----- ------- ---- Total deposits $753,657 100.00% $759,676 100.00% $766,363 100.00%
In the following table the average amount of deposits and average rate is shown for each of the years as indicated.
(In thousands) Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate NOW accounts $ 51,301 1.27% $ 52,884 1.29% $ 53,503 1.53% Demand (non interest-bearing) accounts 13,645 -- 13,166 -- 12,928 -- Money market accounts 28,052 3.29 31,795 2.70 40,850 2.64 Regular savings and special notice accounts 359,397 3.59 482,220 3.34 476,441 3.71 Time certificates of deposit 300,141 5.78 186,222 4.57 184,526 4.29 ------- ----- ------- ----- ------- ----- $752,536 4.11% $766,287 3.41% $768,248 3.58%
19 Investment Management and Trust Services In 1992, the Bank acquired a trust division as part of its Central Savings Bank acquisition. The Trust and Investment Services Division offers a variety of investment, trust and estate planning services and also serves as Trustee, Executor, and Executor's Agent for bank customers. As of December 31, 1995 the Trust Division had approximately $25.3 million (market value) of assets in custody and under management. Savings Bank Life Insurance In 1990 and prior periods, the Bank issued and sold life insurance through its Savings Bank Life Insurance ("SBLI") department. As required by Massachusetts law, the assets, reserves and earnings of the Bank's SBLI department were held solely for policyholders and were segregated from the Bank's assets. The Bank is not liable for any obligations of its SBLI department. As of December 31, 1990, the Bank discontinued offering savings bank life insurance to its customers. On December 31, 1991, SBLI was demutualized by legislation enacted in December, 1990. In connection with this reorganization the newly chartered SBLI Company distributed stock to the SBLI issuing banks in direct proportion to the outstanding assets and liabilities of their SBLI departments. During the first quarter of 1992, the Company recognized non-interest income of $253,000 resulting from this distribution of stock. Competition The Bank faces substantial competition both in originating loans and in attracting deposits. Competition in originating loans comes primarily from other thrift institutions, commercial banks, credit unions and mortgage banking companies. The Bank competes for loans principally on the basis of interest rates and loan fees, the types of loans originated and the quality of services provided to borrowers. In attracting deposits, the Bank's primary competitors are other thrift institutions, commercial banks, mutual funds and credit unions located in its market area. The Bank's attraction and retention of deposits depend on its ability to provide investment opportunities that satisfy the requirements of customers with respect to rate of return, liquidity, risk and other factors. The Bank attracts a significant amount of deposits through its branch offices primarily from the communities in which those branch offices are located. The Bank competes for these deposits by offering competitive rates, convenient branches and ATM locations and convenient business hours. 20 Supervision and Regulation The Bank is in a heavily regulated industry. As a Massachusetts- chartered savings bank whose deposits are insured by the FDIC and The Depositors Insurance Fund, the Bank is subject to regulation, supervision and examination by federal and state regulatory authorities, including, but not limited to the FDIC, the Massachusetts Commissioner of Banks and The Depositors Insurance Fund. This Federal and State regulation is for the benefit of borrowers, depositors and the respective deposit insurance funds and is not for the benefit of the Bank, the Company or its stockholders. The Bank is subject to extensive federal and state statutes, regulations, policies and standards regarding virtually all aspects of its operations, including capital adequacy, reserves, liquidity, payment of dividends, transactions with affiliates, loans to officers, directors, principal shareholders and their related interests, mergers, acquisitions and changes in controlling ownership, establishment, relocation and closure of branch banking offices, community reinvestment, fair lending, fair credit reporting, real estate settlement procedures, funds availability, disclosure to consumers and financial accounting, reporting and recordkeeping. In the event the Bank did not operate in accordance with FDIC statutes, regulations or policies, the FDIC has authority to terminate insurance of the Bank's deposit accounts and the FDIC and the Commissioner of Banks have authority to impose other sanctions for such non-compliance. For a discussion of the Bank's capital adequacy, see the heading "Liquidity and Capital Resources" appearing in the Company's 1995 Annual Report to Stockholders, which is incorporated herein by reference. In addition, as a bank holding company, the Company is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System and is subject to statutes, regulations and policies relating to, among other things, mergers, acquisitions and changes in controlling ownerships, non-bank activities and subsidiaries, capital adequacy, the payment of dividends, the tying of the sale or pricing of products or services of bank and nonbank subsidiaries, and the provision of financial and managerial support of its subsidiary bank. 21 Federal Deposit Insurance Corporation Improvement Act of 1991 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") made significant changes in federal laws governing depository institutions and the FDIC. Among other changes, FDICIA requires federal bank regulatory agencies to take "prompt corrective action" with respect to banks that do not meet applicable regulatory capital requirements. In addition, FDICIA prohibits state chartered banks from engaging, as principals, in activities such as equity investments and insurance underwriting, which are not permissible for national banks, unless the FDIC has determined that the activity would pose no significant risk to the Bank Insurance Fund and the state bank is in compliance with applicable capital standards. An insured state bank, such as MASSBANK, may to the extent permitted by the FDIC, acquire and retain ownership of common or preferred stock listed on a national securities exchange, provided that the insured state bank made or maintained an investment in such securities during the period beginning on September 30, 1990 and ending on November 26, 1991, which MASSBANK did, and provided further that the aggregate amount of the investment does not exceed 100 percent of the Bank's capital. At December 31, 1995, the Bank had marketable equity securities with a market value of approximately $11.3 million, representing 12.6% of the Bank's equity capital. In addition, FDICIA limits the aggregate amount a bank may lend to its directors, executive officers and principal shareholders and their related interests, prohibits depository institutions that are not well capitalized from accepting brokered deposits without an express waiver from the FDIC, requires uniform disclosures to consumers of the terms of bank deposit accounts, and requires banks to give regulators and bank customers advance notice of branch closings. FDICIA also establishes a system of risk-based deposit insurance assessments that takes a bank's capital level and supervisory risk characteristics into account in calculating the amount of its federal deposit insurance assessment. FDICIA imposes new annual audit and reporting requirements on banking organizations with more than $500 million in total assets. Finally, the FDICIA requires the FDIC and the other Federal bank regulatory agencies to issue regulatory standards to govern various aspects of bank operations including real estate lending, executive compensation, loan documentation, credit underwriting, interest rate risk exposure, and asset growth. From time to time the U.S. Congress and the Massachusetts Legislature adopt legislation and the Federal and State bank regulatory agencies issue regulations and policies that may significantly affect the operations of the Bank and the Company. No assurance can be given as to whether additional legislation will be enacted or whether additional regulations or policies will be issued or as to the effect any such legislation, regulations or policies may have on the Bank or the Company. 22 Employees MASSBANK Corp. utilizes the support staff of the Bank from time to time without the payment of any fees. No separate compensation is being paid to the executive officers of MASSBANK Corp., all of whom are executive officers of the Bank and receive compensation as such. As of December 31, 1995, the Bank had 150 full-time employees, including 27 officers, and 65 part-time employees. None of the Bank's employees is represented by a collective bargaining group, and management believes that its employee relations are good. The Bank provides its employees with formal training in product knowledge, sales techniques, fair lending, and motivation. In addition, each supervisor at the Bank receives management training before assuming his or her supervisory duties and periodically thereafter. The Bank maintains a comprehensive employee benefit program for qualified employees that includes a qualified pension plan, an Employee Stock Ownership Plan (ESOP), health and dental insurance, life and long-term disability insurance and tuition assistance. Subsidiaries The Bank has four wholly-owned subsidiaries: Readibank Investment Corporation, Melbank Investment Corporation, Readibank Equipment Corporation and Readibank Properties, Inc. Readibank Investment Corporation and Melbank Investment Corporation were established for the purpose of managing portions of the Bank's investment portfolio. Assets of Readibank Investment Corporation and Melbank Investment Corporation totaled $11.9 million and $58.9 million, at December 31, 1995, respectively. Readibank Equipment Corporation is an office equipment and furniture lessor whose sole lessee is the Bank. Assets of Readibank Equipment Corporation totaled $219 thousand at December 31, 1995. Readibank Properties, Inc. incorporated primarily for the purpose of real estate development, had total assets of $639 thousand at December 31, 1995. Executive Officers of the Registrant The executive officers of the Company and the Bank and the age of each officer as of February 29, 1996 are as follows: Name Age Office Gerard H. Brandi 47 Chairman of the Board of Directors, President and Chief Executive Officer of the Company and the Bank Raymond A. Brearey 59 Vice President of the Bank David F. Carroll 48 Vice President of the Bank Reginald E. Cormier 48 Vice President, Treasurer and Chief Financial Officer of the Company and the Bank Donald R. Washburn 52 Senior Vice President of the Bank Donna H. West 50 Senior Vice President of the Bank and Assistant Secretary of the Company 23 Gerard H. Brandi. Mr. Brandi has served in various capacities with MASSBANK since he joined the Bank in 1975 as Vice President of the Lending Division. He served as Senior Vice President from 1978 to 1981, Executive Vice President and Senior Lending Officer from 1981 to 1983, Executive Vice President and Treasurer from 1983 to 1986, and has served as the Bank's President since 1986. Mr. Brandi became Chief Executive Officer in April, 1992, and Chairman in January, 1993. Raymond A. Brearey. Mr. Brearey is Vice President and Senior Trust Officer of the Bank. Prior to joining the Bank in 1992, Mr. Brearey was a Senior Trust Officer of the Malden Trust Company in Malden, Massachusetts. David F. Carroll. Mr. Carroll has been employed by the Bank since 1983 and has been Vice President of Operations since 1984. He served as Vice President of the Lending Division for a year before becoming Vice President of Operations. Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in September, 1987 and has served in this capacity until his promotion to Vice President, Treasurer and Chief Financial Officer in January, 1995. Donald R. Washburn. Mr. Washburn joined the Bank in 1973 as a Loan Officer. He became an Assistant Vice President in January, 1977 and a Vice President in the Lending Division in June, 1980. Mr. Washburn served as Vice President of the Operations Division from February, 1983 to January, 1984, as Vice President of the Retail Banking Division from January, 1984 to January, 1986 and as Vice President of the Lending Division from January, 1986 until his promotion to Senior Vice President of the Lending Division in June, 1994. Donna H. West. Mrs. West has been employed by the Bank since 1979 and has served as Vice President of the Retail Banking Division since October, 1987. Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West became a Branch Manager in 1981, an Assistant Treasurer and Branch Manager in 1982, an Assistant Treasurer and Regional Branch Administrator in 1984 and an Assistant Vice President and Regional Branch Administrator in 1986. She served in this capacity until her October, 1987 promotion to Vice President of the Retail Banking Division. In June, 1994, Mrs. West was promoted to Senior Vice President of the Retail Banking Division. 24 Item 2. Properties The main office of MASSBANK Corp. and MASSBANK for Savings is located at 123 Haven Street, Reading, Massachusetts. Additionally, the Bank has thirteen branches and three operations facilities. The Bank owns its main office, two operations facilities and six of its branches. All of the remaining branches and other facilities are leased under various leases. At December 31, 1995, management believes that the Bank's existing facilities are adequate for the conduct of its business. The following table sets forth certain information relating to the Bank's existing facilities.
Owned Lease Renewal or Expiration Option Location Leased Date Through MAIN OFFICE: 123 Haven Street, Reading, MA Owned ---- ---- BRANCH 476 Main Street, Melrose, MA Owned ---- ---- OFFICES: 27 Melrose Street, Towers Plaza, Melrose, MA Leased 2004 2014 370 Main Street, Wilmington, MA Owned ---- ---- 219 Lowell Street, Lucci's Plaza, Wilmington, MA Leased 1996 2006 240 Main Street, Stoneham, MA Leased 1998 2003 4110 Mystic Valley Pkwy, Medford, MA Leased 1996 2001 296 Chelmsford Street, Chelmsford, MA Leased 1998 ---- 17 North Road, Chelmsford, MA Leased 1999 (1) 45 Broadway Road, Dracut, MA Leased 2002 ---- 50 Central Street, Lowell, MA Owned ---- ---- 755 Lakeview Avenue, Lowell, MA Owned ---- ---- 1800 Main Street, Tewksbury, MA Owned ---- ---- 203 Littleton Road, Westford, MA Owned ---- ---- OPERATIONS FACILITIES: 159 Haven Street, Reading, MA Owned ---- ---- 169 Haven Street, Reading, MA Owned ---- ---- 11 North Road, Chelmsford, MA Leased 1999 (1)
(1) Bank has option to purchase in year 2000. Item 3. 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 December 31, 1995, 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 4. Submission of Matters to a Vote of Security Holders None. 25 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information contained under the caption "MASSBANK Corp. and Subsidiaries Stockholder Data" in the Registrant's 1995 Annual Report to Stockholders is incorporated herein by reference. Item 6. Selected Financial Data The information contained under the caption "MASSBANK Corp. and Subsidiaries - Selected Consolidated Financial Data" in the Registrant's 1995 Annual Report to Stockholders is incorporated herein by reference. This selected consolidated financial data should be read in conjunction with the consolidated statements and related notes thereto appearing in the Registrant's 1995 Annual Report to Stockholders which are incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1995 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's consolidated financial statements and notes thereto, together with the report of KPMG Peat Marwick LLP, contained in the Registrant's 1995 Annual Report to Stockholders are incorporated herein by reference. The unaudited quarterly financial data set forth on page 45 of such Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The information appearing under the captions "Election of Directors" and "Compliance with Section 16(A) of the Exchange Act" in the Registrant's definitive proxy statement relating to its 1996 Annual Meeting of Stockholders is incorporated herein by reference. Information required by this item concerning the Executive Officers of the Registrant is contained in Part I of this Form 10-K. Item 11. Executive Compensation The information appearing under the caption "Executive Compensation" in the Registrant's definitive proxy statement relating to its 1996 Annual Meeting of Stockholders is incorporated herein by reference. 26 Item 12. Security Ownership of Certain Beneficial Owners and Management The information appearing under the captions "Election of Directors" and "Principal Stockholders" in the Registrant's definitive proxy statement relating to its 1996 Annual Meeting of Stockholders is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information contained in Note 5 of the Financial Statements under the caption "Loans" in the Registrant's 1995 Annual Report to Stockholders is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The following financial statements and financial statement schedules are contained herein or are incorporated herein by reference: (a)1. Financial Statements Reference to 1995 Annual Report to Stockholders (Pages) Independent Auditors' Report 21 Consolidated balance sheets at December 31, 1995 and 1994 22 Consolidated statements of income for the three years ended December 31, 1995 23 Consolidated statements of cash flows for the three years ended December 31, 1995 24-25 Consolidated statements of changes in stockholders' equity for the three years ended December 31, 1995 26 Notes to consolidated financial statements 27-45 2. Financial Statement Schedules All schedules are omitted as the required information is either not applicable or is included in the consolidated financial statements or related notes. 27 3. Exhibits Exhibit No. Description of Exhibit 3.1 Restated Certificate of Incorporation of the Registrant - incorporated by reference to Exhibit 3.1 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 3.2 By-Laws of the Registrant - incorporated by reference to Exhibit 3 of the Registrant's Form 10-Q for the quarter ended September 30, 1991. 4.1 Shareholder Rights Agreement dated as of January 16, 1990, between the Company and The First National Bank of Boston, as Rights Agent - incorporated herein by reference to the Exhibit to the Company's Current Report on Form 8-K dated as of January 16, 1990. 10.1 MASSBANK Corp. 1986 Stock Option Plan, as amended - incorporated by reference to Exhibit 28.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-11949). 10.1.2 Amendment to MASSBANK Corp. 1986 Stock Option Plan dated April 19, 1991 - incorporated by reference to Exhibit 10.1.2 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.1.3 MASSBANK Corp. 1994 Stock Incentive Plan - incorporated by reference to Exhibit 10.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-82110). 10.2 MASSBANK for Savings Employees' Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 10.2.1 Amendments to the MASSBANK for Savings Employee's Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2.1 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3 Form of Employment Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.3 of the Registrant's annual report on Form 10-K for the year ended December 31, 1986 and Exhibit 10.3.1 of the Registrant's annual report on Form 10-K for the year ended December 31, 1989. 10.3.2 Amendment to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.2 of the Registrant's annual report on Form 10-K for the year ended December 31, 1990. 10.3.3 Second amendment dated as of February 1, 1993 to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.3. to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 28 Exhibit No. Description of Exhibit 10.3.4 Form of Employment Agreement with Raymond A. Brearey dated June 22, 1992 - incorporated by reference to Exhibit 10.3.4 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.5 First amendment dated as of February 1, 1993 to the Employment Agreement with Raymond A. Brearey - incorporated by reference to Exhibit 10.3.5 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.6 Second amendment dated as of February 1, 1993 to the Employment Agreement with Raymond A. Brearey - incorporated by reference to Exhibit 10.3.6 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.7 Form of Employment Agreement with David F. Carroll dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.7 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.8 Form of Employment Agreement with Reginald E. Cormier dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.8 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.9 Form of Employment Agreement with Donald R. Washburn dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.9 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.10 Form of Employment Agreement with Donna H. West dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.10 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.11 Executive Severance Agreement with Gerard H. Brandi dated as of January 18, 1994 incorporated by reference to exhibit 10.3.11 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.12 Executive Severance Agreement with David F. Carroll dated as of December 23, 1993 incorporated by reference to exhibit 10.3.12 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.13 Executive Severance Agreement with Reginald E. Cormier dated as of December 23, 1993 incorporated by reference to exhibit 10.3.13 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.14 Executive Severance Agreement with Donald R. Washburn dated as of December 23, 1993 incorporated by reference to exhibit 10.3.14 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 29 Exhibit No. Description of Exhibit 10.3.15 Executive Severance Agreement with Donna H. West dated as of December 23, 1993 incorporated by reference to exhibit 10.3.15 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.4 Form of Executive Supplemental Retirement Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.4 of Registrant's annual report on Form 10-K for the year ended December 31, 1986. 11.1 Computation of Per Share Earnings - Computation of primary and fully diluted earnings per share is attached hereto as Exhibit 11.1 to this Annual Report on Form 10-K. 12 Statement re Computation of Ratios - Not applicable as MASSBANK Corp. does not have any debt securities registered under Section 12 of the Securities Exchange Act of 1934. 13 1995 Annual Report to Stockholders - except for those portions of the 1995 Annual Report to Stockholders which are expressly incorporated by reference in this report, such 1995 Annual Report to Stockholders is furnished for the information of the SEC and is not to be deemed "filed" with the SEC. 22 Subsidiaries of the Registrant - incorporated by reference to Exhibit 22 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 23 Consent of Independent Auditors. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this Form 10-K. (c) Exhibits to this Form 10-K are attached or incorporated by reference as stated in the Index to Exhibits. (d) Not applicable. 30 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MASSBANK CORP. /s/Gerard H. Brandi ------------------- Gerard H. Brandi Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/Gerard H. Brandi Chairman, President, - ---------------------------- Chief Executive Officer and Gerard H. Brandi Director March 27, 1996 /s/Reginald E. Cormier Vice President, Treasurer - ---------------------------- and Chief Financial Officer Reginald E. Cormier (Principal Financial and Accounting Officer) March 27, 1996 /s/Samuel Altschuler Director March 22, 1996 - ---------------------------- Samuel Altschuler /s/Mathias B. Bedell Director March 28, 1996 - ---------------------------- Mathias B. Bedell - ---------------------------- Director Allan S. Bufferd - ---------------------------- Director Peter W. Carr /s/Alexander S. Costello Director March 25, 1996 - ---------------------------- Alexander S. Costello 31 - ---------------------------- Director Robert S. Cummings /s/Robert E. Dyson Director March 25, 1996 - ---------------------------- Robert E. Dyson /s/Louise A. Hickey Director March 22, 1996 - ---------------------------- Louise A. Hickey - ---------------------------- Director Leonard Lapidus /s/Stephen E. Marshall Director March 26, 1996 - ---------------------------- Stephen E. Marshall /s/Arthur W. McPherson Director March 22, 1996 - ---------------------------- Arthur W. McPherson /s/Herbert G. Schurian Director March 22, 1996 - ---------------------------- Herbert G. Schurian /s/Donald B. Stackhouse Director March 25, 1996 - ---------------------------- Donald B. Stackhouse EX-11.1 2 EARNINGS PER SHARE REPORT 1 Exhibit 11.1 MASSBANK CORP. Earnings Per Share The following is a calculation of earnings per share for the years ended December 31, 1995, 1994 and 1993.
Years Ended December 31, - ------------------------------------------------------------------------------- Calculation of Primary Earnings per Share (1) 1995 1994 1993 - ------------------------------------------------------------------------------- Average common shares outstanding 2,755,789 2,862,981 2,934,849 Shares assumed to be repurchased under treasury stock method for stock options 79,823 80,746 72,963 Less: Unallocated Employee Stock Ownership Plan ("ESOP") shares not committed to be released (2) (51,679) ( 60,413) --- ---------- ---------- ---------- Total Shares 2,783,933 2,883,314 3,007,812 Net Income $8,759,000 $8,185,000 $6,695,000 ---------- ---------- ---------- Per Share Amount $3.15 $2.84 $2.23
Years Ended December 31, - ------------------------------------------------------------------------------- 1995 1994 1993 - ------------------------------------------------------------------------------- Calculation of Fully Diluted Earnings per Share (1) - ------------------------------------------------------------------------------- Average common shares outstanding 2,755,789 2,862,981 2,934,849 Shares assumed to be repurchased under treasury stock method for stock options 101,985 82,790 76,538 Less: Unallocated Employee Stock Ownership Plan ("ESOP") shares not committed to be released (2) (51,679) (60,413) --- ----------- ----------- ---------- Total Shares 2,806,095 2,885,358 3,011,387 ---------- --------- ---------- Net Income $8,759,000 $8,185,000 $6,695,000 ---------- ---------- ---------- Per Share Amount $3.12 $2.84 $2.22
2 (1) The prior years' shares outstanding and earnings per share amounts have been restated to reflect the three-for-two stock split of September 9, 1994. (2) The Company adopted the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 93-6 effective January 1, 1994. EX-13 3 1995 ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 M A S S B A N K C O R P. 1995 Annual Report and principal subsidiary MASSBANK for Savings 1986-1995 Celebrating a Decade of Performance 2 FINANCIAL HIGHLIGHTS MASSBANK CORP. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data: Total assets $854,542 $843,647 $855,881 $839,103 $425,428 Mortgage loans 220,603 220,269 219,347 219,932 78,064 Other loans 28,582 30,547 29,699 33,824 20,060 Investments(1) 586,768 568,635 589,666 564,422 315,588 Real estate acquired through foreclosure 255 129 699 905 1,158 Deposits 753,657 759,676 766,363 761,879 356,082 Stockholders' equity 90,817 74,504 80,075 71,062 66,563
- --------------------------------------------------------------------------------------------------------------------------- (In thousands) YEARS ENDED DECEMBER 31, 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- Operating Data: Interest and dividend income $ 56,611 $ 51,451 $ 51,541 $ 51,317 $ 29,040 Interest expense 30,896 26,152 27,485 30,991 18,644 - --------------------------------------------------------------------------------------------------------------------------- Net interest income 25,715 25,299 24,056 20,326 10,396 Provision for possible loan losses 170 705 671 884 83 Gains (losses) on securities, net 92 (533) 198 122 1 Other non-interest income 1,856 3,070 2,307 2,429 996 Non-interest expense 13,178 14,213 14,243 13,421 7,093 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 14,315 12,918 11,647 8,572 4,217 Income tax expense 5,556 4,733 4,711 3,895 1,967 Change in accounting principle -- -- (241) -- -- - --------------------------------------------------------------------------------------------------------------------------- Net income $ 8,759 $ 8,185 $ 6,695 $ 4,677 $ 2,250 - ---------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- Other Data: Yield on average interest-earning assets 6.90% 6.22% 6.25% 6.88% 8.06% Cost of average interest-bearing liabilities 4.11 3.41 3.57 4.48 6.11 Interest rate spread 2.79 2.81 2.68 2.40 1.95 Net interest margin 3.15 3.07 2.93 2.73 2.89 Non-interest expense to average assets 1.57 1.67 1.68 1.75 1.90 Efficiency ratio(2) 47.4 50.8 53.3 58.3 61.8 Return on assets (net income/average assets) 1.04 0.96 0.79 0.61 0.60 Return on equity (net income/average stockholders' equity) 10.65 10.62 8.98 6.79 3.39 Return on average realized equity(3) 10.81 10.62 8.98 6.79 3.39 Percent non-performing loans to total loans 0.97 0.84 0.51 0.59 1.06 Percent non-performing assets to total assets 0.31 0.26 0.23 0.29 0.52 Stockholders' equity to assets, at year-end 10.63 8.83 9.36 8.47 15.65 Book value per share, at year-end $ 33.13 $ 26.78 $ 27.28 $ 24.50 $ 23.38 Earnings per share: Primary 3.15 2.84 2.23 1.59 0.78 Fully diluted 3.12 2.84 2.22 1.59 0.78 Cash dividends declared per share 0.73 0.60 0.4533 0.3533 0.3033 Dividend payout ratio 23% 21% 20% 22% 39% - ---------------------------------------------------------------------------------------------------------------------------
(1) Consists of securities held to maturity and available for sale, trading securities, short-term investments, term federal funds sold and interest-bearing deposits in banks. (2) Determined by dividing non-interest expense by fully taxable equivalent net interest income plus non-interest income. (3) Excludes average unrealized gains or losses on securities available for sale. 1 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion should be read in conjunction with the consolidated financial statements and related notes included in this report. The financial condition and results of operations of MASSBANK Corp. (the "Company") essentially reflect the operations of its subsidiary, MASSBANK for Savings (the "Bank"). The Company's consolidated net income depends largely upon net interest income, which is the difference between interest income from loans and investments ("interest-earning assets") and interest expense on deposits and borrowed funds ("interest-bearing liabilities"). Net interest income is significantly affected by general economic conditions, policies established by regulatory authorities and competition. FINANCIAL CONDITION The Company's total assets increased by $10.9 million from $843.6 million at December 31, 1994 to $854.5 million at December 31, 1995. Total stockholders' equity was $90.8 million at December 31, 1995, up $16.3 million or 21.9% from $74.5 million at December 31, 1994. The increase in stockholders' equity resulted primarily from the Company's net income of $8.8 million in 1995, the net change in unrealized appreciation on investment securities available for sale, net of tax effect, of $11.2 million and the issuance of common stock under the stock option plan, partially offset by the payment of dividends to stockholders and the cost of the additional shares of treasury stock repurchased during the year. In recognition of the record net income and the Company's strong capital position, the Board of Directors increased the dividend to stockholders twice during 1995 and three times between the fourth quarter of 1994 and the first quarter of 1996. The Company's book value per share at December 31, 1995 was $33.13, up $6.35 or 23.7% from $26.78 at December 31, 1994. The Bank's total loan portfolio decreased by $1.6 million during the year, from $250.8 million at December 31, 1994 to $249.2 million at year end 1995. The level of loan amortization and payoffs in the Bank's loan portfolio this past year exceeded its loan originations. Loan originations totaled $39.7 million in 1995 compared to $47.7 million in 1994. Origination volumes have been affected by the interest rate environment which saw interest rates rise during 1994 and decline throughout 1995. This recent decrease in rates helped fuel higher levels of residential loan refinancings in the last quarter of 1995. Total investments consisting of investment securities and other short-term investments, including term federal funds sold and interest bearing bank deposits, increased from $568.6 million at December 31, 1994 to $586.8 million at year end 1995. The majority of these investments are in federal funds sold, shorter-term U.S. Treasury and government agency obligations, and fifteen year mortgage-backed securities. Nearly all of the Bank's investment securities, which totaled $463.3 million at December 31, 1995, have been classified as either available for sale or trading securities. 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. Mortgage-backed securities, at market value, increased by $53.6 million in 1995 to $216.5 million at December 31, 1995. 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 deposits declined by $6.0 million during 1995, from $759.7 million to $753.7 million, a modest decline considering the performance of the financial markets and mutual funds which were fierce competitors for the savers' dollars. The composition of the bank's deposits continued to shift in 1995, as it did in 1994, from savings to higher yielding time certificates of deposit. Total savings deposits declined by $101.8 million, in 1995, while time certificates of deposit increased by $96.6 million. See the non-interest expense section of management's discussion and analysis for additional information. ASSET QUALITY Net loans represented 28.9% of total assets at December 31, 1995 compared to 29.4% of total assets at December 31, 1994. The Bank's investment securities and other short-term investments, representing 68.7% of total assets at December 31, 1995, consisted primarily of U.S. Treasury and government agency obligations, high quality mortgage-backed securities, and federal funds sold. At December 31, 1995, the Bank's loan portfolio consisted of residential mortgages of $213.6 million, commercial mortgages of $7.0 million, consumer loans of $27.8 million and commercial loans of $0.8 million. Non-performing assets were $2.7 million at December 31, 1995, representing 0.31% of total assets. This compares to $2.2 million, or 0.26% of total assets, at December 31, 1994. At year end 1995, the Bank's allowance for possible loan losses was approximately $2.5 million, representing 104.2% of non-performing loans and 1.01% of total loans. The Bank believes that its allowance for possible loan losses is adequate to cover the risks inherent in the loan portfolio under current conditions. 13 4 RESULTS OF OPERATIONS COMPARISON OF THE YEARS 1995 AND 1994 MASSBANK Corp. reported record net income for the year ended December 31, 1995 of $8.8 million or $3.15 per share ($3.12 per share on a fully diluted basis) compared to $8.2 million or $2.84 per share for the year ended December 31, 1994. Return on average assets and return on average realized equity improved to 1.04% and 10.81% in 1995, from 0.96% and 10.62% in 1994, respectively, reflecting an improvement in net interest margin, a lower provision for possible loan losses, and non-interest expense reductions resulting primarily from a significant decrease in deposit insurance expense in 1995. The Company's net interest margin in 1995 was 3.15%, 8 basis points higher than the 3.07% in 1994. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis totaled $25.8 million for 1995, compared to $25.4 million for 1994. The modest increase of $0.4 million was due principally to an improvement in net interest margin. The impact of the wider margin in 1995 was partially offset by a decrease in the Company's average earning assets from $829.7 million in 1994 to $822.0 million in 1995. The Company's interest rate spread decreased slightly to 2.79% for 1995 from 2.81% for 1994. The tables on pages 19 and 20 set forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes due to (1) changes in volume and (2) changes in interest rates. INTEREST AND DIVIDEND INCOME Interest and dividend income on an FTE basis was $56.7 million for the year ended December 31, 1995, compared to $51.6 million for the year ended December 31, 1994. The weighted average yield on earning assets for the year ended December 31, 1995 increased to 6.90% from 6.22% for the year ended December 31, 1994. The average total earning assets of the Company decreased to $822.0 million during 1995, down $7.7 million from $829.7 million in 1994. Interest on loans decreased $0.1 million to $19.5 million for the year ended December 31, 1995. The decrease in interest income earned on loans was due principally to a decrease of $6.0 million in average loan balances in 1995 compared to the prior year. The reduction in average loan volume was partially offset by an increase in yield on loans. The yield on loans improved 15 basis points to 7.93% for 1995 compared to 7.78% for 1994. This improvement is due primarily to consumer loans in the Bank's loan portfolio which float either with the prime interest rate or three month U.S. treasury bill rate. These interest rates were significantly higher during 1995 than during 1994. Interest and dividend income (on an FTE basis) from investments consisting of investment securities, including mortgage-backed securities, trading securities, federal funds sold and other short-term investments increased by $5.2 million to $37.2 million in 1995 from $32.0 million in 1994. This increase resulted primarily from an improvement in weighted average yield on investments from 5.54% in 1994 to 6.47% in 1995, partially offset by a decrease of $1.7 million in average investment balances. INTEREST EXPENSE Total interest expense increased 18.1% to $30.9 million for the year ended December 31, 1995 from $26.2 million for the year ended December 31, 1994. This increase was due principally to an increase of 70 basis points in the Company's average cost of funds from 3.41% in 1994 to 4.11% in 1995, partially offset by lower average deposit volume. Average deposits and borrowed funds declined to $752.5 million in 1995, from $766.4 million a year earlier. The Bank has maintained flat regular savings account deposit rates in 1995 and 1994 while selectively increasing rates on certificates of deposit. This strategy has helped to minimize the effect of rising interest rates on the Company's net interest margin. The strategy has also helped to encourage a shift from savings to time certificates of deposit during this period. During 1995, the Bank's total savings deposits, including money market accounts, declined $101.8 million, from $458.4 million at December 31, 1994 to $356.6 million at December 31, 1995, while its certificates of deposit increased $96.6 million, from $235.4 million at year end 1994 to $332.0 million at year end 1995. 14 5 PROVISION FOR POSSIBLE LOAN LOSSES The provision for loan losses in 1995 was $170 thousand compared to $705 thousand in 1994. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for possible loan losses. In making its decision, management considers a number of factors, including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions, and trends in loan delinquencies and charge-offs. At December 31, 1995, the allowance for possible loan losses was $2.5 million representing 104.2% of non-performing loans. The Bank's non-performing loans totaled $2.4 million at December 31, 1995 compared to $2.1 million a year earlier. Net charge-offs totaled $207 thousand in 1995 compared to $400 thousand in 1994. Management believes that the allowance for possible loan losses is adequate to cover the risks inherent in the loan portfolio under current conditions. NON-INTEREST INCOME Non-interest income consists of gains or losses on securities, deposit account service fees, interest on tax settlements and other non-interest income. Non-interest income decreased to $1.9 million for the year ended December 31, 1995, from $2.5 million for the year ended December 31, 1994. This decrease was due to non-recurring income recorded in 1994. The Company, in 1994, recorded interest on tax settlements which it had received from the IRS totaling approximately $1.2 million. This compares to $51 thousand in interest on tax settlements recorded in 1995. Partly offsetting this non-recurring income were net gains on securities of $92 thousand versus net losses on securities of $533 thousand recorded in 1994. Deposit account service fees and all other non-interest income decreased from $1.9 million in 1994 to $1.8 million in 1995. NON-INTEREST EXPENSE Non-interest expenses (i.e. operating expenses) decreased by $1.0 million or 7.3% to $13.2 million in 1995, from $14.2 million a year ago. Salaries and employee benefits increased by $467 thousand or 6.9% to $7.3 million in 1995 from $6.8 million in 1994. This increase was due primarily to higher salaries and retirement benefit costs. Occupancy and equipment expense decreased by $50 thousand to approximately $2.0 million in 1995 due mostly to a reduction in depreciation expense. Data processing and professional services expenses were reduced 9.6% to $1.0 million in 1995, from approximately $1.1 million the previous year. In 1995, the Federal Deposit Insurance Corporation ("FDIC") reduced deposit insurance rates for well capitalized banks from $0.23 to $0.04 per hundred dollars of deposits effective June 1, 1995. This significant reduction in rates reduced the Bank's total deposit insurance expense by $874 thousand or 48.9% in 1995 to $0.9 million from $1.8 million a year ago. FDIC deposit insurance rates have been further reduced to the annual minimum of $2 thousand for 1996. During 1994, the Bank recorded a non-recurring charge to earnings of $282 thousand, the result of a write-down in loan valuation premium due to significant prepayments of loans purchased from the FDIC in 1992. No such write-down was required in 1995. All other expenses decreased by $188 thousand to $2.0 million in 1995 from $2.2 million in 1994. INCOME TAX EXPENSE The Company recorded a tax expense of approximately $5.5 million in 1995 compared to $4.7 million in 1994. The effective income tax rate for the year ended December 31, 1995 was 38.8%, an increase from 36.6% in 1994. The Company's effective income tax rate for 1994 was reduced due largely to a federal income tax refund of $462 thousand recorded during the year. For further information on income taxes, see Note 12 of Notes to Consolidated Financial Statements. 15 6 RESULTS OF OPERATIONS COMPARISON OF THE YEARS 1994 AND 1993 Net income for the year ended December 31, 1994 increased 22.3% to $8.2 million or $2.84 per share, from $6.7 million or $2.23 per share for the year ended December 31, 1993. The earnings results for 1993 included a non-recurring after tax charge of $241 thousand or $0.08 per share, resulting from the adoption of the Financial Accounting Standards Board ("FASB") Statement 109 which changed the method of accounting for income taxes. The current and prior year per share amounts reflect the three-for-two stock split of the Company's common stock which occurred on September 9, 1994. The Company's favorable financial performance in 1994 can be attributed primarily to an improvement in net interest margin. The net interest margin in 1994 was 3.07%, 14 basis points higher than the 2.93% in 1993. That increase combined with an increase in average earning assets of $3.3 million resulted in net interest income of $25.3 million, an increase of $1.2 million over 1993. Provisions for possible loan losses were increased from $671 thousand in 1993 to $705 thousand in 1994 due to an increase in non-performing loans during the year. Non-interest income was $2.5 million for 1994 and 1993. Total non-interest expenses were $14.2 million in 1994, the same as in 1993. NET INTEREST INCOME Net interest income before provision for possible loan losses totaled $25.3 million in 1994 compared to $24.1 million in 1993. This increase of $1.2 million, 5.2% above 1993's level, was due to an increase of $3.3 million in average earning assets and a net interest margin that was 14 basis points above the previous year. The increase in the margin was the result of an improved interest rate spread, as the Bank's securities and variable rate loans repriced more quickly in the rising interest rate environment of 1994 than the Bank's large base of core deposits. For 1994, the Company's weighted average cost of funds decreased to 3.41% from 3.57% for 1993. The yield on the Company's average earning assets during 1994 did not fall as quickly as its cost of funds and, as a result, the Company's interest rate spread improved to 2.81% for 1994 from 2.68% for 1993. The tables on pages 19 and 20 set forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes due to (1) changes in volume and (2) changes in interest rates. INTEREST AND DIVIDEND INCOME Interest and dividend income was $51.4 million for the year ended December 31, 1994, compared to $51.5 million for the year ended December 31, 1993. The weighted average yield on earning assets for the year ended December 31, 1994 declined to 6.22% from 6.25% for the year ended December 31, 1993. The average total earning assets of the Company increased to $829.7 million during 1994, up $3.3 million from $826.4 million in 1993. Interest earned on loans decreased $1.1 million to $19.6 million for 1994 reflecting a decline in the weighted average loan yield, from 8.25% in 1993 to 7.78% in 1994. This decrease was partially offset by an increase of $0.9 million in average loan balances during the comparable periods. The decline in average loan yield during 1994 results primarily from the volume of loans which were either refinanced, repriced, or originated during the relatively low interest rate environment which prevailed during 1993 and early 1994. Interest and dividend income from investments consisting of investment and mortgage-backed securities held to maturity, securities available for sale, trading securities, short-term investments and federal funds sold increased by $1 million to $31.8 million in 1994 from $30.8 million in 1993. This increase resulted primarily from an improvement in weighted average yield on investments from 5.38% in 1993 to 5.54% in 1994, coupled with a $2.4 million increase in average balances outstanding. INTEREST EXPENSE Total interest expense decreased 4.8% to $26.2 million for the year ended December 31, 1994 from $27.5 million for the year ended December 31, 1993. This decrease was due to a reduction in the Company's average cost of funds from 3.57% in 1993 to 3.41% in 1994, coupled with a decrease of $2 million in the Company's average deposits and borrowed funds, from $768.4 million in 1993 to $766.4 million in 1994. Throughout 1993, as rates were falling, the Bank rewarded its savings account customers with a slight premium. Throughout 1994, as interest rates increased, most financial institutions and many of the bank's competitors continued to pay savings account rates which were lower than MASSBANK's, due in part to the lack of loan demand and less competition for deposits. This negated the need for the bank to raise its savings account rates during the year and helped to reduce its cost of funds for 1994. The lower savings account rates in 1994 also enticed some bank customers to transfer some of their deposits from savings into longer term certificates of deposit. During 1994, the Bank's savings deposits declined $78.4 million, from $536.8 million at December 31, 1993 to $458.4 million at December 31, 1994, while its certificates of deposits increased $68.6 million, from $166.8 million at year end 1993 to $235.4 million at year end 1994. 16 7 PROVISION FOR POSSIBLE LOAN LOSSES The provision for loan losses in 1994 was $705 thousand compared to $671 thousand for 1993. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for possible loan losses. In making its decision, management considers a number of factors, including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions, and trends in loan delinquencies and charge-offs. At December 31, 1994, the allowance for possible loan losses was $2.6 million representing 1.02% of total loans, an increase from 0.91% at December 31, 1993. The Bank's nonaccrual loans totaled $2.1 million at December 31, 1994 compared to $1.3 million at December 31, 1993. Net charge-offs in 1994 totaled $400 thousand compared to $466 thousand in 1993. NON-INTEREST INCOME Non-interest income consists of gains or losses on securities, deposit account service fees, interest on tax settlements and other non-interest income. Excluding securities gains (losses), non-interest income increased $763 thousand or 33.1% from 1993 to 1994. This increase was due to non-recurring income. The Company in 1994 recorded interest on tax settlements which it had received from the IRS totaling approximately $1.2 million. This income resulted primarily from the resolution of certain protective claims of refund filed by the Bank in prior years due to the disallowance of deductions originating from losses on the sale and exchange of pools of mortgage loans (loan swaps). Partly offsetting this non-recurring income were net securities losses for 1994 equalling $533 thousand. This compares to net gains of $198 thousand in 1993. Deposit account service fees and all other non-interest income decreased from $2.3 million in 1993 to $1.9 million in 1994. NON-INTEREST EXPENSE Non-interest expenses (i.e. operating expenses) stayed flat in 1994 despite normal salary increases to employees. Non-interest expenses totaled $14.2 million in 1994, the same as the prior year. Salaries and employee benefits stayed flat at approximately $6.8 million this past year due primarily to a reduction in the total number of bank employees. Occupancy and equipment expense decreased from $2.1 million in 1993 to $2 million in 1994, due in part, to a non-recurring expense totaling $75 thousand incurred in 1993. Another factor in the decrease from 1993 to 1994 was a reduction in real estate taxes resulting from the receipt of real estate tax abatements this past year. Data processing and professional services expenses were reduced approximately $90 thousand from 1993 to 1994. These expenses totaled approximately $1.2 million in 1993 compared to approximately $1.1 million in 1994. The Bank's deposit insurance expense increased by $24 thousand to approximately $1.8 million in 1994. During 1994, the Bank recorded a non-recurring charge to earnings of $282 thousand, the result of a write-down in loan valuation premium due to the significant prepayments of loans purchased from the Federal Deposit Insurance Corporation ("FDIC") in 1992. All other expenses decreased by $130 thousand to $2.2 million in 1994 from $2.3 million in 1993. INCOME TAX EXPENSE Total income tax expense in 1994 was $4.7 million, the same as the prior year despite higher income before taxes. The Company's combined effective tax rate for 1994 was reduced due largely to a tax refund of $462 thousand recorded during the year in connection with the final resolution of the federal income tax matter discussed in the non-interest income section above. The combined effective tax rate for the Company was 36.6% in 1994 compared to 40.4% in 1993. For further information on income taxes, see Note 12 of Notes to 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 December 31, 1995, the Bank had $100.2 million or 11.7% of total assets and $226.3 million or 26.5% of total assets invested respectively in overnight federal funds sold and United States obligations. 17 8 LIQUIDITY AND CAPITAL RESOURCES (continued) The Bank is a Federal Deposit Insurance Corporation 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 Tier 1 capital of at least 3% of their total assets. All other banks are required to have Tier 1 capital of 4% to 5%. The FDIC has authority to impose higher requirements for individual banks. The Bank is also required to maintain a minimum level of risk-based capital. Under the new risk-based capital standards, FDIC insured institutions generally are expected to meet a minimum total qualifying capital to risk-weighted assets ratio of 8.00%. At December 31, 1995, the Bank had a Tier 1 capital to total assets ratio of 9.64% and a total qualifying capital to risk-weighted assets ratio of 37.25%. The Company, on a consolidated basis, had ratios of Tier 1 capital to total assets of 9.75% and total qualifying capital to risk-weighted assets of 37.67% at December 31, 1995. ASSET AND LIABILITY MANAGEMENT The Bank's asset/liability management objective is to attempt to insulate the balance sheet, and therefore the income statement, from excessive risk due to changes in market interest rates. The Company's asset/liability management policy, which is reviewed by the Board of Directors on an annual basis, establishes limits for interest rate risk assumption to prevent the erosion of earnings and capital in an adverse interest rate environment. The Company's asset/liability management policy also states that it is the responsibility of the Bank's ALCO Committee to establish long-term strategies with respect to interest rate risk and to monitor the exposure to interest rate risk in relation to present and prospective market interest rates, economic conditions, and balance sheet composition on an on-going basis. The asset/liability management process at MASSBANK seeks to ensure that the risk to earnings fluctuations from changes in market interest rates is prudently managed. The Bank uses three key measurements to monitor interest rate risk: (1) the interest rate-sensitivity "gap" analysis; (2) a "rate shock" to measure earnings volatility due to an immediate increase or decrease in market interest rates of up to 200 basis points; (3) simulations of net interest income under alternative balance sheet and interest rate scenarios. The Bank occasionally enters into interest rate swap agreements as hedges against its interest rate exposure. 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. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN AND ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME RECOGNITION AND DISCLOSURES Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." These statements establish accounting standards for measuring impairment on loans for which it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS No. 114 requires impairment to be measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. However, impairment must be measured based on the fair value of the collateral if it is determined that foreclosure is probable. SFAS No. 114 also narrows the definition of in-substance foreclosures to include only those loans for which the Company has taken possession of the collateral, but has not completed legal foreclosure proceedings. Accordingly, loans classified as in-substance foreclosure are treated as impaired loans rather than real estate acquired through foreclosure under these pronouncements. Impaired loans consist of all nonaccrual commercial loans. When a loan is placed on nonaccrual status and identified as impaired, interest previously accrued, but not collected is reversed against current period income, and further recognition of accrued interest is suspended. Subsequent cash receipts on impaired loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. 18 9 ACCOUNTING FOR MORTGAGE SERVICING RIGHTS In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which was adopted on January 1, 1996. This Statement requires the Company to recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. A mortgage banking enterprise that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The Statement also requires the assessment of capitalized servicing rights for impairment based on fair value of the rights. The adoption of SFAS No. 122 did not have a material impact on the Company's consolidated financial statements. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective on January 1, 1996. This Statement establishes a fair value based method of accounting for stock-based compensation plans under which compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. However, the statement allows a company to continue to measure compensation cost for such plans under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB Opinion No. 25, no compensation cost is recorded if, at the grant date, the exercise price of the options is equal to the fair market value of the Company's common stock. The Company has elected to continue to follow the accounting in APB Opinion No. 25. SFAS No. 123 requires companies which elect to continue to follow the accounting in APB Opinion No. 25 to disclose in the notes to their financial statements pro forma net income and earnings per share as if the fair value based method of accounting had been applied. The Company will provide the additional required disclosures relating to 1995 and 1996 stock options in its 1996 Annual Report. RATE/VOLUME ANALYSIS The following table presents, for the years indicated, the changes in interest and dividend income and the changes in interest expense attributable to changes in interest rates and changes in the volume of earning assets and interest-bearing liabilities. A change attributable to both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
- --------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1995 COMPARED TO 1994 1994 COMPARED TO 1993 (IN THOUSANDS) INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO - --------------------------------------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total - --------------------------------------------------------------------------------------------------------------------------- Interest and dividend income: Federal funds sold $ 3,165 $ 908 $ 4,073 $(1,912) $ 656 $(1,256) Short-term investments 273 19 292 (159) (4) (163) Investment securities (50) 1,619 1,569 (2,476) 113 (2,363) Trading securities (4,954) 1,867 (3,087) 2,955 525 3,480 Mortgage-backed securities 2,363 46 2,409 2,120 (802) 1,318 Mortgage loans (477) 44 (433) 252 (1,207) (955) Other loans 8 329 337 (183) 32 (151) - --------------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 328 4,832 5,160 597 (687) (90) - --------------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits: Demand and NOW (10) (23) (33) (5) (132) (137) Savings (4,206) 153 (4,053) (117) (1,685) (1,802) Time certificates of deposit 6,163 2,668 8,831 75 532 607 Borrowed funds (1) -- (1) -- (1) (1) - --------------------------------------------------------------------------------------------------------------------------- Total interest expense 1,946 2,798 4,744 (47) (1,286) (1,333) - --------------------------------------------------------------------------------------------------------------------------- Net interest income $(1,618) $2,034 $ 416 $ 644 $ 599 $ 1,243 - ---------------------------------------------------------------------------------------------------------------------------
19 10 AVERAGE BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Interest Average Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance(4) Expense Rate(4) Balance(4) Expense Rate(4) Balance(4) Expense Rate(4) - ------------------------------------------------------------------------------------------------------------------------------ Assets: Earning assets: Federal funds sold $ 90,589 $ 5,356 5.91% $ 32,724 $ 1,283 3.92% $ 86,067 $ 2,539 2.95% Short-term investments(2) 5,168 303 5.86 362 11 3.07 5,526 174 3.15 Investment securities 250,318 15,710 6.28 251,209 14,139 5.63 295,577 16,509 5.59 Mortgage-backed securities 184,976 13,246 7.16 152,026 10,837 7.13 122,883 9,519 7.75 Trading securities 45,012 2,633 5.85 141,479 5,720 4.04 65,271 2,240 3.43 Mortgage loans(1) 216,060 16,678 7.72 222,144 17,111 7.70 219,090 18,066 8.25 Other loans(1) 29,848 2,820 9.45 29,749 2,483 8.35 31,945 2,634 8.25 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 821,971 56,746 6.90% 829,693 51,584 6.22% 826,359 51,681 6.25% - ------------------------------------------------------------------------------------------------------------------------------ Allowance for possible loan losses 2,587 2,343 2,090 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets less allowance for possible loan losses 819,384 827,350 824,269 Other assets 20,765 22,442 23,350 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $840,149 $849,792 $847,619 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities: Deposits: Demand and NOW $ 64,946 652 1.00% $ 66,050 685 1.04% $ 66,431 822 1.23% Savings 387,449 12,898 3.33 514,015 16,951 3.30 517,291 18,753 3.63 Time certificates of deposit 300,141 17,346 5.78 186,222 8,515 4.57 184,526 7,908 4.29 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 752,536 30,896 4.11 766,287 26,151 3.41 768,248 27,483 3.58 Borrowed funds -- -- -- 159 1 0.69 167 2 1.25 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits and borrowed funds 752,536 30,896 4.11% 766,446 26,152 3.41% 768,415 27,485 3.57% - ------------------------------------------------------------------------------------------------------------------------------ Other liabilities 5,365 6,245 4,631 Total liabilities 757,901 772,691 773,046 - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' Equity: 82,248 77,101 74,573 Total liabilities and stockholders' equity $840,149 $849,792 $847,619 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income (tax- equivalent basis) 25,850 25,432 24,196 Less adjustment of tax- exempt interest income 135 133 140 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income $25,715 $25,299 $24,056 - ------------------------------------------------------------------------------------------------------------------------------ Interest rate spread 2.79% 2.81% 2.68% - ------------------------------------------------------------------------------------------------------------------------------ Net interest margin(3) 3.15% 3.07% 2.93% - ------------------------------------------------------------------------------------------------------------------------------
(1) Loans on nonaccrual 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 possible loan losses divided by average interest-earning assets. (4) Includes the effects of SFAS No. 115. 20 11 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders MASSBANK Corp.: We have audited the accompanying consolidated balance sheets of MASSBANK Corp. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MASSBANK Corp. and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in note 1, the Company changed its method of accounting for investments in accordance with Statement of Financial Accounting Standards No. 115, effective December 31, 1993. Also, as discussed in notes 1 and 12, the Company changed its method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, effective January 1, 1993. Boston, Massachusetts January 12, 1996 21 12 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 8,150 $ 9,610 Short-term investments (Note 2) 117,505 22,551 - --------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 125,655 32,161 - --------------------------------------------------------------------------------------------------------------------------- Term federal funds sold 5,000 -- Interest-bearing deposits in banks 941 -- Securities held to maturity, at amortized cost (market value of $402 in 1995 and $163,429 in 1994) (Note 3) 402 172,830 Securities available for sale, at market value (cost of $443,638 in 1995 and $264,530 in 1994) (Note 3) 456,101 257,644 Trading securities, at market value (Note 4) 6,819 115,610 Loans (Notes 5, 7 and 11): Mortgage loans 220,603 220,269 Other loans 28,582 30,547 - --------------------------------------------------------------------------------------------------------------------------- Total loans 249,185 250,816 Less: allowance for possible loan losses (Note 6) 2,529 2,566 - --------------------------------------------------------------------------------------------------------------------------- Net loans 246,656 248,250 - --------------------------------------------------------------------------------------------------------------------------- Premises and equipment (Note 9) 4,226 4,328 Real estate acquired through foreclosure (Note 7) 255 129 Accrued interest receivable 7,280 6,870 Deferred income tax asset, net (Note 12) -- 4,590 Other assets 1,207 1,235 - --------------------------------------------------------------------------------------------------------------------------- Total assets $854,542 $843,647 - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Deposits (Notes 10 and 11): Demand and NOW $ 66,413 $ 67,496 Savings 356,598 458,401 Time certificates of deposit 332,057 235,421 Deposit acquisition premium, net of amortization (1,411) (1,642) - --------------------------------------------------------------------------------------------------------------------------- Total deposits 753,657 759,676 Escrow deposits of borrowers 992 966 Employee stock ownership plan liability (Note 14) 1,093 1,249 Accrued and deferred income taxes payable (Note 12) 4,760 1,243 Other liabilities 3,223 6,009 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 763,725 769,143 - --------------------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities (Notes 8 and 9) Stockholders' equity (Notes 12, 13 and 15): Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued -- -- Common stock, par value $1.00 per share; 10,000,000 shares authorized, 5,424,671 and 5,352,138 shares issued, respectively 5,425 5,352 Additional paid-in capital 56,842 55,609 Retained earnings 58,773 51,995 - --------------------------------------------------------------------------------------------------------------------------- 121,040 112,956 Treasury stock at cost, 2,683,065 and 2,570,411 shares, respectively (36,370) (33,288) Net unrealized gains (losses) on securities available for sale, net of tax effect (Note 3) 7,240 (3,915) Common stock acquired by ESOP (Note 14) (1,093) (1,249) - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 90,817 74,504 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $854,542 $843,647 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 22 13 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Interest and dividend income: Mortgage loans $ 16,678 $ 17,111 $ 18,066 Other loans 2,820 2,483 2,634 Mortgage-backed securities 13,246 10,837 9,519 Securities available for sale 15,553 13,975 16,311 Trading securities 2,633 5,720 2,240 Federal funds sold 5,356 1,283 2,539 Other investments 325 42 232 - ------------------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 56,611 51,451 51,541 - ------------------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits: NOW 652 685 822 Savings 12,898 16,951 18,753 Time certificates of deposit 17,346 8,515 7,908 - ------------------------------------------------------------------------------------------------------------------------------- Total interest expense on deposits 30,896 26,151 27,483 Borrowed funds -- 1 2 - ------------------------------------------------------------------------------------------------------------------------------- Total interest expense 30,896 26,152 27,485 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income 25,715 25,299 24,056 Provision for possible loan losses (Note 6) 170 705 671 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 25,545 24,594 23,385 - ------------------------------------------------------------------------------------------------------------------------------- Non-interest income: Deposit account service fees 923 974 1,104 Gains (losses) on securities, net 92 (533) 198 Interest on tax settlements 51 1,188 35 Other 882 908 1,168 - ------------------------------------------------------------------------------------------------------------------------------- Total non-interest income 1,948 2,537 2,505 - ------------------------------------------------------------------------------------------------------------------------------- Non-interest expense: Salaries and employee benefits 7,260 6,793 6,804 Occupancy and equipment 1,991 2,041 2,146 Data processing 608 640 711 Professional services 414 490 509 Deposit insurance 914 1,788 1,764 Write-down in loan valuation premium -- 282 -- Other 1,991 2,179 2,309 - ------------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 13,178 14,213 14,243 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 14,315 12,918 11,647 Income tax expense (Note 12) 5,556 4,733 4,711 - ------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 8,759 8,185 6,936 Cumulative effect of change in method of accounting for income taxes (Note 12) -- -- (241) - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 8,759 $ 8,185 $ 6,695 - ------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding: Primary 2,783,933 2,883,314 3,007,812 Fully diluted 2,806,095 2,885,358 3,011,387 Earnings per share (in dollars): Primary: Income before cumulative effect of change in accounting principle $ 3.15 $ 2.84 $ 2.31 Cumulative effect of change in method of accounting for income taxes -- -- (0.08) - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 3.15 $ 2.84 $ 2.23 - ------------------------------------------------------------------------------------------------------------------------------- Fully diluted: Income before cumulative effect of change in accounting principle $ 3.12 $ 2.84 $ 2.30 Cumulative effect of change in method of accounting for income taxes -- -- (0.08) - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 3.12 $ 2.84 $ 2.22 - -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 23 14 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 8,759 $ 8,185 $ 6,695 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 462 520 494 Write down of carrying value of bank premises -- -- 75 Amortization of deposit acquisition premium 231 230 292 Amortization of loan valuation premium 64 361 100 Amortization of ESOP shares committed to be released 51 -- -- (Increase) decrease in accrued interest receivable (410) 36 431 Increase (decrease) in other liabilities (2,786) 3,183 (356) Increase (decrease) in current income taxes payable (363) (1,379) (175) Accretion of discounts on securities, net of amortization of premiums (1,137) (729) (912) Net trading securities activity 109,289 26,718 (132,782) (Gains) losses on securities available for sale 407 (308) (276) (Gains) losses on trading securities (499) 841 78 Increase in deferred mortgage loan origination fees, net of amortization 57 15 326 Deferred income tax expense (benefit) 276 (183) -- (Increase) decrease in other assets (186) 270 30 Loans originated for sale (455) (1,034) (1,430) Loans sold 455 1,285 1,287 Provision for possible loan losses 170 705 671 Provisions for losses and writedowns on real estate acquired through foreclosure 25 49 162 (Gains) on sales of real estate acquired through foreclosure -- (30) (119) (Gains) on sales of premises and equipment -- -- (23) Increase (decrease) in escrow deposits of borrowers 26 (64) (127) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 114,436 38,671 (125,559) - ---------------------------------------------------------------------------------------------------------------------------
24 15 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of term federal funds (50,000) -- -- Proceeds from maturities of term federal funds 45,000 -- -- Purchases of bank certificates of deposit (941) -- -- Proceeds from sales of investment securities available for sale 46,035 28,329 30,017 Proceeds from maturities of investment securities held to maturity and available for sale 45,147 129,227 119,316 Purchases of investment securities available for sale (57,927) (127,192) (94,641) Purchases of mortgage-backed securities (61,092) (85,886) (22,782) Principal repayments of mortgage-backed securities 22,084 29,130 47,476 Principal repayments of tax-exempt bonds 18 17 15 Loans originated (39,222) (46,672) (62,881) Loan principal payments received 40,116 43,656 65,917 Purchases of premises and equipment (360) (459) (354) Proceeds from sale of premises and equipment -- -- 28 Proceeds from sale of real estate acquired through foreclosure 265 791 1,088 Net advances on real estate acquired through foreclosure (7) (22) -- - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (10,884) (29,081) 83,199 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in deposits (6,250) (6,917) 4,192 Net decrease in borrowed funds -- (73) (56) Payments to acquire treasury stock (3,082) (5,063) (445) Issuance of common stock under stock option plan 891 840 608 Tax benefit resulting from stock options exercised 364 299 176 Cash dividends paid on common stock (1,981) (1,692) (1,330) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (10,058) (12,606) 3,145 - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 93,494 (3,016) (39,215) Cash and cash equivalents at beginning of year 32,161 35,177 74,392 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $125,655 $ 32,161 $ 35,177 - ----------------------------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosures: Cash transactions: Cash paid during the year for interest $ 30,984 $ 26,153 $ 27,483 Cash paid during the year for taxes 5,230 4,828 6,000 Non-cash transactions: Securities reclassified from available for sale to trading -- -- 10,465 SFAS 115: Securities reclassified from held for sale to available for sale -- -- 300,831 Increase (decrease) in stockholders' equity 11,155 (8,067) 4,152 Increase (decrease) in deferred tax (assets) liabilities 8,194 (6,123) 3,152 Securities reclassified from held to maturity to available for sale 202,800 -- -- Transfers from loans to real estate acquired through foreclosure 409 219 925 Transfers from other assets to securities available for sale 214 -- -- - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 25 16 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ----------------------------------------------------------------------------------------------------------------------------- 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, 1992 $3,486 $55,552 $40,137 $(27,780) $ -- $ (333) $71,062 Net Income -- -- 6,695 -- -- -- 6,695 Cash dividends declared ($0.45 1/3 per share) -- -- (1,330) -- -- -- (1,330) Net increase in liability to ESOP -- -- -- -- -- (843) (843) Purchase of treasury stock -- -- -- (445) -- -- (445) Exercise of stock options and related tax benefits 36 748 -- -- -- -- 784 Net unrealized gains on securities available for sale, net of tax effect upon adoption of SFAS 115 -- -- -- -- 4,152 -- 4,152 - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 3,522 56,300 45,502 (28,225) 4,152 (1,176) 80,075 Net Income -- -- 8,185 -- -- -- 8,185 Cash dividends declared ($0.60 per share) -- -- (1,692) -- -- -- (1,692) Net increase in liability to ESOP -- -- -- -- -- (73) (73) Purchase of treasury stock -- -- -- (5,063) -- -- (5,063) Exercise of stock options and related tax benefits 54 1,085 -- -- -- -- 1,139 Transfer resulting from three-for-two stock split 1,776 (1,776) -- -- -- -- -- Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- -- -- -- (8,067) -- (8,067) - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 5,352 55,609 51,995 (33,288) (3,915) (1,249) 74,504 Net Income -- -- 8,759 -- -- -- 8,759 Cash dividends declared ($0.73 per share) -- -- (1,981) -- -- -- (1,981) Net decrease in liability to ESOP -- -- -- -- -- 156 156 Amortization of ESOP shares committed to be released -- 51 -- -- -- -- 51 Purchase of treasury stock -- -- -- (3,082) -- -- (3,082) Exercise of stock options and related tax benefits 73 1,182 -- -- -- -- 1,255 Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- -- -- -- 11,155 -- 11,155 - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $5,425 $56,842 $58,773 $(36,370) $ 7,240 $(1,093) $90,817 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 26 17 MASSBANK CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MASSBANK Corp. the ("Company") is a Delaware chartered holding company whose principal subsidiary is MASSBANK for Savings (the "Bank"). The Bank operates fourteen full service banking offices in Reading, Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford, Dracut and Lowell providing a variety of deposit, lending and trust services. As a Massachusetts chartered savings bank whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and the Depositors Insurance Fund ("DIF"), the activities of the Bank are subject to regulation, supervision and examination by federal and state regulatory authorities, including, but not limited to the FDIC, the Massachusetts Commissioner of Banks and the DIF. In addition, as a bank holding company, the Company is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: MASSBANK for Savings, Readibank Properties, Inc., Readibank Equipment Corporation, Readibank Investment Corporation and Melbank Investment Corporation. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and income and expenses for the period. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses. Certain amounts in the prior years' consolidated financial statements were reclassified to permit comparison with the current fiscal year. The Company's reported per share amounts and average common and common equivalent shares outstanding for the prior years have been restated to reflect the Company's three-for-two stock split of September 9, 1994. INVESTMENT AND TRADING SECURITIES At December 31, 1993, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under this method, the Company records investment securities available for sale at aggregate market value with the net unrealized holding gains or losses reported, net of tax effect, as a separate component of stockholders' equity until realized. As of December 31, 1995, stockholders' equity included approximately $7.2 million, representing the net unrealized gains on securities available for sale, less applicable income tax benefits. Prior to December 31, 1993, the Company recorded its investment securities available for sale at the lower of aggregate cost or market value with the net unrealized losses reported in non-interest income as a component of "gains (losses) on securities." In the fourth quarter of 1995, the Company adopted the Financial Accounting Standards Board guidelines, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued on November 15, 1995. Under these guidelines, the Company was allowed a one-time opportunity to reassess the appropriateness of its FASB 115 investment classifications and reclassify securities from the held to maturity category to the available for sale category, or vice versa. As a result of this reassessment and after thoughtful consideration, the Company reclassified all of its mortgage-backed securities from the held to maturity category to the available for sale category in accordance with the FASB guidelines. The total amortized cost of the securities reclassified was $202.8 million. These securities had total unrealized gains of $3.7 million on the date they were reclassified. Under its investment policy, management determines the appropriate classification of securities at the time of purchase. Those debt securities that the Company has the intent and the ability to hold to maturity are classified as securities held to maturity and are carried at amortized historical cost adjusted for any premiums or discounts. Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital and other similar factors. Income on debt securities available for sale is accrued and included in interest and dividend income. The specific identification method is used to determine realized gains and losses on sales of securities available for sale which are also reported in non-interest income under the caption "gains (losses) on securities." When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings. Investments classified as trading securities are stated at market value with unrealized gains and losses included in earnings. Income on debt trading securities is accrued and included in interest and dividend income. All of the Company's mortgage-backed securities are currently classified as available for sale. Prior to the fourth quarter of 1995, mortgage-backed securities were classified as securities held to maturity and stated at cost, which was adjusted for amortization of premiums and accretion of discounts by crediting or charging interest and dividend income over the life of the related securities using a method which approximated the level yield method. 27 18 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) LOANS Loans are reported at the principal amount outstanding, net of unearned fees. Loan origination fees and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the loan using the level-yield method. The Bank does not accrue interest on loans which are 90 days or more past due. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed from income and all amortization of deferred loan fees is discontinued. Interest received on nonaccrual loans is either applied against principal or reported as income according to management's judgment as to the collectibility of principal. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. ALLOWANCE FOR POSSIBLE LOAN LOSSES Possible 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 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 losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for possible loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. PREMISES AND EQUIPMENT Land is carried at cost. Premises, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization computed primarily by use of the straight-line method over the estimated useful lives of the related assets or terms of the related leases. REAL ESTATE ACQUIRED THROUGH FORECLOSURE Real estate acquired through foreclosure is comprised of foreclosed properties where the Bank has actually received title and real estate substantially repossessed. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. 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 constructively or actually received, less estimated costs to sell the property following foreclosure. Operating expenses and any subsequent provisions to reduce the carrying value to fair value are charged to current period earnings. Gains and losses upon disposition are reflected in earnings as realized. DEPOSIT ACQUISITION PREMIUM The deposit acquisition premium arising from acquisitions is reported net of accumulated amortization. Such premium is being amortized on a straight-line basis over 10 years. PENSION PLAN The Bank accounts for pension benefits on the net periodic pension cost method for financial reporting purposes. This method recognizes the compensation cost of an employee's pension benefit over that employee's approximate service period. Pension costs are funded in the year of accrual using the aggregate cost method. EARNINGS PER COMMON SHARE The computation of earnings per common share is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Stock options, when dilutive, are included as common stock equivalents using the treasury stock method. 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. As a nonmember of the Federal Reserve System, the Bank is required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston. The amount of this reserve requirement, included in "Cash and Due from Banks," was $2.1 million and $1.7 million at December 31, 1995 and 1994, respectively. 28 19 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INCOME TAXES The Company and its subsidiaries file state and consolidated federal income tax returns on an October 31 year-end. The Bank recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Bank's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. The Bank's deferred tax asset is reviewed and adjustments to such asset are recognized as deferred income tax expense or benefit based upon management's judgment relating to the realizability of such asset. 2. SHORT-TERM INVESTMENTS Short-term investments consist of the following:
--------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 --------------------------------------------------------------------------------------------------------------------------- Federal funds sold (overnight) $100,245 $22,551 Term federal funds sold (with original maturities of 90 days or less) 10,000 -- Money market funds 7,260 -- --------------------------------------------------------------------------------------------------------------------------- Total short-term investments $117,505 $22,551 ---------------------------------------------------------------------------------------------------------------------------
The investments above are stated at cost which approximates market value and have original maturities of 90 days or less. 3. INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities follows:
--------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (IN THOUSANDS) AT DECEMBER 31, 1995 Cost Gains Losses Value --------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Other bonds and obligations $ 402 $ -- $ -- $ 402 --------------------------------------------------------------------------------------------------------------------------- Total securities held to maturity 402 -- -- 402 --------------------------------------------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations 207,771 4,387 (43) 212,115 U.S. Government agency obligations 13,994 178 -- 14,172 Other bonds and obligations 1,996 10 (2) 2,004 --------------------------------------------------------------------------------------------------------------------------- Total 223,761 4,575 (45) 228,291 --------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 81,411 2,160 (19) 83,552 Federal Home Loan Mortgage Corporation 116,500 2,339 (100) 118,739 Federal National Mortgage Association 12,886 574 -- 13,460 Other 726 43 -- 769 --------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 211,523 5,116 (119) 216,520 --------------------------------------------------------------------------------------------------------------------------- Total debt securities 435,284 9,691 (164) 444,811 --------------------------------------------------------------------------------------------------------------------------- Equity securities 8,354 2,961 (25) 11,290 --------------------------------------------------------------------------------------------------------------------------- Total securities available for sale 443,638 $12,652 $(189) $456,101 --------------------------------------------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 12,463 --------------------------------------------------------------------------------------------------------------------------- Total securities available for sale, net 456,101 --------------------------------------------------------------------------------------------------------------------------- Total investment securities, net $456,503 ---------------------------------------------------------------------------------------------------------------------------
29 20 3. INVESTMENT SECURITIES (continued)
--------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (IN THOUSANDS) AT DECEMBER 31, 1994 Cost Gains Losses Value --------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Debt securities: Other bonds and obligations $ 567 $ -- $ (4) $ 563 Mortgage-backed securities: Government National Mortgage Association 90,153 4 (5,700) 84,457 Federal Home Loan Mortgage Corporation 64,921 43 (3,790) 61,174 Federal National Mortgage Association 16,220 153 (136) 16,237 Other 969 29 -- 998 --------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 172,263 229 (9,626) 162,866 --------------------------------------------------------------------------------------------------------------------------- Total securities held to maturity 172,830 229 (9,630) 163,429 --------------------------------------------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations 250,354 146 (7,713) 242,787 U.S. Government agency obligations 5,987 56 -- 6,043 Other bonds and obligations 1,992 -- (78) 1,914 --------------------------------------------------------------------------------------------------------------------------- Total debt securities 258,333 202 (7,791) 250,744 --------------------------------------------------------------------------------------------------------------------------- Equity securities 6,197 792 (89) 6,900 --------------------------------------------------------------------------------------------------------------------------- Total securities available for sale 264,530 $994 $(7,880) $257,644 --------------------------------------------------------------------------------------------------------------------------- Net unrealized losses on securities available for sale (6,886) --------------------------------------------------------------------------------------------------------------------------- Total securities available for sale, net 257,644 --------------------------------------------------------------------------------------------------------------------------- Total investment securities, net $430,474 ---------------------------------------------------------------------------------------------------------------------------
During the years ended December 31, 1995, 1994 and 1993, the Company realized gains and losses on sales of securities available for sale as follows:
--------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 1993 --------------------------------------------------------------------------------------------------------------------------- Realized Realized Realized Gains Losses Gains Losses Gains Losses --------------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 4 $(889) $ -- $(382) $176 $ -- Other bonds and obligations -- -- 1 -- Investments in mutual funds -- -- -- -- 117 -- Marketable equity securities 574 (96) 724 (34) 144 (162) --------------------------------------------------------------------------------------------------------------------------- Total realized gains (loss) $578 $(985) $724 $(416) $438 $(162) ---------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of debt securities available for sale during 1995, 1994 and 1993 were $41.9 million, $25.6 million and $23.0 million, respectively. Proceeds from sales of marketable equity securities available for sale during 1995, 1994 and 1993, were $4.1 million, $2.7 million and $7.0 million, respectively. There were no sales of investment securities held-to-maturity during 1995 and 1994. 30 21 3. 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 are as follows:
--------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 --------------------------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value --------------------------------------------------------------------------------------------------------------------------- Investment securities held to maturity: Other bonds and obligations: Maturing within 1 year $ 225 $ 225 $ 147 $ 147 Maturing after 1 year but within 5 years -- -- 225 221 Maturing after 5 years but within 10 years 124 124 -- -- Maturing after 10 years but within 15 years 53 53 195 195 --------------------------------------------------------------------------------------------------------------------------- Total 402 402 567 563 --------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Maturing after 1 year but within 5 years -- -- 164 167 Maturing after 5 years but within 10 years -- -- 23,525 23,348 Maturing after 10 years but within 15 years -- -- 148,574 139,351 --------------------------------------------------------------------------------------------------------------------------- Total -- -- 172,263 162,866 --------------------------------------------------------------------------------------------------------------------------- Total debt securities held to maturity $ 402 $ 402 $172,830 $163,429 --------------------------------------------------------------------------------------------------------------------------- Investment securities available for sale: U.S. Treasury obligations: Maturing within 1 year $ 75,948 $ 76,251 $ 52,821 $ 52,371 Maturing after 1 year but within 5 years 128,838 132,716 192,553 185,838 Maturing after 5 years but within 10 years 2,985 3,148 4,980 4,578 --------------------------------------------------------------------------------------------------------------------------- Total 207,771 212,115 250,354 242,787 --------------------------------------------------------------------------------------------------------------------------- U.S. Government agency obligations: Maturing within 1 year 6,995 7,103 999 1,011 Maturing after 1 year but within 5 years 6,999 7,069 4,988 5,032 --------------------------------------------------------------------------------------------------------------------------- Total 13,994 14,172 5,987 6,043 --------------------------------------------------------------------------------------------------------------------------- Other bonds and obligations: Maturing within 1 year 999 997 -- -- Maturing after 1 year but within 5 years 997 1,007 1,992 1,914 --------------------------------------------------------------------------------------------------------------------------- Total 1,996 2,004 1,992 1,914 --------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Maturing after 1 year but within 5 years 38 38 -- -- Maturing after 5 years but within 10 years 21,967 22,846 -- -- Maturing after 10 years but within 15 years 189,518 193,636 -- -- --------------------------------------------------------------------------------------------------------------------------- Total 211,523 216,520 -- -- --------------------------------------------------------------------------------------------------------------------------- Total debt securities available for sale 435,284 444,811 258,333 250,744 --------------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) on debt securities available for sale 9,527 -- (7,589) -- --------------------------------------------------------------------------------------------------------------------------- Total debt securities available for sale, net carrying value $444,811 $444,811 $250,744 $250,744 ---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities are shown at their contractual maturity but are expected to have shorter average lives. 31 22 4. TRADING SECURITIES The amortized cost and approximate market values of trading securities are as follows:
------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 ------------------------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations: Maturing within 1 year $ -- $ -- $112,486 $112,166 Investments in mutual funds 6,834 6,819 3,747 3,444 -------------------------------------------------------------------------------------------------------------------------- Total trading securities $6,834 $6,819 $116,233 $115,610 --------------------------------------------------------------------------------------------------------------------------
During the years ended December 31, 1995, 1994 and 1993, the Company realized gains and losses on sales of trading securities as follows:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993 -------------------------------------------------------------------------------------------------------------------------- Realized Realized Realized Gains Losses Gains Losses Gains Losses -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $20 $-- $3 $ (52) $13 $-- Investments in mutual funds -- (133) 6 (271) -- -- Marketable equity securities 4 -- -- -- -- -- -------------------------------------------------------------------------------------------------------------------------- Total realized gains (losses) $24 $(133) $9 $(323) $13 $-- --------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of trading securities during 1995, 1994 and 1993 were $26.5 million, $81.1 million and $9.7 million, respectively. Unrealized gains or (losses) included in income in 1995, 1994 and 1993 were $608 thousand, $(532) thousand and $(91) thousand, respectively. 5. LOANS The Bank's lending activities are conducted principally in the local communities in which it operates banking offices, and to a lesser extent, in selected areas of Massachusetts and southern New Hampshire. The Bank offers single family and multi-family residential loans, mortgage loans secured by commercial or investment property such as apartment buildings and commercial or corporate facilities, and a variety of consumer loans. The Bank also offers loans for the construction of residential homes, multi-family properties and for land development. Most loans granted by the Bank are either collateralized by real estate or guaranteed by federal or local governmental authorities. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the borrowers' geographic areas. The ability of commercial real estate and construction loan borrowers to honor their repayment commitments is generally dependent on the economic health of the real estate sector in the borrowers' geographic areas and the overall economy. 32 23 5. LOANS (continued) The composition of the Bank's loan portfolio is summarized as follows:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 -------------------------------------------------------------------------------------------------------------------------- Mortgage loans: Residential: Conventional: Fixed rate $163,691 $162,413 Variable rate 45,717 45,359 FHA and VA 3,244 4,158 Commercial 6,975 8,155 Construction 1,516 603 -------------------------------------------------------------------------------------------------------------------------- Total mortgage loans 221,143 220,688 Add: premium on loans 388 452 Less: deferred mortgage loan origination fees (928) (871) -------------------------------------------------------------------------------------------------------------------------- Mortgage loans, net 220,603 220,269 -------------------------------------------------------------------------------------------------------------------------- Other loans: Consumer: Installment 1,988 1,972 Guaranteed education 10,420 10,152 Other secured 2,012 2,598 Home equity lines of credit 13,144 14,674 Unsecured 265 269 -------------------------------------------------------------------------------------------------------------------------- Total consumer loans 27,829 29,665 Commercial 753 882 -------------------------------------------------------------------------------------------------------------------------- Total other loans 28,582 30,547 -------------------------------------------------------------------------------------------------------------------------- Total loans $249,185 $250,816 --------------------------------------------------------------------------------------------------------------------------
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." These statements establish accounting standards for measuring impairment on loans for which it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS No. 114 requires impairment to be measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. However, impairment must be measured based on the fair value of the collateral if it is determined that foreclosure is probable. Impaired loans consist of all nonaccrual commercial loans. As of year end 1995, the Company had no impaired loans as defined in SFAS No. 114. Additionally, the Company's average recorded investment in impaired loans during the period ended December 31, 1995 was negligible. In the ordinary course of business, the Bank makes loans to its directors, officers and their associates and affiliated companies ("related parties") at substantially the same terms as those prevailing at the time of origination for comparable transactions with unrelated borrowers. An analysis of total related party loans for the year ended December 31, 1995 follows:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 $2,879 Additions 114 Repayments (183) -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $2,810 --------------------------------------------------------------------------------------------------------------------------
33 24 6. ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the activity in the allowance for possible loan losses is as follows:
--------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993 --------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $2,566 $2,261 $2,056 Provision for loan losses 170 705 671 Recoveries of loans previously charged-off 42 26 22 --------------------------------------------------------------------------------------------------------------------------- Total 2,778 2,992 2,749 --------------------------------------------------------------------------------------------------------------------------- Less charge-offs: Mortgage loans (124) (339) (440) Other loans (125) (87) (48) --------------------------------------------------------------------------------------------------------------------------- Balance at end of year $2,529 $2,566 $2,261 ---------------------------------------------------------------------------------------------------------------------------
The following table shows the allocation of the allowance for loan losses by category of loans at December 31, 1995, 1994 and 1993.
--------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 1993 --------------------------------------------------------------------------------------------------------------------------- Percentage Percentage Percentage of Loans of Loans of Loans Amount to Total Amount to Total Amount to Total --------------------------------------------------------------------------------------------------------------------------- Mortgage loans: Residential $2,101 86% $1,908 84% $1,936 84% Commercial 104 3 67 3 69 4 Consumer loans 237 11 134 12 74 12 Other loans 61 -- 56 1 6 -- Unallocated 26 -- 401 -- 176 -- --------------------------------------------------------------------------------------------------------------------------- Total $2,529 100% $2,566 100% $2,261 100% ---------------------------------------------------------------------------------------------------------------------------
7. NON-PERFORMING ASSETS The following schedule summarizes non-performing assets at the dates shown:
--------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 1993 --------------------------------------------------------------------------------------------------------------------------- Total loans delinquent for 90 or more days $2,428 $2,098 $1,269 --------------------------------------------------------------------------------------------------------------------------- Total real estate acquired through foreclosure 255 129 699 --------------------------------------------------------------------------------------------------------------------------- Total non-performing assets $2,683 $2,227 $1,968 --------------------------------------------------------------------------------------------------------------------------- Percent non-performing loans to total loans 0.97% 0.84% 0.51% Percent non-performing assets to total assets 0.31% 0.26% 0.23% ---------------------------------------------------------------------------------------------------------------------------
Interest income of approximately $204 thousand would have been recorded in 1995 on the non-accrual loans (loans delinquent for 90 or more days) if they had been on a current basis in accordance with their original terms. Interest income actually recorded in 1995 amounted to approximately $60 thousand. 34 25 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts reflect the extent of involvement the Bank has in particular classes of these instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
-------------------------------------------------------------------------------------------------------------------------- CONTRACT OR NOTIONAL AMOUNT (IN THOUSANDS) AT DECEMBER 31, 1995 1994 -------------------------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to originate residential mortgage loans $ 3,466 $ 767 Unadvanced portions of construction loans 444 326 Unused credit lines, including unused portions of equity lines of credit 20,714 20,180 --------------------------------------------------------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management's credit evaluation of the borrower. 9. PREMISES AND EQUIPMENT A summary of premises and equipment and their estimated useful lives used for depreciation purposes is as follows:
---------------------------------------------------------------------------------------------------------------------------- ESTIMATED USEFUL LIFE (IN THOUSANDS) AT DECEMBER 31, 1995 1994 IN YEARS ---------------------------------------------------------------------------------------------------------------------------- Premises: Land $1,168 $1,168 -- Buildings 3,395 3,395 15-45 Building and leasehold improvements 1,449 1,208 3-30 Equipment 2,921 2,802 3-20 -------------------------------------------------------------------------------------------------------------------------------- 8,933 8,573 Less: accumulated depreciation and amortization 4,707 4,245 -------------------------------------------------------------------------------------------------------------------------- Total premises and equipment, net $4,226 $4,328 --------------------------------------------------------------------------------------------------------------------------
The Bank is obligated under a number of noncancelable operating leases for various banking offices. These operating leases expire at various dates through 2004 with options for renewal. Rental expenses for the years ended December 31, 1995, 1994 and 1993 amounted to $494 thousand, $484 thousand and $446 thousand, respectively. The minimum rental commitments, with initial or remaining terms of one year or more exclusive of operating costs and real estate taxes to be paid by the Bank under these leases as of December 31, 1995, are as follows:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS -------------------------------------------------------------------------------------------------------------------------- 1996 $ 487 1997 407 1998 355 1999 290 2000 95 Later years 179 -------------------------------------------------------------------------------------------------------------------------- Total $1,813 --------------------------------------------------------------------------------------------------------------------------
35 26 10. DEPOSITS Deposits are summarized as follows:
--------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 --------------------------------------------------------------------------------------------------------------------------- Amount Rate Amount Rate --------------------------------------------------------------------------------------------------------------------------- Demand and NOW: NOW accounts $ 51,197 1.23% $ 53,428 1.29% Demand accounts 15,216 -- 14,068 -- --------------------------------------------------------------------------------------------------------------------------- Total demand and NOW 66,413 0.95 67,496 1.02 --------------------------------------------------------------------------------------------------------------------------- Savings: Regular savings and special notice accounts 330,230 3.39 430,143 3.34 Money market accounts 26,368 3.28 28,258 3.08 --------------------------------------------------------------------------------------------------------------------------- Total savings 356,598 3.38 458,401 3.32 --------------------------------------------------------------------------------------------------------------------------- Time certificates: Fixed rate certificates 274,684 5.80 187,319 4.88 Variable rate certificates 57,373 6.65 48,102 6.76 --------------------------------------------------------------------------------------------------------------------------- Total time certificates 332,057 5.95 235,421 5.26 --------------------------------------------------------------------------------------------------------------------------- Deposit acquisition premium, net of amortization (1,411) -- (1,642) -- --------------------------------------------------------------------------------------------------------------------------- Total deposits and weighted average rate $753,657 4.30% $759,676 3.72% ---------------------------------------------------------------------------------------------------------------------------
The maturity distribution and related rate structure of the Bank's time certificates at December 31, 1995 follows:
--------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 --------------------------------------------------------------------------------------------------------------------------- Average Amount Interest Rate --------------------------------------------------------------------------------------------------------------------------- Due within 3 months $ 67,341 5.74% Due within 3-6 months 60,507 5.52 Due within 6-12 months 106,385 5.99 Thereafter 97,824 6.30 --------------------------------------------------------------------------------------------------------------------------- Total $332,057 5.95% ---------------------------------------------------------------------------------------------------------------------------
At December 31, the Bank had individual time certificates of deposit over $100 thousand maturing as follows:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 -------------------------------------------------------------------------------------------------------------------------- Due within 3 months $ 8,969 $ 2,545 Due within 3-6 months 6,206 3,062 Due within 6-12 months 14,311 6,839 Thereafter 16,863 12,628 -------------------------------------------------------------------------------------------------------------------------- Total $ 46,349 $25,074 --------------------------------------------------------------------------------------------------------------------------
36 27 11. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Bank disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Bank's financial instruments. CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND ACCRUED INTEREST RECEIVABLE The carrying amounts for these financial instruments approximate fair value because they mature in 90 days or less. INTEREST-BEARING DEPOSITS IN BANKS AND TERM FEDERAL FUNDS SOLD The interest-bearing deposits in banks at December 31, 1995 consisted of bank certificates of deposit with a carrying amount of $941 thousand and an estimated fair value of $957 thousand. The carrying amounts of the term federal funds sold reported in the balance sheet at December 31, 1995 approximate fair value. SECURITIES The fair value of longer-term investments and mortgage-backed securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. Refer to Notes 3 and 4 for the carrying value and estimated fair value of investment and mortgage-backed securities at December 31, 1995 and 1994. Statement 107 specifies that fair values should be calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, commercial real estate, consumer and other. The fair values of residential, commercial, and certain consumer and other loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For certain variable rate consumer loans, including home equity lines of credit, carrying value approximates fair value. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information. The following table presents information for loans:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 -------------------------------------------------------------------------------------------------------------------------- Carrying Calculated Carrying Calculated Amount Fair Value Amount Fair Value -------------------------------------------------------------------------------------------------------------------------- Real estate: Residential: Adjustable $ 46,101 $ 46,632 $ 45,469 $ 44,841 Fixed 167,539 171,096 166,657 159,856 Commercial: Adjustable 6,569 6,410 7,309 6,693 Fixed 394 400 834 779 Consumer and other 28,582 28,393 30,547 30,579 -------------------------------------------------------------------------------------------------------------------------- Total loans 249,185 252,931 250,816 242,748 Less: allowance for possible loan losses 2,529 -- 2,566 -- -------------------------------------------------------------------------------------------------------------------------- Net loans $246,656 $252,931 $248,250 $242,748 --------------------------------------------------------------------------------------------------------------------------
37 28 11. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) DEPOSIT LIABILITIES Under Statement 107, the fair value of deposits with no stated maturity, such as demand deposits, NOW accounts, regular savings and special notice accounts, and money market accounts, is equal to the amount payable on demand as of December 31, 1995 and 1994. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 -------------------------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------------------------------------------------------------------------------------------------------------------- Demand accounts $ 15,216 $ 15,216 $ 14,068 $ 14,068 NOW accounts 51,197 51,197 53,428 53,428 Regular savings and special notice accounts 330,230 330,230 430,143 430,143 Money market accounts 26,368 26,368 28,258 28,258 Time certificates 332,057 334,641 235,421 234,891 Deposit acquisition premium, net of amortization (1,411) -- (1,642) -- -------------------------------------------------------------------------------------------------------------------------- Total deposits 753,657 757,652 759,676 760,788 Escrow deposits of borrowers 992 992 966 966 -------------------------------------------------------------------------------------------------------------------------- Total $754,649 $758,644 $760,642 $761,754 --------------------------------------------------------------------------------------------------------------------------
The fair value estimates and the carrying amounts above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. COMMITMENTS TO EXTEND CREDIT The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The Bank estimates the fair value of the cost to terminate commitments to advance funds on construction loans and for residential mortgage loans in the pipeline at December 31, 1995 and 1994 to be immaterial. Unused credit lines, including unused portions of equity lines of credit, are at floating interest rates and therefore there is no fair value adjustment. LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a trust department that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. 38 29 12. INCOME TAXES As discussed in Note 1, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as of January 1, 1993. The cumulative effect of this change in accounting for income taxes of $241 thousand was determined as of January 1, 1993, and is reported separately in the Consolidated Statement of Income for the year ended December 31, 1993. Prior years' consolidated financial statements have not been restated to apply the provisions of Statement No. 109. Income tax payable (receivable) was allocated as follows:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 -------------------------------------------------------------------------------------------------------------------------- Current income tax payable (receivable): Federal $ 894 $ 939 State (14) 304 -------------------------------------------------------------------------------------------------------------------------- Total current income tax payable 880 1,243 -------------------------------------------------------------------------------------------------------------------------- Deferred income tax payable (receivable): Federal 2,878 (3,311) State 1,002 (1,279) -------------------------------------------------------------------------------------------------------------------------- Total deferred income tax payable (receivable) 3,880 (4,590) -------------------------------------------------------------------------------------------------------------------------- Total income tax payable (receivable) $4,760 $(3,347) --------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) was allocated as follows:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993 -------------------------------------------------------------------------------------------------------------------------- Current income tax expense: Federal $4,209 $3,635 $ 3,579 State 1,071 1,265 1,372 -------------------------------------------------------------------------------------------------------------------------- Total current tax expense 5,280 4,900 4,951 -------------------------------------------------------------------------------------------------------------------------- Deferred income tax expense (benefit): Federal 183 (164) (197) State 115 (28) (57) Change in valuation reserve (22) 25 14 -------------------------------------------------------------------------------------------------------------------------- Total deferred tax expense (benefit) 276 (167) (240) -------------------------------------------------------------------------------------------------------------------------- Total income tax expense $5,556 $4,733 $ 4,711 --------------------------------------------------------------------------------------------------------------------------
Income tax expense attributable to income from operations for the years ended December 31, differed from the amounts computed by applying the federal income tax rate of 35 percent in 1995 and 1994, and 34 percent in 1993, as a result of the following:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993 -------------------------------------------------------------------------------------------------------------------------- Computed "expected" income tax expense at statutory rate $5,010 $4,521 $ 3,960 Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal benefit 771 804 868 Recognition of previously unrecognized tax benefits -- (462) -- Dividends received deduction (72) (71) (69) Other (131) (84) (62) Change in valuation reserve (22) 25 14 -------------------------------------------------------------------------------------------------------------------------- Income tax expense $5,556 $4,733 $ 4,711 -------------------------------------------------------------------------------------------------------------------------- Effective income tax rate 38.8% 36.6% 40.4% --------------------------------------------------------------------------------------------------------------------------
39 30 12. INCOME TAXES (continued) At December 31, 1995 and 1994, the Bank had gross deferred tax assets and gross deferred tax liabilities as follows:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1995 1994 -------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Deferred income $ -- $ 22 Loan losses 455 612 Deferred loan fees, net 405 377 Deferred compensation and pension cost 485 433 Valuation of securities -- 2,971 Other unrealized securities losses -- 160 Depreciation 39 -- Purchase accounting 70 -- Other 37 95 -------------------------------------------------------------------------------------------------------------------------- Gross deferred tax asset 1,491 4,670 Valuation reserve (18) (40) -------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset 1,473 4,630 -------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation -- 4 Valuation of securities 5,223 -- Other unrealized securities gains 100 -- Other 30 36 -------------------------------------------------------------------------------------------------------------------------- Gross deferred tax liability 5,353 40 -------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset (liability) $(3,880) $4,590 --------------------------------------------------------------------------------------------------------------------------
Based on the Company's historical and current pretax earnings, management believes it is more likely than not that the Company will realize the gross deferred tax asset existing at December 31, 1995. The primary sources of recovery of the gross federal deferred tax asset are federal income taxes paid of $11.1 million in 1995, 1994 and 1993 that are available for carryback and the expectation that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. Since there is no carryback provision for state income tax purposes, management believes the existing net deductible temporary differences which give rise to the gross deferred state income tax asset will reverse during periods in which the Company generates net taxable income. There can be no assurance, however, that the Company will generate any earnings or any specific level of continuing earnings. Included in retained earnings at December 31, 1995 is approximately $7,300,000 which is classified for federal income tax purposes as an allowance for possible loan losses. If this amount, or any portion thereof, is used for purposes other than to absorb loan losses, the amount so used must be included in gross income for federal income tax purposes. Further, the Tax Reform Act of 1986 specifies that if the Bank's "qualifying assets" (as defined by such Act) fall below 60% of total assets, this tax-basis allowance for loan losses will become subject to taxation and the resultant tax will be payable over four years. At the end of the Bank's most recent tax year, qualifying assets exceeded 60% of total assets. 13. STOCKHOLDERS' EQUITY The Company may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause its stockholders' equity to be reduced below or otherwise violate legal or regulatory requirements. Substantially all of the Company's retained earnings are unrestricted at December 31, 1995. The Company and the Bank exceed all of their regulatory capital requirements. 40 31 14. EMPLOYEE BENEFITS PENSION PLAN The Bank sponsors a non contributory defined benefit pension plan that covers all employees who meet specified age and length of service requirements, which is administered by the Savings Banks Employees Retirement Association ("SBERA"). The plan provides for benefits to be paid to eligible employees at retirement based primarily upon their years of service with the Bank and compensation levels near retirement. Contributions to the plan reflect benefits attributed to employees' service to date, as well as services expected to be earned in the future. Pension plan assets consist principally of government and agency securities, equity securities (primarily common stocks) and short-term investments. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated financial statements for the plan years ended October 31, 1995, 1994 and 1993, the plan's latest valuation dates:
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 1993 -------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested $3,845 $3,436 $3,345 Non vested 55 79 60 -------------------------------------------------------------------------------------------------------------------------- Total accumulated benefit obligation $3,900 $3,515 $3,405 -------------------------------------------------------------------------------------------------------------------------- Actuarial present value of projected benefit obligation for service rendered to date $4,622 $4,036 $3,860 Plan assets at fair value 4,181 3,648 4,050 -------------------------------------------------------------------------------------------------------------------------- Excess (deficiency) of plan assets over projected benefit obligation $ (441) $ (388) $ 190 --------------------------------------------------------------------------------------------------------------------------
Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: Discount rate 7.00% 7.50% 7.50% Rate of increase in compensation levels 4.00% 5.50% 5.50%
Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and the amounts included in the consolidated balance sheets are shown below: Unrecognized net asset at October 31, being recognized over 21 years $ 254 $ 275 $ 295 Unrecognized net losses (412) (538) (124) (Accrued) prepaid pension cost (283) (125) 19 -------------------------------------------------------------------------------------------------------------------------- Excess (deficiency) of plan assets over projected benefit obligation $ (441) $ (388) $ 190 --------------------------------------------------------------------------------------------------------------------------
Net pension expense for the year ended December 31, included the following components: Service cost--benefits earned during the period $ 319 $ 228 $ 162 Accrual of discount 303 270 218 Actual return on plan assets (686) (219) (486) Net amortization and deferral 412 (80) 227 -------------------------------------------------------------------------------------------------------------------------- Net pension expense $ 348 $ 199 $ 121 --------------------------------------------------------------------------------------------------------------------------
Assumptions used to develop the net pension expense data were: Discount rate 7.50% 7.50% 7.00% Expected long-term rate of return on assets 7.50% 7.50% 7.00% Rate of increase in compensation levels 5.50% 5.50% 6.00%
The foregoing accrued benefits and related asset values do not include those pertaining to retired employees, who are accounted for separately in a state-wide pool. 41 32 14. EMPLOYEE BENEFITS (continued) PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLAN The Bank's Profit Sharing and Incentive Compensation Bonus Plan provides for the payment of bonuses to employees under certain circumstances based upon a year-end measurement of the Company's net income and attainment of individual goals and objectives by certain key officers. Bonuses of $413 thousand, $433 thousand and $413 thousand were awarded under the plan in 1995, 1994 and 1993, respectively. EMPLOYEE STOCK OWNERSHIP PLAN Effective May 28, 1986, the Bank established an Employee Stock Ownership Plan ("ESOP"). Under the plan, the ESOP has borrowed funds from a third party bank to invest in the Company's common stock. As this obligation will be liquidated primarily through future contributions to the ESOP by the Bank, the obligation is reflected as a liability of the Company and a reduction of stockholders' equity on the consolidated balance sheet. As of December 31, 1995 and 1994, such outstanding liabilities totaled $1,093 thousand and $1,249 thousand, respectively. Total compensation and interest expense applicable to the ESOP amounted to $303 thousand, $206 thousand and $250 thousand for the years ended December 31, 1995, 1994 and 1993, respectively. STOCK OPTION PLAN Effective May 28, 1986, the Board of Directors of the Bank adopted a stock option plan for the benefit of its officers and other employees. In January, 1991, the plan was amended to authorize the grant of options to non-employee Directors of the Company. The maximum number of shares issued or currently reserved for issuance under the plan, when adjusted for the three-for-two stock split of the Company's common stock of September 9, 1994, is 517,500. However, only 751.5 shares remain available for issuance under the 1986 plan as of December 31, 1995. On April 19, 1994, shareholders approved and the Bank adopted the Company's 1994 Stock Incentive Plan. The total number of shares of common stock that can be issued under this plan is 142,500 shares. Both incentive stock options and non-qualified stock options may be granted under the plans. As of December 31, 1995, there were 131,679 non-qualified stock options and 145,653 incentive stock options granted and outstanding to purchase shares under the plans at exercise prices ranging from $9.17 to $26.50. The maximum option term is ten years. Further stock options may be granted pursuant to the plans and will generally have an exercise price equal to, or in excess of, the fair market value of a share of common stock of the Company on the date the option is granted. Changes in total options outstanding during 1995, 1994 and 1993 are as follows:
-------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 -------------------------------------------------------------------------------------------------------------------------- Shares Average Shares Average Shares Average Under Option Under Option Under Option Option Price Option Price Option Price -------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 317,366 $16.33 339,961.5 $14.47 290,514 $11.46 Granted during year 33,250 23.38 49,500 22.95 103,500 21.41 Exercised during year (72,533) 12.28 (69,470.5) 12.15 (53,302.5) 11.40 Forfeited during year (751) 22.98 (2,625) 22.05 (750) 21.33 -------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 277,332 $18.21 317,366 $16.33 339,961.5 $14.47 -------------------------------------------------------------------------------------------------------------------------- Options exercisable at end of year under stock option plan 277,332 $18.21 317,366 $16.33 339,586.5 $14.47 --------------------------------------------------------------------------------------------------------------------------
The Company will adopt SFAS No. 123, "Accounting for Stock-Based Compensation" in 1996. The Company intends to continue to account for stock-based compensation costs under APB Opinion No. 25, and will provide the additional required disclosures relating to 1995 and 1996 stock options in its 1996 Annual Report. EMPLOYMENT AGREEMENTS The Bank has entered into employment agreements with certain executive officers which provide that the officer will receive a minimum amount of annual compensation from the Bank for a specified period. The agreements also provide for the continued payment of compensation to the officer for a specified period after termination under certain circumstances, including if the officer's termination follows a "change of control," generally defined to mean a person or group attaining ownership of 25% or more of the shares of the Company. 42 33 14. EMPLOYEE BENEFITS (continued) EXECUTIVE SUPPLEMENTAL RETIREMENT AGREEMENTS The Bank maintains executive supplemental retirement agreements for certain executive officers. These agreements provide retirement benefits designed to supplement benefits available through the Bank's retirement plan for employees. Total expenses for benefits payable under the agreements amounted to $94 thousand, $87 thousand and $85 thousand in 1995, 1994 and 1993, respectively. 15. SHAREHOLDER RIGHTS AGREEMENT In January, 1990, the Board of Directors adopted a Shareholders Rights Plan. Under the Plan, the Rights automatically become part of and trade with the Company's shares of common stock. Although the Rights are not exercisable initially, they become exercisable upon the occurrence of one of three triggering events as specified in the Plan. In the event they become exercisable, each holder of a Right would then be entitled to buy a unit consisting of one one-hundredth of a share of the Company's preferred stock at an exercise price of $70. The provisions of the Rights Plan, including the time periods set forth therein, generally may be extended or amended by the Board of Directors. The Rights will expire January 16, 2000, but they may be redeemed at the option of the Board of Directors for $0.011/3 per Right until ten days after a person becomes a 15% shareholder of MASSBANK Corp. or until certain other triggering events have occurred. 16. PARENT COMPANY FINANCIAL STATEMENTS The following are the condensed financial statements for MASSBANK Corp. (the "Parent Company") only: BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 1995 1994 -------------------------------------------------------------------------------------------------------------------------- Assets: Cash $ 11 $ 16 Interest-bearing deposits in banks 1,018 694 Investment in subsidiaries 90,998 75,134 Other assets 25 -- -------------------------------------------------------------------------------------------------------------------------- Total assets $ 92,052 $ 75,844 -------------------------------------------------------------------------------------------------------------------------- Liabilities: Accrued income taxes payable $ 9 $ 89 Employee stock ownership plan liability (Note 14) 1,093 1,249 Due to subsidiaries 123 2 Other liabilities 10 -- -------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,235 1,340 -------------------------------------------------------------------------------------------------------------------------- Stockholders' equity (Notes 12, 13 and 15): Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued -- -- Common stock, par value $1.00 per share; 10,000,000 shares authorized, 5,424,671 and 5,352,138 shares issued, respectively 5,425 5,352 Additional paid-in capital 56,842 55,609 Retained earnings 58,773 51,995 -------------------------------------------------------------------------------------------------------------------------- 121,040 112,956 Treasury stock at cost, 2,683,065 and 2,570,411 shares, respectively (36,370) (33,288) Net unrealized gains (losses) on securities available for sale, net of tax effect (Note 3) 7,240 (3,915) Common stock acquired by ESOP (Note 14) (1,093) (1,249) -------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 90,817 74,504 -------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 92,052 $ 75,844 --------------------------------------------------------------------------------------------------------------------------
43 34 16. PARENT COMPANY FINANCIAL STATEMENTS (continued)
STATEMENTS OF INCOME -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993 -------------------------------------------------------------------------------------------------------------------------- Income: Dividends received from subsidiaries $4,400 $4,000 $3,310 Interest and dividend income 22 34 34 -------------------------------------------------------------------------------------------------------------------------- 4,422 4,034 3,344 Non-interest expense 95 102 104 -------------------------------------------------------------------------------------------------------------------------- Income before income taxes, cumulative effect of change in accounting principle, and equity in undistributed earnings of subsidiaries 4,327 3,932 3,240 Income tax benefit 130 13 16 Cumulative effect of change in method of accounting for income taxes -- -- (28) -------------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiaries 4,457 3,945 3,228 Equity in undistributed earnings of subsidiaries 4,302 4,240 3,467 -------------------------------------------------------------------------------------------------------------------------- Net income $8,759 $8,185 $6,695 --------------------------------------------------------------------------------------------------------------------------
The Parent Company only Statements of Changes in Stockholders' Equity are identical to the consolidated statements and therefore are not presented here.
STATEMENTS OF CASH FLOWS -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993 -------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 8,759 $ 8,185 $ 6,695 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (4,302) (4,240) (3,467) Increase in other assets (25) -- -- (Decrease) increase in accrued income taxes payable (80) 4 6 (Decrease) increase in other liabilities 10 (10) 1 (Decrease) increase in amount due to subsidiaries 121 (1) (7) -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,483 3,938 3,228 -------------------------------------------------------------------------------------------------------------------------- Cash flow from financing activities: Payments to acquire treasury stock (3,082) (5,063) (445) Issuance of common stock under stock option plan 891 841 608 Tax benefit resulting from stock options exercised 8 7 16 Dividends paid on common stock (1,981) (1,692) (1,330) -------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (4,164) (5,907) (1,151) -------------------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 319 (1,969) 2,077 Cash and cash equivalents at beginning of year 710 2,679 602 -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,029 $ 710 $ 2,679 --------------------------------------------------------------------------------------------------------------------------
During the years ended December 31, 1995, 1994 and 1993, the Company made cash payments for income taxes of $13 thousand, $17 thousand and $8 thousand, respectively, and no payments for interest. In addition, the Company made cash payments to the state of Delaware for franchise taxes in the amount of $28 thousand, $49 thousand and $50 thousand during the years ended December 31, 1995, 1994 and 1993, respectively. 44 35 17. TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
----------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1995 1994 1993 1992 1991 ----------------------------------------------------------------------------------------------- Net income $8,759 $8,185 $6,695 $4,677 $2,250 Primary earnings per share 3.15 2.84 2.23 1.59 0.78 Cash dividends declared per share 0.73 0.60 0.45 1/3 0.35 1/3 0.30 1/3 Book value per share, at year end 33.13 26.78 27.28 24.50 23.38 Return on average assets 1.04% 0.96% 0.79% 0.61% 0.60% Return on average realized equity(1) 10.81% 10.62% 8.98% 6.79% 3.39% ----------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1990 1989 1988 1987 1986 ---------------------------------------------------------------------------------------------- Net income $725 $2,668 $4,917 $5,521 $4,509 Primary earnings per share 0.22 0.66 1.14 1.14 -- Cash dividends declared per share 0.29 1/3 0.28 0.25 1/3 0.22 0.05 1/3 Book value per share, at year end 21.60 20.21 18.95 17.65 16.03 Return on average assets 0.23% 0.86% 1.56% 1.69% 1.52% Return on average realized equity(1) 1.03% 3.38% 6.20% 6.79% 7.88% ----------------------------------------------------------------------------------------------
(1) Excludes average unrealized gains or losses on securities available for sale. 18. QUARTERLY DATA (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1995 1994 -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT 4th 3rd 2nd 1st 4th 3rd 2nd 1st PER SHARE DATA) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------------------------------------------------- Interest and dividend income $14,299 $14,244 $14,220 $13,848 $13,589 $13,047 $12,627 $12,188 Interest expense 8,095 7,933 7,680 7,188 6,940 6,638 6,385 6,189 -------------------------------------------------------------------------------------------------------------------------- Net interest income 6,204 6,311 6,540 6,660 6,649 6,409 6,242 5,999 Provision for possible loan losses 30 30 40 70 185 150 250 120 -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 6,174 6,281 6,500 6,590 6,464 6,259 5,992 5,879 Non-interest income 535 376 609 428 356 523 1,163 495 Non-interest expense 3,060 3,040 3,557 3,521 3,387 3,423 3,837 3,566 -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 3,649 3,617 3,552 3,497 3,433 3,359 3,318 2,808 Income tax expense 1,402 1,400 1,383 1,371 1,270 1,216 1,224 1,023 -------------------------------------------------------------------------------------------------------------------------- Net income $ 2,247 $ 2,217 $ 2,169 $ 2,126 $ 2,163 $ 2,143 $ 2,094 $ 1,785 -------------------------------------------------------------------------------------------------------------------------- Earnings per share (in dollars):(1)(2) Primary $ 0.81 $ 0.80 $ 0.78 $ 0.76 $ 0.76 $ 0.74 $ 0.73 $ 0.61 Fully diluted 0.81 0.80 0.78 0.76 0.76 0.74 0.73 0.61 -------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding:(2) Primary 2,776 2,774 2,789 2,797 2,856 2,878 2,856 2,945 Fully diluted 2,778 2,781 2,794 2,798 2,859 2,878 2,868 2,946 --------------------------------------------------------------------------------------------------------------------------
(1) Share amounts for 1994 have been restated to reflect the three-for-two stock split of the Company's common stock which occurred on September 9, 1994. (2) Computation of earnings per share is further described in Note 1. 45 36 MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA YEARS ENDED DECEMBER 31, 1995 AND 1994 MASSBANK Corp.'s common stock is currently traded on the Nasdaq Stock Market under the symbol "MASB." At December 31, 1995 there were 2,741,606 shares outstanding and 1,033 shareholders of record. Shareholders of record do not reflect the number of persons or entities who hold their stock in nominee or "street" name. The following table includes the quarterly ranges of high and low sales prices for the common stock, as reported by Nasdaq, and dividends declared per share for the periods indicated.
-------------------------------------------------------------------------------------------------------------------------- Price per Share -------------------------------------- Cash Dividends High Low Declared -------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1995 -------------------------------------------------------------------------------------------------------------------------- Fourth Quarter 32 1/2 30 3/4 $0.19 Third Quarter 32 1/4 26 1/4 0.19 Second Quarter 27 1/2 23 1/2 0.17 1/2 First Quarter 25 22 1/4 0.17 1/2 -------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1994 -------------------------------------------------------------------------------------------------------------------------- Fourth Quarter 26 20 1/8 $0.16 Third Quarter 28 2/3 24 0.16 Second Quarter 26 22 0.14 First Quarter 24 1/3 22 2/3 0.14 --------------------------------------------------------------------------------------------------------------------------
CORPORATE INFORMATION MASSBANK Corp. 123 Haven Street Reading, MA 01867 (617) 662-0100 FAX (617) 942-1022 24 Hour Rate Line Savings (617) 662-0154 Mortgages (617) 662-0144 (508) 452-1256 Notice of Shareholders' Meeting The Annual Meeting of the Shareholders of MASSBANK Corp. will be held at 10:00 a.m. on Tuesday, April 16, 1996 at The Crowne Plaza Two Forbes Road Woburn, MA 01801 Form 10-K Shareholders may obtain without charge a copy of the Company's 1995 Form 10-K. Written requests should be addressed to: Shareholder Services MASSBANK Corp. 159 Haven Street Reading, MA 01867 Dividend Reinvestment and Stock Purchase Plan Shareholders may obtain a brochure containing a detailed description of the plan by writing to: Shareholder Services MASSBANK Corp. 159 Haven Street Reading, MA 01867 Transfer Agent Boston EquiServe Shareholder Services P.O. Box 644 Boston, MA 02102-0644 Independent Auditors KPMG Peat Marwick LLP 99 High Street Boston, MA 02110 Legal Counsel Goodwin, Procter & Hoar Exchange Place Boston, MA 02109 Reports on Effectiveness of Internal Control Structure Over Financial Reporting Shareholders may obtain without charge a copy of Management's and the Independent Auditors' 1995 Reports on the Effectiveness of the Company's Internal Control Structure Over Financial Reporting. Written requests should be addressed to: Shareholder Services MASSBANK Corp. 159 Haven Street Reading, MA 01867 46 37 OFFICERS AND DIRECTORS MASSBANK CORP. OFFICERS Gerard H. Brandi Chairman, President and Chief Executive Officer Reginald E. Cormier Vice President, Treasurer and Chief Financial Officer Robert S. Cummings Secretary Donna H. West Assistant Secretary BOARD OF DIRECTORS Samuel Altschuler President, Altron Incorporated *Mathias B. Bedell Retired, Bedell Brothers Insurance Agency, Inc. *Gerard H. Brandi Chairman, President and Chief Executive Officer, MASSBANK Corp. Allan S. Bufferd Deputy Treasurer and Director of Investments Massachusetts Institute of Technology +Peter W. Carr Retired, Guilford Transportation Industries Alexander S. Costello President, Lowell Sun Publishing Co., Inc. *Robert S. Cummings Partner, Peabody and Brown Robert E. Dyson Partner, Dick, Dyson and Bolton Louise A. Hickey Retired, Melrose-Wakefield Hospital Leonard Lapidus Retired, Depositors Insurance Fund *Stephen E. Marshall President, C.H. Cleaves Insurance Agency, Inc. +Arthur W. McPherson Certified Financial Planner +*Herbert G. Schurian Certified Public Accountant *Dr. Donald B. Stackhouse Dentist *Member, Executive Committee +Member, Audit Committee OFFICERS AND DIRECTORS MASSBANK FOR SAVINGS OFFICERS Gerard H. Brandi Chairman, President and Chief Executive Officer Donald R. Washburn Senior Vice President, Lending Donna H. West Senior Vice President, Retail Banking Raymond A. Brearey Vice President, Administration Senior Trust Officer David F. Carroll Vice President, Operations Reginald E. Cormier Vice President, Treasurer and Chief Financial Officer Marilyn H. Abbott Assistant Treasurer Andrea S. Bradford Assistant Vice President Gregory W. Bowe Assistant Vice President Ernest G. Campbell, Jr. Collections Officer Charles F. Coupe Information Officer Janet L. Daniels Loan Officer Aunali Dohadwala Auditor Karen L. Flammia Assistant Vice President Melissa J. Flanagan Assistant Treasurer Ana M. Foster Compliance and Security Officer Rachael E. Garneau Assistant Treasurer Margo E. Higgins Assistant Vice President and Human Resources Officer Brian W. Hurley Assistant Vice President Kenneth A. Masson Assistant Vice President Robyn L. Nadeau Assistant Treasurer Mindy S. Peloquin Assistant Treasurer Thomas J. Queeney Assistant Treasurer Alice B. Sweeney Assistant Comptroller Richard A. Tatarczuk Assistant Vice President and Comptroller Evangeline C. Westgate Assistant Treasurer Michael J. Woods Assistant Vice President BOARD OF DIRECTORS AND EXECUTIVE COMMITTEE Mathias B. Bedell Gerard H. Brandi, Chairman Robert S. Cummings, Clerk Stephen E. Marshall Herbert G. Schurian Dr. Donald B. Stackhouse 47 38 MASSBANK FOR SAVINGS BRANCH OFFICES Main Office 123 Haven Street Reading, MA 01867 (617) 942-8187 Melrose 476 Main Street Melrose, MA 02176 (617) 662-0100 27 Melrose Street Towers Plaza Melrose, MA 02176 (617) 662-0165 Stoneham 240 Main Street Stoneham, MA 02180 (617) 662-0177 Wilmington 370 Main Street Wilmington, MA 01887 (508) 658-4000 219 Lowell Street Lucci's Plaza Wilmington, MA 01887 (508) 658-5775 Medford 4110 Mystic Valley Parkway Wellington Circle Plaza Medford, MA 02155 (617) 395-4899 Tewksbury 1800 Main Street Tewksbury, MA 01876 (508) 851-0300 Chelmsford 17 North Road Chelmsford, MA 01824 (508) 256-3733 296 Chelmsford Street Eastgate Plaza Chelmsford, MA 01824 (508) 256-3751 Dracut 45 Broadway Road Dracut, MA 01826 (508) 441-0040 Lowell 50 Central Street Lowell, MA 01852 (508) 458-3400 755 Lakeview Avenue Lowell, MA 01853 (508) 458-3437 Westford 203 Littleton Road Westford, MA 01886 (508) 692-3467 48 EX-23 4 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23 Consent of Independent Auditors The Board of Directors MASSBANK Corp. We consent to incorporation by reference in the registration statements (No. 33-11949 and No. 33-82110) on Form S-8 of MASSBANK Corp. of our report dated January 12, 1996, relating to the consolidated balance sheets of MASSBANK Corp. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, which report appears in the December 31, 1995 annual report on Form 10-K of MASSBANK Corp. /s/KPMG Peat Marwick LLP Boston, Massachusetts March 26, 1996 EX-27 5 FINANCIAL DATA SCHEDULE
9 0000799166 MASSBANK CORP. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 8,150 941 115,245 6,819 456,101 402 402 249,185 (2,529) 854,542 753,657 992 7,983 1,093 0 0 5,425 85,392 854,542 19,498 31,432 5,681 56,611 30,896 30,896 25,715 170 92 13,178 14,315 14,315 0 0 8,759 3.15 3.12 3.15 2,428 0 0 2,428 2,566 (249) 42 2,529 2,503 0 26
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