-----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, Oi6k9VCiLacaSDnh1rlTBiqZTo3cVDA/881hEyKlyURfAWr/kDlW50sdYIw7u0pX otjPyGFkhyVYj+fBip0Lbw== 0000950135-98-001863.txt : 19980330 0000950135-98-001863.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950135-98-001863 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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: SEC FILE NUMBER: 000-15137 FILM NUMBER: 98575047 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 CORP. 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, 1997 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 13, 1998 as reported by NASDAQ, was $166,212,860. As of March 13, 1998, there were 3,578,478 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1997 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 1998 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. 2 Note regarding forward-looking statements. The discussions set forth below and elsewhere herein contain certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include fluctuations in interest rates, inflation, government regulations and economic conditions and competition in the geographic and business areas in which the Company conducts its operations. 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 (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 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, 1997 were represented by its investment in the Bank of $101.1 million and other assets of $3.5 million. The Company's liabilities consisted of loan indebtedness of $0.8 million and other liabilities of less than $0.1 million. The proceeds of the loan were used to fund stock purchases through the Employee Stock Ownership Plan ("ESOP"). See Note 18 to the Consolidated Financial Statements for parent company only financial information. At December 31, 1997 MASSBANK Corp. on a consolidated basis had total assets of $925.4 million, deposits of $809.9 million, and stockholders' equity of $103.8 million which represents 11.2% of total assets. Book value per share at December 31, 1997 was $29.06. 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. 2 3 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 - 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. 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 $0.885 per share in 1997 compared to $0.69 per share in 1996 and $0.5475 per share in 1995. The Company's dividend payout ratios (cash dividends paid divided by net income) for 1997, 1996 and 1995 were 31%, 26% and 23%, respectively. Stock Repurchase Program In July 1997, MASSBANK Corp. announced that its Board of Directors (the "Board") had extended, for another year, the stock repurchase program which it authorized in July, 1996. During 1997, the Company repurchased 46,807 of its common shares under its ongoing repurchase program. This leaves 171,398 shares available for repurchase in the current program. 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-hundredth 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 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". 3 4 Business of MASSBANK General MASSBANK 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. In 1996, the name of the bank was changed from "MASSBANK for Savings" to "MASSBANK". The Bank is primarily engaged in the business of attracting deposits from the general public through its fifteen full service banking offices in Reading, Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Stoneham, Tewksbury, Westford and Wilmington, 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. Acquisition On February 26, 1997, MASSBANK signed a definitive merger agreement to purchase the Glendale Co-operative Bank ("Glendale") of Everett, Massachusetts. Under the agreement, MASSBANK acquired all of the outstanding shares of Glendale at a price of $28.00 per share, for an aggregate purchase price of $7.38 million. Glendale Co-operative Bank was a Massachusetts chartered co-operative bank founded in 1928. Glendale operated a single banking office in the city of Everett with total assets of $35.6 million. On July 21, 1997 MASSBANK completed the acquisition. The transaction was accounted for as a purchase. 4 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 15 branch offices located on a broad arc stretching from Melrose and Everett 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, Everett, Lowell, Medford, Melrose, Reading, Stoneham, Tewksbury, Westford and Wilmington. Lending Activities The Bank's net loan portfolio totaled $270.0 million at December 31, 1997. 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, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------- Mortgage loans: Residential: Conventional $243,482 $216,832 $209,408 $207,772 $204,096 FHA and VA 1,843 2,515 3,244 4,158 5,166 Commercial 3,861 4,121 6,975 8,155 9,654 Construction 492 1,388 1,516 603 474 - ------------------------------------------------------------------------------------------- Total mortgage loans 249,678 224,856 221,143 220,688 219,390 Add: premium on loans 343 325 388 452 813 Less: deferred mortgage loan origination fees (1,223) (1,042) (928) (871) (856) - ------------------------------------------------------------------------------------------- Mortgage loans, net 248,798 224,139 220,603 220,269 219,347 - ------------------------------------------------------------------------------------------- Other loans: Consumer: Installment 2,199 1,967 1,988 1,972 2,474 Guaranteed education 8,934 9,729 10,420 10,152 9,131 Other secured 1,600 1,611 2,012 2,598 1,735 Home equity lines of credit 10,470 11,316 13,144 14,674 15,744 Unsecured 266 271 265 269 277 - ------------------------------------------------------------------------------------------- Total consumer loans 23,469 24,894 27,829 29,665 29,361 Commercial 36 628 753 882 338 - ------------------------------------------------------------------------------------------- Total other loans 23,505 25,522 28,582 30,547 29,699 - ------------------------------------------------------------------------------------------- Total loans 272,303 249,661 249,185 250,816 249,046 Less: Allowance for loan losses (2,334) (2,237) (2,529) (2,566) (2,261) - ------------------------------------------------------------------------------------------- Net loans $269,969 $247,424 $246,656 $248,250 $246,785 - -------------------------------------------------------------------------------------------
5 6 The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 1997: Maturity/Scheduled Payments (1)
Within One to Five to After (In thousands) one year five years ten years ten years Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $1,482 $ 6,869 $63,393 $172,720 $244,464 Commercial & construction 628 1,040 1,286 1,380 4,334 - ------------------------------------------------------------------------------------------- Total mortgage loans 2,110 7,909 64,679 174,100 248,798 Other loans 1,777 3,278 6,090 12,360 23,505 - ------------------------------------------------------------------------------------------- Total loans $3,887 $11,187 $70,769 $186,460 $272,303 - -------------------------------------------------------------------------------------------
(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 $192,976 $50,006 $242,982 Commercial & construction 488 3,218 3,706 - ------------------------------------------------------------------------------------------- Total mortgage loans 193,464 53,224 246,688 Other loans 2,315 19,413 21,728 - ------------------------------------------------------------------------------------------- Total loans $195,779 $72,637 $268,416 - -------------------------------------------------------------------------------------------
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 29.2% and 27.9% of the Company's total assets at December 31, 1997, and 1996, 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. The Bank anticipates that its loan portfolio will grow slowly over the next few years. 6 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 1997 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, 15 or 20 year fixed rate mortgages and adjustable rate mortgages it originates for its own portfolio. Long-term (25 or 30 year) 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, 5 or 10 year intervals and provide a margin over various mortgage indices. During the latter part of 1997, the Bank introduced a new Home Equity Line of Credit product which it hopes will be well received by customers in the months ahead. This new product offers customers a special introductory interest rate of 7.25% which is fixed until the year 2000. Thereafter, the interest rate will be variable and will be indexed to the 13 week (91 day) Treasury Bill auction rate plus a margin of 3.25%. This indexed variable rate has historically responded more favorably to movements in market interest rates than the PRIME RATE used by many financial institutions and should, therefore, be more attractive to bank customers. In the last few years, the Bank has instituted several other new loan programs which have been well received by customers. It instituted a program featuring 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. In 1996, the Bank introduced the "Home Town Advantage" mortgage program which has produced some good results. This new program offers homebuyers a (0.125) percent discount on their mortgage rate if they purchase residential property located in one of the communities where the bank operates a banking office. At December 31, 1997, 1-4 family residential mortgage loans totaled $244.5 million, or 89.8% of the total loan portfolio, compared to $218.6 million, or 87.6% of the total loan portfolio, at December 31, 1996. Residential mortgage loan originations amounted to $50.0 million during 1997, an increase of 19.3% from $41.9 million in 1996. Origination volumes are sensitive to interest rates and are affected by the interest rate environment. The prevailing low interest rates in 1997 encouraged many borrowers to refinance. This resulted in higher mortgage loan originations for the Bank. 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, 1997, commercial and multifamily real estate mortgages and construction loans totaled approximately $4.3 million, or 1.6% of the total loan portfolio, compared to $5.5 million, or 2.2% of the total loan portfolio, at December 31, 1996. In 1997, commercial and multifamily real estate mortgage loan originations amounted to $0.3 million. 7 8 Mortgage Lending (continued) The total amount of first mortgage loans held by the Bank at December 31, 1997 was $248.8 million as indicated in the maturity distribution table appearing on the previous page. Of this amount, $53.9 million was subject to interest rate adjustments. The remaining $194.9 million in fixed rate mortgage loans represents 21.1% of the Company's total assets. 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 $23.5 million at December 31, 1997 representing 8.6% of the Bank's total loan portfolio. Of this amount $8.9 million or 3.3% 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 $14.5 million at December 31, 1997, representing 5.3% of the Bank's total loan portfolio. At December 31, 1997, the Bank had only $36 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, 1997, the Bank had issued commitments on residential first mortgage loans totaling $4,090,000, and had commitments to advance funds on construction loans and unused credit lines, including unused portions of home equity lines of credit, of $496,000 and $19,445,000, 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 generally 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 $1,771,000 at December 31, 1997. 8 9 Real Estate Acquired through Foreclosure. Real estate acquired through foreclosure is comprised of foreclosed properties where the Bank has actually received title and loans determined to be substantially repossessed. Real estate loans that are substantially repossessed include only those loans for which the Bank has taken possession of the collateral but has not completed legal foreclosure proceedings. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Real estate acquired through foreclosure 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. As of year-end 1997, MASSBANK had zero real estate acquired through foreclosure on its balance sheet. Non-Performing Assets The following table shows the composition of non-performing assets at the dates shown:
- ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Nonaccrual loans: Mortgage loans: Residential: Conventional $1,536 $1,468 $2,016 $1,496 $1,048 FHA and VA 9 13 14 62 43 Commercial -- -- -- 152 -- Consumer 226 120 398 388 178 - ------------------------------------------------------------------------------------------------ Total nonaccrual loans 1,771 1,601 2,428 2,098 1,269 - ------------------------------------------------------------------------------------------------ Real estate acquired through foreclosure: Residential: Conventional -- 503 255 129 699 - ------------------------------------------------------------------------------------------------ Total real estate acquired through foreclosure -- 503 255 129 699 - ------------------------------------------------------------------------------------------------ Total non-performing assets $1,771 $2,104 $2,683 $2,227 $1,968 - ------------------------------------------------------------------------------------------------ Percent of non-performing loans to total loans 0.65% 0.64% 0.97% 0.84% 0.51% Percent of non-performing assets to total assets 0.19% 0.24% 0.31% 0.26% 0.23%
The reduction in interest income associated with nonaccrual loans is as follows:
- ------------------------------------------------------------------------------------------------ (In thousands) Years Ended December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Interest income that would have been recorded under original terms $163 $149 $204 $185 $105 Interest income actually recorded 97 78 60 88 40 - ------------------------------------------------------------------------------------------------ Reduction in interest income $ 66 $ 71 $144 $ 97 $ 65 - ------------------------------------------------------------------------------------------------
9 10 Allowance for Loan Losses. The allowance for loan losses is increased by provisions charged to operations based on management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may affect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the information available in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. The following table sets forth the activity in the allowance for loan losses during the years indicated:
- ------------------------------------------------------------------------------------------------ (In thousands) Years ended December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Balance at beginning of year $2,237 $2,529 $2,566 $2,261 $2,056 Glendale Co-Operative Bank acquisition 105 -- -- -- -- Provision for loan losses 260 160 170 705 671 Charge-offs: Residential real estate (221) (480) (124) (339) (305) Commercial real estate -- -- -- -- (135) Consumer loans (12) (25) (30) (24) (17) Other loans (94) (37) (95) (63) (31) Recoveries: Residential real estate 34 83 41 23 20 Commercial real estate 20 -- -- -- -- Consumer loans 1 7 1 3 2 Other Loans 4 -- -- -- -- - ------------------------------------------------------------------------------------------------ Net charge-offs (268) (452) (207) (400) (466) - ------------------------------------------------------------------------------------------------ Balance at end of year $2,334 $2,237 $2,529 $2,566 $2,261 - ------------------------------------------------------------------------------------------------ Net loan charge offs as a percent of average loans outstanding during the period 0.10% 0.18% 0.08% 0.16% 0.19% Allowance for loan losses as a percent of total loans outstanding at year-end 0.86% 0.90% 1.01% 1.02% 0.91% Allowance for loan losses as a percent of nonaccrual loans 131.8% 139.7% 104.2% 122.3% 178.2% - ------------------------------------------------------------------------------------------------
10 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. 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. 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. 11 12 Investment Activities (continued) 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. 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, 1997, 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 $635.7 million, representing 68.7% of the Company's total assets. 12 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, 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Federal funds sold: Overnight federal funds $ 85,241 $109,902 $100,245 Term federal funds 20,000 10,000 15,000 - ------------------------------------------------------------------------------------------------ Total federal funds sold 105,241 119,902 115,245 Money market funds 24,514 24,408 7,260 Interest-bearing deposits in bank 2,083 1,751 941 - ------------------------------------------------------------------------------------------------ Total federal funds sold and other short-term investments $131,838 $146,061 $123,446 - ------------------------------------------------------------------------------------------------ Percent of total assets 14.2% 16.4% 14.4% - ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Securities held to maturity: (a) Other bonds and obligations $ 372 $ 160 $ 402 - ------------------------------------------------------------------------------------------------ Total securities held to maturity 372 160 402 Securities available for sale: (b) U.S. Treasury obligations 123,021 140,706 212,115 U.S. Government agency obligations 9,813 7,877 14,172 Other bonds and obligations -- 1,000 2,004 Marketable equity securities 17,545 15,574 11,290 Investments in mutual funds 1,114 -- -- Mortgage-backed securities 330,731 306,595 216,520 - ------------------------------------------------------------------------------------------------ Total securities available for sale 482,224 471,752 456,101 Trading securities: (b) U.S. Treasury obligations 18,542 -- -- Investments in mutual funds 2,718 4,672 6,819 - ------------------------------------------------------------------------------------------------ Total trading securities 21,260 4,672 6,819 - ------------------------------------------------------------------------------------------------ Total securities $503,856 $476,584 $463,322 - ------------------------------------------------------------------------------------------------ Percent of total assets 54.4% 53.7% 54.2% - ------------------------------------------------------------------------------------------------ Total investments $635,694 $622,645 $586,768 Total investments as a percent of total assets 68.7% 70.1% 68.7% - ------------------------------------------------------------------------------------------------
(a) At amortized cost. (b) At market value. 13 14 The following tables present the carrying value of debt securities held to maturity and available for sale at December 31, 1997 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 after 1 but within 5 years Amount $ 230 $ 230 Yield 6.77% 6.77% Maturing after 5 years but within 10 years Amount $ 97 $ 97 Yield 9.36% 9.36% Maturing after 10 years but within 15 years Amount 45 45 Yield 10.61% 10.61% - ----------------------------------------------------------------------------------------- Total Amount $ 372 $ 372 Yield 7.91% 7.91% Average life in years 5.35 5.35
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 $ 35,869 $2,000 $ -- $ 312 $ 38,181 Yield 6.62% 6.75% 4.50% 6.61% Maturing after 1 but within 5 years Amount 85,530 6,600 -- 8,826 100,956 Yield 6.59% 6.18% 7.44% 6.64% Maturing after 5 but within 10 years Amount -- 1,000 -- 30,677 31,677 Yield 6.76% 7.64% 7.61% Maturing after 10 but within 15 years Amount -- -- -- 279,147 279,147 Yield 6.89% 6.89% Maturing after 15 years Amount -- 200 -- 6,142 6,342 Yield 7.94% 6.15% 6.21% - ------------------------------------------------------------------------------------------------ Total Amount $121,399 $9,800 $ -- $325,104 $456,303 Yield 6.60% 6.39% 6.96% 6.85% - ------------------------------------------------------------------------------------------------ Average life in years 1.72 3.18 -- Average contractual maturity in years 12.49
14 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, 1997, 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. 15 16 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 fifteen 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 increased by $21.5 million or 2.7% during the twelve months ended December 31, 1997, from $788.4 million at year end 1996 to $809.9 million at the end of 1997. The increase is attributable to the $29.8 million in deposits acquired in connection with the Glendale purchase. Also, in 1997, the Bank experienced some modest deposit outflow due to the strong performance of the stock market and mutual funds which were both fierce competitors for the savers' dollars. 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 1997 or 1996. 16 17 DEPOSITS The following table shows the composition of the deposits as of the dates indicated:
(In thousands) at December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Percent Percent Percent of of of Amount Deposits Amount Deposits Amount Deposits Demand and NOW NOW $ 47,944 5.92% $ 45,352 5.75% $ 51,197 6.79% Demand accounts (non interest-bearing) 18,915 2.34 17,382 2.21 15,216 2.02 -------- ------ -------- ------ -------- ------ Total demand and NOW 66,859 8.26 62,734 7.96 66,413 8.81 Savings: Regular savings and special notice accounts 329,348 40.67 333,834 42.35 330,230 43.82 Money market accounts 23,527 2.90 23,824 3.02 26,368 3.50 -------- ------ -------- ------ -------- ------ Total savings 352,875 43.57 357,658 45.37 356,598 47.32 Time Certificates of deposit: Fixed rate certificates 316,368 39.06 303,722 38.52 274,684 36.45 Variable rate certificates 74,666 9.22 65,417 8.30 57,373 7.61 -------- ------ -------- ------ -------- ------ Total time certificates of deposit 391,034 48.28 369,139 46.82 332,057 44.06 Deposit acquisition premium, net of amortization (918) (0.11) (1,181) (.15) (1,411) (.19) -------- ------ -------- ------ -------- ------ Total deposits $809,850 100.00% $788,350 100.00% $753,657 100.00% -------- ------ -------- ------ -------- ------
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, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate NOW accounts $ 46,580 1.14% $ 47,197 1.21% $ 50,513 1.28% Demand (non interest-bearing) accounts 18,156 -- 15,992 -- 13,645 -- Escrow deposits of borrowers 1,159 0.28 780 0.19 788 0.28 Money market accounts 24,186 3.07 25,205 3.20 28,052 3.29 Regular savings and special notice accounts 331,209 3.47 332,851 3.44 359,397 3.59 Time certificates of deposit 386,062 5.67 352,385 5.74 300,141 5.78 -------- -------- -------- 807,352 4.30% $774,410 4.27% $752,536 4.11%
17 18 Investment Management and Trust Services The Bank's 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, 1997 the Trust Division had approximately $30.2 million (market value) of assets in custody and under management. 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. 18 19 Supervision and Regulation of the Company and its Subsidiaries 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 Note 15 of Notes to Consolidated Financial Statements appearing in the Company's 1997 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. 19 20 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, 1997, the Bank had marketable equity securities and investment in mutual funds with a market value of approximately $21.4 million, representing 21.3% 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 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. In 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate Banking Act") was enacted. The Interstate Banking Act's provisions, among other things: (i) permit bank holding companies, under certain circumstances, to acquire control of banks in any state, subject to (a) specified maximum national and state deposit concentration limits; (b) any applicable state law provisions requiring that the acquired bank has to have been in existence for a specified period of up to 5 years; (c) any applicable nondiscriminatory state provisions that make an acquisition of a bank contingent upon a requirement to hold a portion of such bank's assets available for call by a state-sponsored housing entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by banks in different states, including branching through bank mergers, beginning June 1, 1997, subject to the provisions noted in (i) and to any state laws that "opt-in" as of an earlier date or "opt-out" of the provisions entirely; (iii) authorize states to enact legislation permitting interstate de novo branching; and (iv) provide for parity of treatment for foreign bank branch activities. In 1996, Massachusetts enacted legislation implementing the provisions of the Interstate Banking Act. In the new legislation, Massachusetts authorized immediate "opt-in" to interstate banking. Thus, the 1996 legislation substantially facilitates the geographic expansion of banking by Massachusetts and out-of-state banks. 20 21 The 1996 legislation also allows out-of-state banks to establish and maintain branches through a merger or consolidation with or the purchase of assets or stock of any Massachusetts bank or through de novo branch establishment or purchase of a branch without purchase of the bank which owns the branch, in Massachusetts, provided that such out-of-state bank is expressly authorized to do so by the laws of the state under which it is organized. The 1996 legislation also allows Massachusetts banks to establish and maintain branches through a merger or consolidation with or by the purchase of the whole or any part of the assets or stock of any out-of-state bank or through de novo branch establishment in any other state other than Massachusetts. Finally, the 1996 legislation prohibits the establishment of bank holding companies and acquisition of banks and bank holding companies by Massachusetts and out-of-state bank holding companies if the Massachusetts bank to be acquired has been in existence less than 3 years or if, after such acquisition, the bank holding company would control 28% of the deposits in Massachusetts (until 1998, when the deposit limitation is increased to 30%). 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. 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, 1997, the Bank had 150 full-time employees, including 30 officers, and 62 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. 21 22 Subsidiaries The Bank has three wholly-owned subsidiaries: Readibank Investment Corporation, Melbank Investment 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 $66.8 million and $63.7 million, at December 31, 1997, respectively. Readibank Properties, Inc. incorporated primarily for the purpose of real estate development, had total assets of $631 thousand at December 31, 1997. Executive Officers of the Registrant The executive officers of the Company and the Bank and the age of each officer as of March 13, 1998 are as follows: Name Age Office - ---- --- ------ Gerard H. Brandi 49 Chairman of the Board of Directors, President and Chief Executive Officer of the Company and the Bank Raymond A. Brearey 62 Vice President and Senior Trust Officer of the Bank David F. Carroll 50 Vice President of the Bank Reginald E. Cormier 50 Vice President, Treasurer and Chief Financial Officer of the Company and the Bank Donald R. Washburn 54 Senior Vice President of the Bank Donna H. West 52 Senior Vice President of the Bank and Assistant Secretary of the Company 22 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, and Executive Vice President and Treasurer from 1983 to 1986. Mr. Brandi was named President of the Company and the Bank in 1986, Chief Executive Officer in 1992 and Chairman in 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 Community 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 Community 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 Community Banking Division. In June, 1994, Mrs. West was promoted to Senior Vice President of the Community Banking Division. 23 24 Item 2. Properties The main office of MASSBANK Corp. and MASSBANK is located at 123 Haven Street, Reading, Massachusetts. Additionally, the Bank has fourteen branches and three operations facilities. The Bank owns its main office, two operations facilities and seven of its branches. All of the remaining branches and other facilities are leased under various leases. At December 31, 1997, 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 296 Chelmsford Street, Chelmsford, MA Leased 1998 ---- OFFICES: 17 North Road, Chelmsford, MA Leased 1999 (1) 45 Broadway Road, Dracut, MA Leased 2002 ---- 738 Broadway, Everett, MA Owned ---- ---- 50 Central Street, Lowell, MA Owned ---- ---- 755 Lakeview Avenue, Lowell, MA Owned ---- ---- 4110 Mystic Valley Pkwy, Medford, MA Leased 2001 ---- 476 Main Street, Melrose, MA Owned ---- ---- 27 Melrose Street, Towers Plaza, Melrose, MA Leased 2004 2014 240 Main Street, Stoneham, MA Leased 1998 2003 1800 Main Street, Tewksbury, MA Owned ---- ---- 203 Littleton Road, Westford, MA Owned ---- ---- 370 Main Street, Wilmington, MA Owned ---- ---- 219 Lowell Street, Lucci's Plaza, Wilmington, MA Leased 2006 ---- 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, 1997, none of these actions individually or in the aggregate is believed by management to be material to the financial condition of MASSBANK Corp. or the Bank. Item 4. Submission of Matters to a Vote of Security Holders None. 24 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 1997 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 1997 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 1997 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 1997 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 1997 Annual Report to Stockholders are incorporated herein by reference. The unaudited quarterly financial data set forth on page 65 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 caption "Election of Directors" and "Compliance with Section 16(A) of the Exchange Act" in the Registrant's definitive proxy statement relating to its 1998 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 1998 Annual Meeting of Stockholders is incorporated herein by reference. 25 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 1998 Annual Meeting of Stockholders is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information contained in Note 5 of the Consolidated Financial Statements under the caption "Loans" in the Registrant's 1997 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 1997 Annual Report to Stockholders (Pages) Independent Auditors' Report 37 Consolidated balance sheets at December 31, 1997 and 1996 38 Consolidated statements of income for the three years ended December 31, 1997 39 Consolidated statements of cash flows for the three years ended December 31, 1997 40-41 Consolidated statements of changes in stockholders' equity for the three years ended December 31, 1997 42 Notes to consolidated financial statements 43-65 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. 26 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). 10.1.4 Amendment to MASSBANK Corp. 1994 Stock Incentive Plan is attached hereto as Exhibit 10.1.4 to this Annual Report. 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. 10.2.2 Amendments to the MASSBANK for Savings Employee's Stock Ownership Plan and Trust Agreement are attached hereto as Exhibit 10.2.2 to this Annual Report. 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. 27 28 Exhibit No. Description of Exhibit 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. 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. 28 29 Exhibit No. Description of Exhibit 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. 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. 10.4.1 Amendments to the Executive Supplemental Retirement Agreement with Gerard H. Brandi are incorporated by reference to Exhibit 10.4.1 of the Registrant's annual report on Form 10-K for the year ended December 31, 1996. 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 1997 Annual Report to Stockholders - except for those portions of the 1997 Annual Report to Stockholders which are expressly incorporated by reference in this report, such 1997 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 - A list of subsidiaries of the Registrant is attached hereto as Exhibit 22 to this Annual Report. 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. 29 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 11, 1998 /s/ Reginald E. Cormier Vice President, Treasurer - ------------------------- and Chief Financial Officer Reginald E. Cormier (Principal Financial and Accounting Officer) March 11, 1998 /s/ Samuel Altschuler Director March 18, 1998 - ------------------------- Samuel Altschuler /s/ Mathias B. Bedell Director March 11, 1998 - ------------------------- Mathias B. Bedell Director - ------------------------- Allan S. Bufferd Director - ------------------------- Peter W. Carr /s/ Alexander S. Costello Director March 19, 1998 - ------------------------- Alexander S. Costello 30 31 /s/ Robert S. Cummings Director March 11, 1998 - ------------------------- Robert S. Cummings /s/ Louise A. Hickey Director March 18, 1998 - ------------------------- Louise A. Hickey Director - ------------------------- Leonard Lapidus /s/ Stephen E. Marshall Director March 11, 1998 - ------------------------- Stephen E. Marshall /s/ Arthur W. McPherson Director March 18, 1998 - ------------------------- Arthur W. McPherson /s/ Herbert G. Schurian Director March 11, 1998 - ------------------------- Herbert G. Schurian /s/ Donald B. Stackhouse Director March 11, 1998 - ------------------------- Donald B. Stackhouse 31 EX-10.1.4 2 AMENDED AND RESTATED STOCK PLAN 1 MASSBANK CORP. AMENDED AND RESTATED 1994 STOCK INCENTIVE PLAN SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS. The name of the plan is the MASSBANK Corp. Amended and Restated 1994 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and enable the personnel of MASSBANK Corp. (the "Company") and its Subsidiaries upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company's welfare will assure a closer identification of their interests with those of the Company, thereby stimulating their efforts on the Company's behalf and strengthening their desire to remain with the Company. The following terms shall be defined as set forth below: "Act" means the Securities Exchange Act of 1934, as amended. "Award" or "Awards," except where referring to a particular category of grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Unrestricted Stock Awards and Performance Share Awards. "Award Agreement" means the agreement executed and delivered to the Company by the recipient of an Award. "Board" means the Board of Directors of the Company. "Cause" means, for purposes of the Plan, and shall be limited to, a determination of the Board that the optionee should be dismissed as a result of (i) dishonesty of the optionee with respect to the Company, MASSBANK (the "Bank"), or any affiliate thereof; (ii) the optionee's commission of a crime punishable as a felony; or (iii) the optionee's failure to perform in a satisfactory manner a substantial portion of such optionee's duties and responsibilities to the Company or the Bank. "Change of Control" is defined in Section 14. "Code" means the Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations. "Committee" means the Board or any Committee of the Board as described in Section 2. 2 "Disability" means disability as set forth in Section 22(e)(3) of the Code. "Disinterested Person" shall have the meaning set forth in Rule 16b-3(c)(2)(i) promulgated under the Act, or any successor definition under the Act. "Effective Date" is defined in Section 16. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the related rules, regulations and interpretations. "Fair Market Value" on any given date means the last sale price at which Stock is traded on such date or, if no Stock is traded on such date, the most recent date on which the Stock was traded, as reflected on the NASDAQ National Market System or, if applicable, any other national stock exchange or trading system on which the Stock is traded. "Incentive Stock Option" means any Stock Option designated and qualified as an "incentive stock option" as defined in Section 422 of the Code. "Non-Employee Director" means a member of the Board who is not also an employee of the Company or any Subsidiary. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. "Normal Retirement" means retirement from active employment with the Company and its Subsidiaries in accordance with the retirement policies of the Company and its Subsidiaries then in effect. "Option" or "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5. "Performance Share Award" means an Award granted pursuant to Section 9(a). "Restricted Stock Award" means an Award granted pursuant to Section 7(a). "Stock" means the Common Stock, $0.01 par value, of the Company, subject to adjustment pursuant to Section 3. "Stock Appreciation Right" means an Award granted pursuant to Section 6(a). "Subsidiary" means any bank, corporation or other entity (other than the Company) in any unbroken chain of banks, corporations or other entities, beginning with the Company if each of the banks, corporations or entities (other than the last bank, corporation or entity in the 2 3 unbroken chain) owns stock or other interests possessing 50% or more of the total combined voting power of all classes of stock or other interests in one of the other banks, corporations or entities in the chain. "Unrestricted Stock Award" means an Award granted pursuant to Section 8. SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT PARTICIPANTS AND DETERMINE AWARDS, ETC. (a) Committee. The Plan shall be administered by the Board or a committee thereof appointed by the Board (such committee, or the Board acting in such capacity, is hereinafter referred to as the "Committee"). (b) Powers of Committee. The Committee shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority: (i) to select the officers, other employees and directors of the Company and its Subsidiaries to whom Awards may from time to time be granted; (ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Unrestricted Stock and Performance Shares, or any combination of the foregoing, granted to any one or more participants; (iii) to determine the number of shares to be covered by any Award; (iv) to determine and modify the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Award, which terms and conditions may differ among individual Awards and participants, and to approve the form of Award Agreements; (v) to accelerate the exercisability or vesting of all or any portion of any Award; (vi) to determine whether, to what extent, and under what circumstances Stock and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the participant and whether and to what extent the Company shall pay or credit amounts equal to interest (at rates determined by the Committee) or dividends or deemed dividends on such deferrals; and (vii) to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including 3 4 related Award Agreements); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan. All decisions and interpretations of the Committee shall be binding on all persons, including the Company and Plan participants. SECTION 3. SHARES ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION. (a) Shares Issuable. The maximum number of shares of Stock reserved and available for issuance under the Plan shall be 190,000, subject to adjustment in accordance with Section 3(b) below. For purposes of this limitation, the shares of Stock underlying any Awards which are forfeited, cancelled, reacquired by the Company, satisfied without the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Stock available for issuance under the Plan so long as the Plan participants to whom such Awards had been previously granted received no benefits of ownership of the underlying shares of Stock to which the Award related. Subject to such overall limitation, shares may be issued up to such maximum number pursuant to any type or types of Award, including Incentive Stock Options. No more than 70,000 shares may be issued to any one individual in the form of Options and Stock Appreciation Rights in any period of three consecutive years, subject to the adjustment of such number of shares in accordance with Section 3(b) below. Shares issued under the Plan may be authorized but unissued shares or shares reacquired by the Company. Upon the exercise of a Stock Appreciation Right settled in stock, the right to purchase an equal number of shares of Common Stock covered by a related Stock Option, if any, shall be deemed to have been surrendered and will no longer be exercisable, and said number of shares shall no longer be available under the Plan. (b) Stock Dividends, Mergers, Etc. In the event of a stock dividend, stock split or similar change in capitalization affecting the Stock, the Committee shall make appropriate adjustments in (i) the number and kind of shares of stock or securities that may be issued pursuant to the Plan or on which Awards may thereafter be granted, (ii) the number and kind of shares remaining subject to outstanding Awards, and (iii) the option or purchase price in respect of such shares. In the event of any merger, consolidation, dissolution or liquidation of the Company, the Committee in its sole discretion (and without the consent of the optionee) may, as to any outstanding Awards, make such substitution (including the substitution of shares of capital stock of any other entity) or adjustment in the aggregate number of shares reserved for issuance under the Plan and in the number and purchase price (if any) of shares subject to such Awards as it may determine and as may be permitted by the terms of such transaction, or accelerate, amend or terminate such Awards upon such terms and conditions as it shall provide (which, in the case of the termination of the vested portion of any Award, shall require payment or other consideration which the Committee deems equitable in the circumstances), subject, however, to the provisions of Section 14. 4 5 (c) Substitute Awards. The Committee may grant Awards under the Plan in substitution for stock and stock based awards held by employees of another corporation who concurrently become employees of the Company or a Subsidiary as the result of a merger or consolidation of the employing corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or stock of the employing corporation. The Committee may direct that the substitute awards be granted on such terms and conditions as the Committee considers appropriate in the circumstances. SECTION 4. ELIGIBILITY. Participants in the Plan will be such officers and other employees of the Company and its Subsidiaries who are responsible for or contribute to the management, growth or profitability of the Company and its Subsidiaries and who are selected from time to time by the Committee, in its sole discretion. Non-Employee Directors are also eligible to participate in the Plan but only to the extent provided in Section 5(c) and Section 8(c) below. SECTION 5. STOCK OPTIONS. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be either Incentive Stock Options or Non-Qualified Stock Options. To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. No Incentive Stock Option shall be granted under the Plan after January 17, 2004. (a) Stock Options Granted to Employees. The Committee in its discretion may grant Stock Options to employees of the Company or any Subsidiary. Stock Options granted to employees pursuant to this Section 5(a) shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (i) Exercise Price. The per share exercise price of a Stock Option shall be determined by the Committee at the time of grant but shall be, in the case of Incentive Stock Options, not less than 100% of Fair Market Value on the date of grant. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation and an Incentive Stock Option is granted to such employee, the option price shall be not less than 110% of Fair Market Value on the grant date. 5 6 (ii) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (iii) Exercisability; Rights of a Shareholder. Stock Options shall become vested and exercisable at such time or times, whether or not in installments, as shall be determined by the Committee at or after the grant date. The Committee may at any time accelerate the exercisability of all or any portion of any Stock Option. An optionee shall have the rights of a shareholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options. (iv) Method of Exercise. Stock Options may be exercised in whole or in part, by giving written notice of exercise to the Company, specifying the number of shares to be purchased. Payment of the purchase price may be made by one or more of the following methods: (A) In cash, by certified or bank check or other instrument acceptable to the Committee; (B) Through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the optionee in the open market or that have been held by the optionee for at least six months and are not then subject to restrictions under any Company plan, if permitted by the Committee, in its discretion. Such surrendered shares shall be valued at Fair Market Value on the exercise date; or (C) By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price; provided that in the event the optionee chooses to pay the option purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure. The delivery of certificates representing shares of Stock to be purchased pursuant to the exercise of a Stock Option will be contingent upon receipt from the Optionee (or a purchaser acting in his stead in accordance with the provisions of the Stock Option) by the Company of the full purchase price for such shares and the fulfillment of any other 6 7 requirements contained in the Stock Option or applicable provisions of laws. Payment instruments will be received subject to collection. In the event an optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the shares of Stock transferred to the optionee upon the exercise of the Stock Option shall be net of the number of shares attested to. (v) No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. Notwithstanding the foregoing, the Committee, in its sole discretion, may provide in an Award Agreement that the optionee may transfer, without consideration for the transfer, his Non-Qualified Stock Options to members of his immediate family, to trusts for the benefit of such family members and to partnerships in which such family members are the only partners; provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Award Agreement. (vi) Termination by Death. If any optionee's employment by the Company and its Subsidiaries terminates by reason of death, the Stock Option may thereafter be exercised, to the extent exercisable at the date of death, by the legal representative or legatee of the optionee, for a period of one year (or such shorter period as the Committee shall specify at the time of grant or such longer period as the Committee shall specify at any time) from the date of death, or until the expiration of the stated term of the Option, if earlier. (vii) Termination by Reason of Disability or Normal Retirement. (A) Any Stock Option held by an optionee whose employment by the Company and its Subsidiaries has terminated by reason of Disability may thereafter be exercised, to the extent it was exercisable at the time of such termination, for a period of one year (or such shorter period as the Committee shall specify at the time of grant or such longer period as the Committee shall specify at any time) from the date of such termination of employment, or until the expiration of the stated term of the Option, if earlier. (B) (1) Any Non-Qualified Stock Option held by an optionee whose employment by the Company and its Subsidiaries has terminated by reason of Normal Retirement may thereafter be exercised, to the extent it was exercisable at the time of such termination, for a period of one year (or such shorter period as the Committee shall specify at the time of grant or such longer period as the Committee shall specify at any time) from the date of such termination of employment, or until the expiration of the stated term of the Option, if earlier. 7 8 (2) Any Incentive Stock Option held by an optionee whose employment by the Company and its Subsidiaries has terminated by reason of Normal Retirement may thereafter be exercised, to the extent it was exercisable at the time of such termination, for a period of three months (or such shorter period as the Committee shall specify at the time of grant or such longer period as the Committee shall specify at any time) from the date of such termination of employment, or until the expiration of the stated term of the Option, if earlier. (C) The Committee shall have sole authority and discretion to determine whether a participant's employment has been terminated by reason of Disability or Normal Retirement. (D) Except as otherwise provided by the Committee at the time of grant, the death of an optionee during a period provided in this Section 5(a)(vii) for the exercise of a Non-Qualified Stock Option (or during the final year of such period if longer than one year), shall extend such period for one year following death, subject to termination on the expiration of the stated term of the Option, if earlier. (viii) Termination for Cause. If any optionee's employment by the Company and its Subsidiaries has been terminated for Cause, any Stock Option held by such optionee shall immediately terminate and be of no further force and effect; provided, however, that the Committee may, in its sole discretion, provide that such Stock Option can be exercised for a period of up to three months from the date of termination of employment or until the expiration of the stated term of the Option, if earlier. (ix) Other Termination. Unless otherwise determined by the Committee, if an optionee's employment by the Company and its Subsidiaries terminates for any reason other than death, Disability, Normal Retirement or for Cause, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable on the date of termination of employment, for a period of three months (or such shorter period as the Committee shall specify at the time of grant or such longer period as the Committee shall specify at any time) from the date of termination of employment or until the expiration of the stated term of the Option, if earlier. (x) Annual Limit on Incentive Stock Options. To the extent required for "incentive stock option" treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the Stock with respect to which Incentive Stock Options granted under this Plan and any other plan of the Company or its Subsidiaries become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. 8 9 (xi) Form of Settlement. Shares of Stock issued upon exercise of a Stock Option shall be free of all restrictions under this Plan, except as otherwise provided in this Plan. (b) Reload Options. At the discretion of the Committee, Options granted under Section 5(a) may include a so-called "reload" feature pursuant to which an optionee exercising an Option and paying the purchase price by the delivery of a number of shares of Stock in accordance with Section 5(a)(iv)(B) hereof would automatically be granted an additional Option (with an exercise price equal to the Fair Market Value of the Stock on the date the additional Option is granted and with the same expiration date as the original Option being exercised, and with such other terms as the Committee may provide) to purchase that number of shares of Stock equal to the number delivered to pay the purchase price in connection with the exercise of the original Option. (c) Stock Options Granted to Non-Employee Directors. (i) Grant of Options. The Committee in its discretion may grant Non-Qualified Stock Options to Non-Employee Directors subject to the following terms and conditions (it being noted that under the current Rules under the Act, such grant may result in the members of the Committee ceasing for a period of time to be Disinterested Persons and the Plan ceasing to be qualified under Rule 16b-3). (ii) Exercise Price. The exercise price per share for the Stock covered by a Stock Option granted pursuant to this Section 5(c) shall be equal to the Fair Market Value of the Stock on the date the Stock Option is granted. (iii) Exercise; Termination; Non-transferability. (A) No Option granted under this Section 5(c) may be exercised before the first anniversary of the date upon which it was granted; provided, however, that any Option so granted shall become exercisable upon the termination of service of the Non-Employee Director because of Disability or death or upon the occurrence of a Change in Control as set forth in Section 14 hereof. No Option issued under this Section 5(c) shall be exercisable after the expiration of ten years from the date upon which such Option is granted. (B) The rights of a Non-Employee Director in an Option granted under Section 5(c) shall terminate three months after such Director ceases to be a Director of the Company or the specified expiration date, if earlier; provided, however, that if the Non-Employee Director resigns, is not re-nominated for election or is removed as a Director and the Committee determines that the primary reason for such resignation, failure to re-nominate or removal would 9 10 constitute Cause, then the rights shall terminate immediately on the date on which he ceases to be a Director. (C) No Stock Option granted under this Section 5(c) shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and Options granted under this Section 5(c) shall be exercisable, during the optionee's lifetime, only by the optionee. Notwithstanding the foregoing, the Committee, in its sole discretion, may provide in an Award Agreement that the optionee may transfer, without consideration for the transfer, his Stock Options to members of his immediate family, to trusts for the benefit of such family members and to partnerships in which such family members are the only partners; provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Award Agreement. Any Option granted to a Non-Employee Director and outstanding on the date of his death may be exercised by the legal representative or legatee of the optionee for a period of one year from the date of death or until the expiration of the stated term of the Option, if earlier. (D) Options granted under this Section 5(c) may be exercised only by written notice to the Company specifying the number of shares to be purchased. Payment of the full purchase price of the shares to be purchased may be made by one or more of the methods specified in Section 5(a)(iv). An optionee shall have the rights of a shareholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options. SECTION 6. STOCK APPRECIATION RIGHTS; DISCRETIONARY PAYMENTS. (a) Nature of Stock Appreciation Right. A Stock Appreciation Right is an Award entitling the recipient to receive an amount in cash or shares of Stock (or in a form of payment permitted under Section 6(e) below) or a combination thereof having a value equal to (or if the Committee shall so determine at time of grant, less than) the excess of the Fair Market Value of a share of Stock on the date of exercise over the exercise price per share set by the Committee at the time of grant (or over the option exercise price per share, if the Stock Appreciation Right was granted in tandem with a Stock Option) multiplied by the number of shares with respect to which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (b) Grant and Exercise of Stock Appreciation Rights. Stock Appreciation Rights may be granted to any employees of the Company or any Subsidiary by the Committee in tandem with, or independently of, any Stock Option granted pursuant to Section 5(a) of the Plan. In the case of a Stock Appreciation Right granted in tandem with a Non-Qualified Stock Option, such Right may be granted either at or after the time of the grant of such Option. In 10 11 the case of a Stock Appreciation Right granted in tandem with an Incentive Stock Option, such Right may be granted only at the time of the grant of the Option. A Stock Appreciation Right or applicable portion thereof granted in tandem with a Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, at the Committee's discretion, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall only so terminate if and to the extent that the number of shares covered by the exercise or termination of the related Stock Option exceeds the number of shares not covered by such Stock Appreciation Right. (c) Terms and Conditions of Stock Appreciation Rights. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined from time to time by the Committee, subject to the following: (i) Stock Appreciation Rights granted in tandem with Stock Options shall be exercisable at such time or times and to the extent that the related Stock Options shall be exercisable. (ii) Upon exercise of a Stock Appreciation Right, the applicable portion of any related Stock Option shall be surrendered. (iii) Stock Appreciation Rights granted in tandem with a Stock Option shall be transferable only when and to the extent that the underlying Stock Option would be transferable. Stock Appreciation Rights not granted in tandem with a Stock Option shall not be transferable otherwise than by will or the laws of descent or distribution. All Stock Appreciation Rights shall be exercisable during the participant's lifetime only by the participant or the participant's legal representative. (d) Settlement in the Form of Restricted Shares. Shares of Stock issued upon exercise of a Stock Appreciation Right shall be free of all restrictions under this Plan, except as otherwise provided in this Plan. SECTION 7. RESTRICTED STOCK AWARDS. (a) Nature of Restricted Stock Award. The Committee may grant Restricted Stock Awards to any employees of the Company or any Subsidiary. In no event shall the number of shares of Stock issued pursuant to the grant of Restricted Stock Awards or the award of Unrestricted Stock for consideration less than Fair Market Value at the time of the award exceed in the aggregate 10% of the maximum number of shares of Stock reserved and available for issuance under this Plan, as such number may be adjusted in accordance with Section 3 hereof. A Restricted Stock Award is an Award entitling the recipient to acquire, at no cost or for a purchase price determined by the Committee, shares of Stock subject to such restrictions 11 12 and conditions as the Committee may determine at the time of grant ("Restricted Stock"). Conditions may be based on continuing employment and/or achievement of pre-established performance goals and objectives. A Restricted Stock Award may be granted to an employee by the Committee in lieu of any compensation otherwise due to such employee. (b) Award Agreement. A participant who is granted a Restricted Stock Award shall have no rights with respect to such Award unless the participant shall have accepted the Award within 60 days (or such shorter date as the Committee may specify) following the award date by making payment to the Company by certified or bank check or other instrument or form of payment acceptable to the Committee in an amount equal to the specified purchase price, if any, of the shares covered by the Award and by executing and delivering to the Company a Restricted Stock Award Agreement in such form as the Committee shall determine. (c) Rights as a Shareholder. Upon complying with Section 7(b) above, a participant shall have all the rights of a shareholder with respect to the Restricted Stock including voting and dividend rights, subject to non-transferability restrictions and Company repurchase or forfeiture rights described in this Section 7 and subject to such other conditions contained in the Award Agreement. Unless the Committee shall otherwise determine, certificates evidencing shares of Restricted Stock shall remain in the possession of the Company until such shares are vested as provided in Section 7(e) below. (d) Restrictions. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein. In the event of termination of employment of the participant by the Company and its Subsidiaries for any reason (including death, Disability, Normal Retirement and for Cause), the Company shall have the right, at the discretion of the Committee, to repurchase shares of Restricted Stock with respect to which conditions have not lapsed at their purchase price, or to require forfeiture of such shares to the Company if acquired at no cost, from the participant or the participant's legal representative. The Company must exercise such right of repurchase or forfeiture not later than the 90th day following such termination of employment (unless otherwise specified in the Award Agreement). (e) Vesting of Restricted Stock. The Committee at the time of grant shall specify the date or dates and/or the attainment of performance goals, objectives and other conditions on which the non-transferability of the Restricted Stock and the Company's right of repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or the attainment of such pre-established goals, objectives and other conditions, the shares on which all restrictions have lapsed shall no longer be Restricted Stock and shall be deemed "vested." The Committee at any time may accelerate such date or dates and otherwise waive or, subject to Section 12, amend any conditions of the Award. 12 13 (f) Waiver, Deferral and Reinvestment of Dividends. The Restricted Stock Award Agreement may require or permit the immediate payment, waiver, deferral or investment of dividends paid on the Restricted Stock. SECTION 8. UNRESTRICTED STOCK AWARDS. (a) Grant or Sale of Unrestricted Stock. The Committee may, in its sole discretion, grant (or sell at a purchase price determined by the Committee) to any employees of the Company or any Subsidiary shares of Stock free of any restrictions under the Plan ("Unrestricted Stock"). The number of shares of Stock issued pursuant to all awards of Unrestricted Stock shall be limited as described in Section 7(a) hereof. Shares of Unrestricted Stock may be granted or sold as described in the preceding sentence in respect of past services or other valid consideration, or in lieu of any cash compensation due or payable to such employee. (b) Elections to Receive Unrestricted Stock In Lieu of Compensation. Upon the request of an employee and with the consent of the Committee, each employee may, pursuant to an irrevocable written election delivered to the Company no later than the date or dates specified by the Committee, receive a portion of the cash compensation otherwise due to him in Unrestricted Stock (valued at Fair Market Value on the date or dates the cash compensation would otherwise be paid). Such Unrestricted Stock may be paid to the employee at the same time as the cash compensation would otherwise be paid, or at a later time, as specified by the employee in the written election. (c) Elections to Receive Unrestricted Stock in Lieu of Directors' Fees. Each Non-Employee Director may, pursuant to an irrevocable written election delivered to the Company no later than the date or dates specified by the Committee, receive all or a portion of such fees in Unrestricted Stock (valued at Fair Market Value on the date or dates the directors' fees would otherwise be paid). Such Unrestricted Stock may be paid to the Non-Employee Director at the same time the directors' fees would otherwise have been paid, or at a later time, as specified by the Non-Employee Director in the written election. (d) Restrictions on Transfers. The right to receive Unrestricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and distribution. SECTION 9. PERFORMANCE SHARE AWARDS. (a) Nature of Performance Shares. A Performance Share Award is an award entitling the recipient to acquire shares of Stock upon the attainment of specified performance goals. The Committee may make Performance Share Awards independently of or in connection with the granting of any other Award under the Plan. Performance Share Awards may be granted under the Plan to any employees of the Company or any Subsidiary, including 13 14 those who qualify for awards under other performance plans of the Company. The Committee in its sole discretion shall determine whether and to whom Performance Share Awards shall be made, the performance goals applicable under each such Award, the periods during which performance is to be measured, and all other limitations and conditions applicable to the awarded Performance Shares; provided, however, that the Committee may rely on the performance goals and other standards applicable to other performance based plans of the Company in setting the standards for Performance Share Awards under the Plan. (b) Restrictions on Transfer. Performance Share Awards and all rights with respect to such Awards may not be sold, assigned, transferred, pledged or otherwise encumbered. (c) Rights as a Shareholder. A participant receiving a Performance Share Award shall have the rights of a shareholder only as to shares actually received by the participant under this Plan and not with respect to shares subject to the Award but not actually received by the participant. A participant shall be entitled to receive a stock certificate evidencing the acquisition of shares of Stock under a Performance Share Award only upon satisfaction of all conditions specified in the written instrument evidencing the Performance Share Award (or in the performance plan adopted by the Committee). (d) Termination. Except as may otherwise be provided by the Committee at any time, a participant's rights in all Performance Share Awards shall automatically terminate upon the participant's termination of employment by the Company and its Subsidiaries for any reason (including death, Disability, Normal Retirement, termination without Cause and termination for Cause). (e) Acceleration, Waiver, Etc. At any time prior to the participant's termination of employment by the Company and its Subsidiaries, the Committee may in its sole discretion accelerate, waive or, subject to Section 12, amend any or all of the goals, restrictions or conditions imposed under any Performance Share Award. SECTION 10. TAX WITHHOLDING. (a) Payment by Participant. Each participant shall, no later than the date as of which the value of an Award or of any Stock or other amounts received thereunder first becomes includable in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, all Federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (b) Payment in Shares. Subject to the approval of the Committee, a participant may elect to have such tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued pursuant to any Award a number of 14 15 shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due, or (ii) transferring to the Company shares of Stock owned by the participant with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due. SECTION 11. TRANSFER, LEAVE OF ABSENCE, ETC. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or (b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee's right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Committee otherwise so provides in writing. SECTION 12. AMENDMENTS AND TERMINATION. The Board may at any time amend or discontinue the Plan and the Committee may at any time amend or cancel any outstanding Award (or provide substitute Awards at the same or reduced exercise or purchase price or with no exercise or purchase price, but such price, if any, must satisfy the requirements which would apply to the substitute or amended Award if it were then initially granted under this Plan) for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Award without the holder's consent. SECTION 13. STATUS OF PLAN. With respect to the portion of any Award which has not been exercised and any payments in cash, stock or other consideration not received by a participant, a participant shall have no rights greater than those of a general creditor of the Company unless the Committee shall otherwise expressly determine in connection with any Award or Awards. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the Company's obligations to deliver Stock or make payments with respect to Awards hereunder; provided that the existence of such trusts or other arrangements is consistent with the provision of the foregoing sentence. 15 16 SECTION 14. CHANGE OF CONTROL PROVISIONS. Upon the occurrence of a Change of Control as defined in this Section 14: (a) Each Stock Option, Stock Appreciation Right and Performance Share Award shall automatically become fully exercisable unless the Committee shall otherwise expressly provide at the time of grant. (b) Restrictions and conditions on Awards of Restricted Stock shall automatically be deemed waived, and the recipients of such Awards shall become entitled to receipt of the Stock subject to such Awards. (c) To the extent Section 14(a) hereof is not applicable to any Stock Options, Stock Appreciation Rights or Performance Share Awards, the Committee may at any time prior to or after a Change of Control accelerate the exercisability of any Stock Options, Stock Appreciation Rights and Performance Share Awards to the extent it shall in its sole discretion determine. (d) "Change of Control" shall mean the occurrence of any one of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Act) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Act) (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) persons who, as of the date hereof, constitute the Company's Board (the "Incumbent Board") cease for any reason, including without limitation as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board; provided that any person becoming a director of the Company subsequent to the date hereof whose nomination was approved by at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this Plan, be considered a member of the Incumbent Board; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation or other entity, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the 16 17 combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. SECTION 15. GENERAL PROVISIONS. (a) No Distribution; Compliance with Legal Requirements. The Committee may require each person acquiring shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. No shares of Stock shall be issued pursuant to an Award until all applicable securities laws and other legal and stock exchange requirements have been satisfied. The Committee may require the placing of such stop-orders and restrictive legends on certificates for Stock and Awards as it deems appropriate. (b) Delivery of Stock Certificates. Delivery of Stock certificates to participants under this Plan shall be deemed effected for all purposes when the Company or a stock transfer agent of the Company shall have delivered such certificates in the United States mail, addressed to the participant, at the participant's last known address on file with the Company. (c) Other Compensation Arrangements; No Employment Rights. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. Neither the adoption of this Plan nor the grant of any Award to any employer shall confer upon any employee any right to continued employment with the Company or any Subsidiary. SECTION 16. EFFECTIVE DATE OF PLAN. This Plan shall become effective upon approval by the holders of a majority of the shares of capital stock of the Company present or represented and entitled to vote at a meeting of stockholders. Subject to such approval by the stockholders, and to the requirement that no Stock may be issued hereunder prior to such approval, Stock Options and other Awards may be granted hereunder on and after adoption of this Plan by the Board. 17 18 SECTION 17. GOVERNING LAW. This Plan shall be governed by Massachusetts law except to the extent such law is preempted by Federal law. EX-10.2.2 3 AMENDMENTS TO EMPLOYEE STOCK OWNERSHIP PLAN 1 Exhibit 10.2.2 Fifth Amendment --------------- to MASSBANK FOR SAVINGS -------------------- EMPLOYEES' STOCK OWNERSHIP PLAN AND TRUST ----------------------------------------- A. The Trust Agreement dated April 16, 1986 by and between MASSBANK FOR SAVINGS, a Massachusetts savings bank having its principal place of business in Reading, Massachusetts (the "Company"), and State Street Bank and Trust Company, as previously amended, is hereby amended as follows: 1. Effective November 1, 1989, Section 2.09 is hereby amended by adding the following to the end thereof: "In determining the Compensation of a Member for purposes of this compensation limitation, the rules of Section 414(q)(6) of the Code shall apply, except that in applying such rules, the term "family" shall include only the spouse of the Member and any lineal descendants of the Member that have not attained age 19 before the close of the Plan Year. If, as a result of the application of such rules the adjusted limitation is exceeded, then the limitation shall be pro rated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation." 2. Effective November 1, 1994, Section 2.09 is hereby further amended by adding the following to the end thereof: "In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, beginning in such calendar year over which compensation is determined (determination period). If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by 2 a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision." 3. Effective January 1, 1993, the following Article XV is added immediately following the end of Article XIV: "ARTICLE XV DIRECT ROLLOVERS 15.01 APPLICATION OF THIS ARTICLE. This Article applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. 15.02 WAIVER OF 30-DAY NOTICE. Notwithstanding the foregoing, if a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distributions may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (a) the Committee clearly informs the Member that the Member has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (b) the Member, after receiving the notice, affirmatively elects a distribution. 15.03 DEFINITIONS. Whenever used in this Article, the following words shall have the following meanings: (a) ELIGIBLE ROLLOVER DISTRIBUTION: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal 2 3 periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (b) ELIGIBLE RETIREMENT PLAN: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) DISTRIBUTEE: A distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (d) DIRECT ROLLOVER: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee." B. The Trust Agreement is in all other respects hereby confirmed. 3 4 IN WITNESS WHEREOF, this Amendment has been signed and sealed on behalf of the Bank by its duly authorized officer this 5th day of April, 1995. MASSBANK FOR SAVINGS By: /s/ Gerard H. Brandi ----------------------------------- President 4 5 Exhibit 10.2.2 Sixth Amendment --------------- to MASSBANK EMPLOYEES' STOCK OWNERSHIP PLAN AND TRUST -------------------------------------------------- A. The Trust Agreement dated April 16, 1986 by and between MASSBANK, a Massachusetts savings bank having its principal place of business in Reading, Massachusetts (the "Company"), and State Street Bank and Trust Company, as previously amended, is hereby further amended as follows, to reflect the change of the legal name of the Company: 1. Section 1.01 is hereby amended by deleting the first sentence thereof and substituting the following therefor: "There is hereby established hereunder a trust known as the 'MASSBANK EMPLOYEES' STOCK OWNERSHIP TRUST.'" 2. Section 2.08 is hereby amended by deleting such section in its entirety and substituting the following therefor: "2.08 'Company' means MASSBANK, or any successor to all or a major portion of its business which adopts and continues the Plan and Trust pursuant to Section 10.05." 3. Section 2.17 is hereby amended by deleting such section in its entirety and substituting the following therefor: "2.17 'Plan' means the 'MASSBANK EMPLOYEES' STOCK OWNERSHIP PLAN' as set forth herein, and as it may be amended from time to time." 4. Section 13.03 is hereby amended by deleting the last sentence thereof and substituting the following therefor: "Subject to Sections 13.04 and 13.06, each Participating Company hereby authorizes MASSBANK to exercise on its behalf all such rights, powers, and duties, including amendment or termination of the Plan." B. This Sixth Amendment is effective as of November 1, 1996. 6 C. Except as amended by Section A above, the Trust Agreement is in all other respects hereby confirmed. IN WITNESS WHEREOF, this Sixth Amendment has been signed and sealed on behalf of the Bank by its duly authorized officer, this 6th day of June, 1997. MASSBANK By: /s/ Gerard H. Brandi ----------------------------------- President 2 EX-13 4 ANNUAL REPORT 1 FINANCIAL HIGHLIGHTS MASSBANK CORP. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Total assets $925,403 $888,237 $854,542 $ 843,647 $ 855,881 Mortgage loans 248,798 224,139 220,603 220,269 219,347 Other loans 23,505 25,522 28,582 30,547 29,699 Allowance for loan losses 2,334 2,237 2,529 2,566 2,261 Investments(1) 635,694 622,645 586,768 568,635 589,666 Real estate acquired through foreclosure -- 503 255 129 699 Deposits 809,850 788,350 753,657 759,676 766,363 Stockholders' equity 103,779 92,250 90,817 74,504 80,075 - ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- OPERATING DATA: Interest and dividend income $ 60,733 $ 58,109 $ 56,611 $ 51,451 $ 51,541 Interest expense 34,681 33,062 30,896 26,152 27,485 - ------------------------------------------------------------------------------------------------------------------- Net interest income 26,052 25,047 25,715 25,299 24,056 Provision for loan losses 260 160 170 705 671 Gains (losses) on securities, net 1,939 868 92 (533) 198 Other non-interest income 1,859 1,797 1,856 3,070 2,307 Non-interest expense 13,425 12,124 13,178 14,213 14,243 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 16,165 15,428 14,315 12,918 11,647 Income tax expense 5,998 6,001 5,556 4,733 4,711 Change in accounting principle -- -- -- -- (241) - ------------------------------------------------------------------------------------------------------------------- Net income $ 10,167 $ 9,427 $ 8,759 $ 8,185 $ 6,695 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- OTHER DATA: Yield on average interest-earning assets 6.81% 6.84% 6.90% 6.22% 6.25% Cost of average interest-bearing liabilities 4.30 4.27 4.11 3.41 3.57 Interest rate spread 2.51 2.57 2.79 2.81 2.68 Net interest margin 2.93 2.96 3.15 3.07 2.93 Non-interest expense to average assets(5) 1.39 1.40 1.57 1.67 1.68 Efficiency ratio(2)(5)(6) 43.0 43.5 47.4 50.8 53.3 Return on assets (net income/average assets) 1.12 1.08 1.04 0.96 0.79 Return on equity (net income/average stockholders' equity) 10.51 10.65 10.65 10.62 8.98 Return on average realized equity(3) 11.11 11.01 10.81 10.62 8.98 Percent non-performing loans to total loans 0.65 0.64 0.97 0.84 0.51 Percent non-performing assets to total assets 0.19 0.24 0.31 0.26 0.23 Stockholders' equity to assets, at year-end 11.21 10.39 10.63 8.83 9.36 Book value per share, at year-end(4) $ 29.06 $ 25.75 $ 24.84 $ 20.09 $ 20.46 Earnings per share:(4) Basic 2.88 2.65 2.43 2.19 1.71 Diluted 2.77 2.58 2.34 2.13 1.67 Cash dividends declared per share(4) 0.885 0.69 0.5475 0.45 0.34 Dividend payout ratio 31% 26% 23% 21% 20% - -------------------------------------------------------------------------------------------------------------------
(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 net unrealized gains or losses on securities available for sale. (4) All share information presented has been adjusted to reflect the 4-for-3 and 3-for-2 split of the Company's common stock effective September 15, 1997 and September 9, 1994, respectively. (5) Excludes non-recurring non-interest expense of $778 thousand in 1997. (6) Excludes $620 thousand in market appreciation on securities contributed to the MASSBANK Charitable Foundation in 1997. 2 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. Certain amounts reported for prior years have been reclassified to conform to the 1997 presentation. The discussion contains certain forward-looking statements regarding the future performance of the Company. All forward-looking information is inherently uncertain and actual results may differ substantially from the assumptions, estimates, or expectations reflected or contained in the forward-looking information. The financial condition and results of operations of MASSBANK Corp. (the "Company") essentially reflect the operations of its subsidiary, MASSBANK (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. RECENT DEVELOPMENTS ACQUISITION OF GLENDALE CO-OPERATIVE BANK On February 26, 1997 the Company's wholly-owned subsidiary, MASSBANK, executed an agreement with the Glendale Cooperative Bank ("Glendale") pursuant to which MASSBANK would acquire all of the outstanding shares of Glendale at a price of $28.00 per share. The transaction was valued at $7.38 million. Glendale operated a single banking office in the city of Everett with total assets of $35.6 million. On July 21, 1997 MASSBANK consummated the acquisition. The transaction was accounted for as a purchase. FINANCIAL CONDITION Total assets at December 31, 1997 were $925.4 million, an increase of 4.2%, or $37.2 million from $888.2 million a year ago. The increase is largely attributable to the securities, loans and other assets acquired in the Glendale purchase. Glendale on the closing date had total assets of $35.6 million. Short-term investments in 1997 decreased $24.6 million. This was fully offset by increases in term federal funds sold and trading securities. Goodwill at year-end 1997 totaled $1.5 million reflecting the premium paid in connection with the Glendale purchase. The Bank's total loan portfolio increased $22.6 million to $272.3 million at December 31, 1997 reflecting approximately $14.0 million in loans acquired in connection with the Glendale purchase and modest internal growth. Internal net loan growth in 1997 was approximately 3.4%, or $8.6 million, compared with a slight net increase in loans of $0.5 million, in 1996. Loan originations totaled $58.6 million in 1997, up 14.0%, or $7.2 million compared to $51.4 million in 1996. The level of principal amortization and payoffs in the Bank's portfolio continues to be high, making it difficult to grow the portfolio. This is due in part to the shorter term mortgages that the Bank originates and the prevailing low interest rates which encourage borrowers to prepay higher rate mortgages. Total investments consisting of investment securities and other short term investments, including term federal funds sold and interest-bearing bank deposits, increased from $622.6 million at December 31, 1996 to $635.7 million at December 31, 1997. These investments are principally in federal funds sold, short-term U.S. Treasury notes and government agency fifteen year mortgage-backed securities. Essentially all of the Bank's investment securities are classified as either available for sale or trading securities. Investment securities available for sale and trading securities provide liquidity, facilitate interest rate risk management and enhance the Bank's ability to respond to customers' needs should loan demand increase and/or deposits decline. Adding to the increase in total investments was a change in net unrealized gains on securities available for sale from $6.9 million at December 31, 1996 to $15.5 million at December 31, 1997, an $8.6 million increase in market value. The increase in market value of the investment securities portfolio is directly related to the upward movement in both bond and stock prices in 1997. The change in the market value of the Bank's securities available for sale also had the effect of increasing stockholders' equity by $5.1 million since year-end 1996. The net unrealized gains on securities available for sale, net of tax effect reported as part of stockholders' equity totaled $9.1 million at year-end 1997, up from $4.0 million at December 31, 1996. Total stockholders' equity was $103.8 million at December 31, 1997, up $11.5 million from $92.3 million at December 31, 1996. Also contributing to the increase in stockholders' equity was the Company's record net income of $10.2 million in 1997 and the issuance of common stock under the Company's stock option plan. These were partially offset by the payment of $3.1 million in dividends to stockholders and the cost of the additional shares of treasury stock repurchased during the year of $1.7 million. 25 3 FINANCIAL CONDITION (continued) Record earnings in 1997 and a strong capital position have permitted the Company to continue to reward its shareholders through the payment of higher quarterly cash dividends. The Company's Board of Directors has increased the quarterly cash dividend paid to shareholders twice during 1997. Annual cash dividends per share paid to shareholders during 1997 increased 28% over the prior year. The Company's book value per share at December 31, 1997 was $29.06, up $3.31 or 12.9% from the prior year. 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 increased by $21.5 million or 2.7% during the twelve months ended December 31, 1997, from $788.4 million at year end 1996 to $809.9 million at the end of 1997. The increase is attributable to the $29.8 million in deposits acquired in connection with the Glendale purchase. Also, in 1997, the Bank experienced some modest deposit outflow due to the strong performance of the stock market and mutual funds which were both fierce competitors for the savers' dollars. ASSET QUALITY Net loans represented 29.2% of total assets at December 31, 1997 compared to 27.9% of total assets at December 31, 1996. The Bank's investment securities and other short-term investments, representing 68.7% of total assets at December 31, 1997, consisted primarily of U.S. Treasury notes, government agency mortgage-backed securities and federal funds sold. At December 31, 1997, the Bank's loan portfolio consisted of residential mortgages of $244.9 million, commercial mortgages of $3.9 million and consumer loans of $23.5 million. Non-performing assets were $1.8 million at December 31, 1997, representing 0.19% of total assets. This compares to $2.1 million, or 0.24% of total assets, at December 31, 1996. At year end 1997, the Bank's allowance for loan losses was approximately $2.3 million, representing 131.8% of non-performing loans and 0.86% of total loans. The Bank believes that its allowance for loan losses is adequate to cover the risks inherent in the loan portfolio under current conditions. Also, as of year-end 1997, the Company had no real estate acquired through foreclosure on its balance sheet. RESULTS OF OPERATIONS COMPARISON OF THE YEARS 1997 AND 1996 MASSBANK Corp. recorded record net income for the year ended December 31, 1997 of $10.2 million or $2.88 in basic earnings per share compared to $9.4 million or $2.65 in basic earnings per share for the year ended December 31, 1996. On a diluted basis, the Company earned $2.77 per share in 1997, up 7.4% or $0.19 per share from the $2.58 in diluted earnings per share reported in 1996. In 1997, MASSBANK achieved record breaking results in net income, earnings per share and return on average realized equity, and increased its return on average assets. Return on average realized equity and return on average assets improved to 11.11% and 1.12% in 1997 from 11.01% and 1.08% in 1996, respectively. The Company's favorable financial performance in 1997 can be attributed to an improvement in net interest income and higher securities gains, partially offset by an increase in non-interest expenses and provision for loan losses. Also, in 1997, the Bank received a non-recurring tax benefit of approximately $260,000 from a donation of appreciated securities made to endow the MASSBANK Charitable Foundation, a tax exempt private foundation established for the purpose of making grants in future years to benefit the Bank's local communities. NET INTEREST INCOME The Company's net interest income on a fully taxable equivalent ("FTE") basis was $26.2 million in 1997, an increase of $1.0 million over the prior year. This year's improvement in net interest income reflects the positive effect of earning asset growth exceeding the negative effect of a slightly lower net interest margin. The Company's average earning assets increased $42.3 million or 5% to $894.6 million in 1997, up from $852.3 million in 1996. The Company's net interest margin was 2.93% in 1997, slightly below its 1996 net interest margin of 2.96%. The tables on pages 34 and 35 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. 26 4 INTEREST AND DIVIDEND INCOME Interest and dividend income on a fully taxable equivalent basis was $60.9 million for the year ended December 31, 1997, compared to $58.3 million for the year ended December 31, 1996. The average total earning assets of the Company increased to $894.6 million in 1997, up $42.3 million from $852.3 million in 1996. As reflected in the table on page 35, the combination of yield declines in loans and investment securities, partially offset by yield increases in federal funds sold and short-term investments, resulted in an overall decline in yield on total average earning assets of 3 basis points. The weighted average yield on earning assets for the year ended December 31, 1997 was 6.81% compared to 6.84% in the prior year. As exhibited in the rate/volume analysis table on page 34, the total effect of lower earning asset rates on interest income in 1997 was a $270 thousand decline from 1996. Conversely, the total effect of higher average earning assets on interest income in 1997 was a $2.9 million increase over 1996, resulting in a net increase in total interest and dividend income of $2.6 million over 1996. INTEREST EXPENSE Total interest expense increased 4.9% to $34.7 million for the year ended December 31, 1997 from $33.1 million for the year ended December 31, 1996. This increase is due to an increase in the Company's average deposits, from $774.4 million in 1996 to $807.3 million in 1997, coupled with an increase in the Company's average cost of funds from 4.27% in 1996 to 4.30% in 1997. The increase in the Company's average total deposits in 1997 is attributable to the deposits acquired in connection with the Glendale purchase and internal growth. As reflected in the table on page 35, the migration from lower cost savings deposits to higher cost CDs, combined with the growth in CDs in 1997, contributed significantly to the Company's increased cost of funds in 1997. As exhibited in the rate/volume analysis table on page 34, the effect on total interest expense from changes in interest bearing deposit rates from a year ago was a $219 thousand decrease from 1996. Conversely, the total effect of higher average deposits on interest expense in 1997 was a $1.8 million increase over 1996, resulting in a net increase in total interest expense of $1.6 million over 1996. PROVISION FOR LOAN LOSSES The provision for loan losses in 1997 was $260 thousand compared to $160 thousand in 1996. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for 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, 1997, the allowance for loan losses was $2.3 million representing 131.8% of non-performing loans. The Bank's non-performing loans totaled $1.8 million at December 31, 1997 compared to $1.6 million a year earlier. Net charge-offs totaled $268 thousand in 1997 compared to $452 thousand in 1996. Management believes that the allowance for 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, and other non-interest income. Non-interest income increased to $3.8 million for the year ended December 31, 1997, from $2.7 million for the year ended December 31, 1996. This improvement is due to an increase in securities gains in 1997. Net gains on securities totaled $1.9 million in 1997 compared to $868 thousand in 1996. Included in the $1.9 million in securities gains is $620 thousand in market appreciation on securities contributed to the MASSBANK Charitable Foundation. All other non-interest income combined increased $62 thousand to $1.9 million from $1.8 million in the prior year. NON-INTEREST EXPENSE Non-interest expenses (i.e., operating expenses) increased by $1.3 million in 1997, from $12.1 million a year ago. This increase is due largely to an increase in those expenses which are tied to the Company's stock performance and non-recurring expenses incurred in 1997 which are summarized below: Salaries and employee benefits increased by $528 thousand or 7.3%, to $7.7 million in 1997, from $7.2 million in 1996. The increase reflects a $247 thousand increase in Employee Stock Ownership Plan ("ESOP") and Deferred Compensation Plan expenses which are tied to MASSBANK Corp.'s stock performance. The price of MASSBANK Corp. stock increased by $19.03 or 66.6% in 1997, from $28.59 at December 31, 1996 to $47.62 at December 31, 1997. In addition, salaries increased by $289 thousand due primarily to normal salary increases granted to employees. These increases were partially offset by a decrease in the costs of employee retirement benefits of $86 thousand. The expense for all other employee benefits combined increased $78 thousand over 1996. 27 5 NON-INTEREST EXPENSE (continued) Occupancy and equipment expense increased by $119 thousand to $2.1 million in 1997. This is due largely to an increase in depreciation expense resulting from building and leasehold improvements and the computer equipment that the bank purchased in conjunction with its computer conversion in July, 1997. The Bank made this change to its computer systems to enhance its technological capabilities in order to better service its customers and continue to provide increased efficiencies throughout the bank. Data processing expenses were reduced by $170 thousand to $438 thousand in 1997, from $608 the previous year. This decrease reflects $150 thousand in total credits that the bank negotiated as part of its initial contract with a new data center which it converted to in July, 1997. The temporary reduction in data processing expense was used to defray nonrecurring expenses which the bank incurred in converting to the new data center. Professional services expenses increased by $67 thousand to $407 thousand in 1997, from $340 thousand in 1996. This increase was due mostly to an increase of $40 thousand in legal fees. The non-recurring merger and acquisition related expenses incurred in connection with the acquisition of the Glendale Co-operative Bank totaled $156 thousand in 1997. Advertising and marketing expenses were reduced by $33 thousand to $187 thousand in 1997, from $220 thousand in 1996. The amortization of intangibles expense was $251 thousand in 1997, up from $230 thousand in 1996. This increase is due to the Glendale acquisition. Deposit insurance expense in 1997 increased $103 thousand over 1996 due to increases in the FDIC deposit insurance and Depositors Insurance Fund ("DIF") assessments. The DIF insures customer deposits in excess of the FDIC insurance limits. The increased assessments are attributable to higher deposit volume and the FDIC's Financing Corporation (FICO) debt service assessment which became applicable to all insured institutions as of January 1, 1997, in accordance with the Deposit Insurance Act of 1996. The bank's contributions expense increased to $664 thousand in 1997, from $60 thousand in the prior year. In the second quarter 1997, the bank established and endowed a tax exempt private foundation -- the "MASSBANK Charitable Foundation" -- for the purpose of making grants in future years to benefit the bank's local communities. The bank contributed appreciated equity securities valued at $622 thousand. This expense will benefit the bank by reducing its contributions expense in future years, since many of the contributions previously made by the bank will now be made by the Foundation. Other expenses were reduced by $94 thousand to $1.4 million in 1997, from $1.5 million in 1996. This decrease is essentially due to a reduction in real estate acquired through foreclosure expenses. INCOME TAX EXPENSE The Company recorded a tax expense of $6.0 million in 1997 and 1996. The effective income tax rate for the year ended December 31, 1997 was 37.1%, a decrease from 38.9% in 1996. In 1997, the Bank received a non-recurring tax benefit of approximately $260,000 as a result of having donated appreciated securities to establish and endow the MASSBANK Charitable Foundation. For further information on income taxes, see Note 12 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS Comparison of the Years 1996 and 1995 Massbank Corp. reported record net income for the year ended December 31, 1996 of $9.4 million or $2.65 in basic earnings per share compared to $8.8 million or $2.43 in basic earnings per share for the year ended December 31, 1995. On a diluted basis, the Company earned $2.58 per share in 1996, up 10.3% or $0.24 per share from the $2.34 in diluted earnings per share reported in 1995. This is the fourth consecutive year that the Company has achieved record breaking results in net income, earnings per share and return on average realized equity, and the sixth consecutive year of increase in the Company's return on average assets. Return on average realized equity and return on average assets improved to 11.01% and 1.08% in 1996 from 10.81% and 1.04% in 1995, respectively. The Company's improved financial performance in 1996 can be attributed to several factors. Non-interest expenses were down again in 1996 due to incremental improvements throughout the Bank and another substantial drop in deposit insurance expense; securities gains increased significantly over 1995; and the provision for loan losses decreased slightly. Offsetting these factors were decreases in net interest income and other non-interest income. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis totaled $25.2 million for 1996, compared to $25.8 million for 1995. The decrease of $0.6 million was due principally to a decrease in net interest margin. The impact of the lower net interest margin in 1996 was partially offset by an increase in the Company's average earning assets from $822.0 million in 1995 to $852.3 million in 1996. The Company's net interest margin in 1996 was 2.96%, 19 basis points lower than the 3.15% of the prior year. 28 6 NET INTEREST INCOME (continued) The tables on pages 34 and 35 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 $58.3 million for the year ended December 31, 1996, compared to $56.7 million for the year ended December 31, 1995. The weighted average yield on earning assets for the year ended December 31, 1996 decreased to 6.84% from 6.90% for the year ended December 31, 1995. The average total earning assets of the Company increased to $852.3 million in 1996, up $30.3 million from $822.0 million in 1995. Interest on loans decreased $0.1 million to $19.4 million for the year ended December 31, 1996. The decrease in interest income earned on loans was due principally to a decrease in yield. The yield on the Bank's loans declined 23 basis points to 7.70% for the year ended December 31, 1996 compared to 7.93% for the year ended December 31, 1995. The reduction in yield was partially offset by an increase of $6.1 million in average loan volume. The decline in market interest rates in the first half of 1996 compared to 1995 generated more residential loan growth for the Bank, but at lower yields. This, along with floating rate loans and adjustable rate mortgage loans which repriced downward, had the greatest impact on the Bank's loan yields during 1996. 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 $1.6 million to $38.8 million in 1996 from $37.2 million in 1995. This increase resulted primarily from an increase of $24.2 million in average volume. Average total investments were $600.3 million in 1996 compared to $576.1 million in 1995. The weighted average yield on investments was 6.47% in 1996 and 1995. INTEREST EXPENSE Total interest expense increased 7.0% to $33.1 million for the year ended December 31, 1996 from $30.9 million for the year ended December 31, 1995. This increase is due to an increase in the Company's average cost of funds from 4.11% in 1995 to 4.27% in 1996, coupled with an increase of $21.9 million in the Company's average deposits, from $752.5 million in 1995 to $774.4 million in 1996. The growth in average deposits is attributable to an increase in time certificates of deposit (CD). The average CD volume increased by $52.3 million to $352.4 million in 1996, from $300.1 million in 1995. Partially offsetting this increase was a reduction of $30.4 million in the average savings, and demand and NOW deposit volume, from $452.4 in 1995 to $422.0 million in 1996. The migration from lower cost savings deposits to higher cost (longer term) CDs, combined with the growth in CDs in 1996, contributed significantly to the Company's increased cost of funds in 1996. PROVISION FOR LOAN LOSSES The provision for loan losses in 1996 was $160 thousand compared to $170 thousand in 1995. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for 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, 1996, the allowance for loan losses was $2.2 million representing 139.7% of non-performing loans. The Bank's non-performing loans totaled $1.6 million at December 31, 1996 compared to $2.4 million a year earlier. Net charge-offs totaled $452 thousand in 1996 compared to $207 thousand in 1995. Management believes that the allowance for 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 on securities, deposit account service fees and other non-interest income. Non-interest income increased to $2.7 million for the year ended December 31, 1996, from $1.9 million for the year ended December 31, 1995. This improvement is due to a significant increase in securities gains, the results of a strong stock market in 1996, partially offset by a slight decrease in all other non-interest income. Net gains on securities totaled $868 thousand in 1996 compared to $92 thousand in 1995. All other non-interest income decreased from $1.9 million in 1995 to $1.8 million in 1996 due primarily to non-recurring income recorded in 1995. In 1995, the Company recorded interest on tax settlements which it had received from the IRS totaling $51 thousand. 29 7 NON-INTEREST EXPENSE Non-interest expenses (i.e., operating expenses) decreased by $1.1 million or 8.0% to $12.1 million in 1996, from $13.2 million in 1995. Salaries and employee benefits decreased by $45 thousand to $7.2 million in 1996 from $7.3 million in 1995. This improvement was due to a decrease in the costs of employee retirement benefits partially offset by a modest increase in salaries due to normal salary increases granted to employees. Occupancy and equipment expense decreased by $14 thousand to approximately $2.0 million in 1996 due mostly to a reduction in depreciation expense. Data processing and professional services expenses were reduced by $74 thousand to $948 thousand in 1996, from approximately $1.0 million the previous year. Deposit insurance expense in 1996 took another substantial drop due to a further reduction in Federal Deposit Insurance Corporation ("FDIC") deposit insurance rates. FDIC deposit insurance rates were reduced to an annual minimum of $2 thousand for 1996. As a result, total deposit insurance expense decreased from $914 thousand in 1995 to $13 thousand in 1996. Deposit insurance expense also includes an assessment from the Depositors Insurance Fund ("DIF") to insure customer deposits in excess of the FDIC insurance limits. All other expenses essentially stayed flat in 1996. INCOME TAX EXPENSE The Company recorded a tax expense of $6.0 million in 1996 compared to approximately $5.5 million in 1995. The effective income tax rate for the year ended December 31, 1996 was 38.9%, a modest increase from 38.8% in 1995. 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 level 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, 1997, the Bank had $85.2 million or 9.2% of total assets and $132.8 million or 14.4% of total assets invested, respectively, in overnight federal funds sold and United States obligations. 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 I capital. Highly rated banks (i.e., those with a composite rating of 1 under the CAMEL rating system) are required to maintain a minimum leverage ratio of Tier I capital to total average assets of at least 3.00%. An additional 100 to 200 basis points are required for all but these most highly rated institutions. The Bank is also required to maintain a minimum level of risk-based capital. Under the new risk-based capital standards, FDIC insured institutions must maintain a Tier I capital to risk-weighted assets ratio of 4.00% and are generally expected to meet a minimum total qualifying capital to risk-weighted assets ratio of 8.00%. The new risk-based capital guidelines take into consideration risk factors, as defined by the regulators, associated with various categories of assets, both on and off the balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk adjusted assets to determine the risk-based capital ratios. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus the Tier II capital components is referred to as total qualifying capital. The capital ratios of the Bank and the Company currently exceed the minimum regulatory requirements. At December 31, 1997, the Bank had a leverage Tier I capital to average assets ratio of 9.85%, a Tier I capital to risk-weighted assets ratio of 32.87% and a total capital to risk-weighted assets ratio of 33.73%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to average assets of 10.23%, Tier I capital to risk-weighted assets of 34.14% and total capital to risk-weighted assets of 35.01% at December 31, 1997. YEAR 2000 ISSUES The Company has conducted a review of its computer systems to identify the systems that could be affected by the Year 2000 issues and is developing a comprehensive compliance plan to address the issues. The year 2000 problem is the result of computer programs being written using two digits rather than four, to define the applicable year. Any of the Company's systems that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a 30 8 YEAR 2000 ISSUES (continued) system failure or in miscalculations. While the company uses a third party data center for the majority of its data processing, the Company has incurred and will continue to incur expenses in connection with the testing and updating of its computer systems to prepare for the Year 2000. At this time, these expenditures are not expected to be material. Systems conversion and testing activities are currently in process. In addition, the Company is developing contingency plans for any hardware or software that does not function correctly on January 1, 2000. Management presently does not believe that the Year 2000 issues will pose significant operational problems for the Company. However, to comply with regulatory directives, modifications and conversions must be made by the Company's third party data center and other banks and governmental agencies that interface with the Company. If such entities are not compliant in a timely manner, the Year 2000 problem could have a material adverse affect on the Company's operations. ASSET AND LIABILITY MANAGEMENT The goal of asset/liability management is to ensure that liquidity, capital and market risk are prudently managed. Asset/liability management is governed by policies reviewed and approved annually by the Bank's Board of Directors (the "Board"). The Board establishes policy limits for long-term interest rate risk assumption and delegates responsibility for monitoring and measuring the Company's exposure to interest rate risk to the Asset/Liability Committee ("ALCO"). The ALCO which is comprised of members of the Company's Board of Directors, members of senior management and the bank's comptroller, generally meets quarterly to review the economic environment and the volume, mix and maturity of the Company's assets and liabilities. INTEREST RATE RISK The primary goal of interest-rate risk management is to control the Company's exposure to interest rate risk both within limits approved by the Board and within narrower guidelines approved by ALCO. These limits and guidelines reflect the Company's tolerance for interest rate risk over both short-term and long-term time horizons. The Company monitors its interest rate exposures using a variety of financial tools. It also produces a GAP analyses quarterly, reflecting the known or assumed maturity, repricing and other cash flow characteristics of the Company's interest-earning assets and interest-bearing liabilities. Interest rate risk materializes in two forms, market value risk and reinvestment risk. Financial instruments calling for future cash flows show market value increases or decreases when rates change. Management monitors the potential change in market value of the Company's debt securities assuming an immediate (parallel) shift in interest rates of up to 200 basis points up or down. Results are calculated using industry standard modeling analytics and securities data from The Bloomberg. The Company uses the results to review the potential changes in market value resulting from immediate rate shifts and to manage the effect of market value changes on the Company's capital position. Reinvestment risk occurs when an asset and the liability funding the asset do not reprice and/or mature at the same time. The difference or mismatch with respect to repricing frequency and/or maturity is a risk to net interest income. Complicating management's efforts to control the Company's exposure to interest rate risk is the fundamental uncertainty of the maturity, repricing and/or runoff characteristics of a significant portion of the Company's assets and liabilities. This uncertainty often reflects optional features embedded in these financial instruments. The most important optional features are embedded in the Company's deposits, loans and mortgage-backed securities. For example, many of the Company's interest-bearing deposit products (e.g., savings, money market deposit accounts and NOW accounts) have no contractual maturity. Customers have the right to withdraw funds from these deposit accounts freely. Deposit balances may therefore run off unexpectedly due to changes in competitive or market conditions. In addition, when market interest rates rise, customers with time certificates of deposit ("CDs") often pay a penalty to redeem their CDs and reinvest at higher rates. Given the uncertainties surrounding deposit runoff and repricing, the interest rate sensitivity of the Company's liabilities cannot be determined precisely. Similarly, customers have the right to prepay loans, particularly residential mortgage loans, usually without penalty. As a result, the Company's mortgage based assets (i.e., mortgage loans and mortgage-backed securities) are subject to prepayment risk. This risk tends to increase when interest rates fall due to the benefits of refinancing. Since the future prepayment behavior of the Company's customers is uncertain, the interest rate sensitivity of mortgage based assets cannot be determined exactly. Management monitors and adjusts the difference between the Company's interest-earning assets and interest-bearing liabilities repricing within various time frames ("GAP position"). GAP analysis provides a static view of the maturity and repricing characteristics of the Company's balance sheet positions. The interest rate GAP is prepared by scheduling all interest-earning assets and interest-bearing liabilities according to scheduled or anticipated repricing or maturity. The GAP analysis identifies the difference between an institution's assets and 31 9 INTEREST RATE RISK (continued) liabilities that will react to a change in market rates. GAP analysis theory postulates that if the GAP is positive and rates increase, profits will increase as more assets than liabilities react to the rate change. If the GAP is negative, more liabilities than assets will react to a change in market rates. If rates rise, the institution's profits will fall as more liabilities react to market rates than assets. In contrast, however, the Company's one-year GAP position in recent years has been negative and its profits have moved in the same direction as the change in market rates rather than in the opposite direction as GAP analysis theory postulates. One of the more significant reasons for this is the fact that a GAP presentation does not reflect the degrees to which interest earning assets and deposit costs respond to changes in market interest rates. The rates on all financial instruments do not always move by the same amount as the general change in market rates. In addition, the Company has elected, in recent years, either not to raise rates or to raise rates by a modest amount on its savings and transaction-oriented accounts in response to a change in market rates. It should be noted that for the above two reasons, among others, the Company's profits have moved in the same direction as market interest rates in the past and are likely to in the near future despite having a negative cumulative one-year GAP position. The Company's policy is to limit its one-year GAP position to 15 percent of total assets. The Company has historically managed its interest rate GAP primarily by lengthening or shortening the maturity structure of its securities portfolio, by continually modifying the composition of its securities portfolio and by selectively pricing and marketing its various deposit products. The following table summarizes the Company's GAP position at December 31, 1997. As of this date, the Company's one-year cumulative GAP position was negative $99.4 million, or approximately 10.74% of total assets. The cumulative GAP-asset ratio measures the direction and extent of imbalance between an institution's assets and liabilities repricing through the end of a particular period.
- ----------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVITY PERIODS 3 MONTHS 3 TO 6 6 MONTHS 1 TO 5 OVER (IN THOUSANDS) OR LESS MONTHS TO 1 YEAR YEARS 5 YEARS TOTAL - ----------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans $ 33,262 $ 14,170 $ 30,496 $111,834 $ 82,541 $272,303 Short-term investments: Federal funds sold 85,241 85,241 Investment in money market funds 24,514 24,514 Term federal funds sold 10,000 10,000 20,000 Interest-bearing deposits in banks 67 791 1,225 2,083 Securities held to maturity 45 327 372 Securities available for sale 46,087 19,385 44,429 264,420 107,903 482,224 Trading securities 21,260 21,260 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 220,476 $ 43,555 $ 75,716 $377,806 $190,444 $907,997 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Deposits 272,979 $ 76,768 $ 89,394 $ 92,102 $261,194 $792,437 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 272,979 $ 76,768 $ 89,394 $ 92,102 $261,194 $792,437 - ----------------------------------------------------------------------------------------------------------------------------- GAP for period $ (52,503) $(33,213) $ (13,678) $285,704 $(70,750) Cumulative GAP $ (52,503) $(85,716) $ (99,394) $186,310 $115,560 Cumulative GAP as a percent of total assets (5.67%) (9.27%) (10.74%) 20.13% 12.49% - -----------------------------------------------------------------------------------------------------------------------------
32 10 The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values as of December 31, 1997. EXPECTED MATURITY DATE AT DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------- Fair Value (In thousands) 1998 1999 2000 2001 2002 Thereafter Total at 12/31/97 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVE ASSETS: Fixed rate securities $ 38,318 $42,884 $32,207 $16,419 $10,384 $320,648 $460,860 $460,860 Average interest rate(1) 6.22% 6.56% 6.52% 6.60% 7.42% 6.79% 6.71% Variable rate securities 39,919 -- 953 -- -- 2,124 42,996 42,996 Average interest rate(1) 5.55% -- 6.04% -- -- 6.56% 5.61% Fixed rate loans 31,387 24,742 21,803 19,296 18,260 83,474 198,962 203,274 Average interest rate 7.72% 8.68% 8.32% 8.31% 8.04% 7.26% 7.28% Variable rate loans 10,281 8,204 7,058 6,237 6,748 34,813 73,341 73,976 Average interest rate 9.08% 9.52% 7.71% 7.72% 9.12% 8.53% 8.29% Other fixed rate assets 20,791 720 504 -- -- -- 22,015 22,015 Average interest rate 5.77% 6.02% 6.25% -- -- -- 5.79% Other variable rate assets 109,823 -- -- -- -- -- 109,823 109,823 Average interest rate 5.95% -- -- -- -- -- 5.95% - ---------------------------------------------------------------------------------------------------------------------------------- Total interest sensitive assets $250,519 $76,550 $62,525 $41,952 $35,392 $441,059 $907,997 $912,944 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVE LIABILITIES: Savings and money market deposit accounts $ 11,577 $11,081 $10,606 $10,154 $ 9,721 $299,736 $352,875 $352,875 Average interest rate 3.29% 3.29% 3.29% 3.29% 3.29% 3.46% 3.44% Fixed rate certificates of deposit 256,232 48,154 9,999 1,268 601 114 316,368 317,246 Average interest rate 5.48% 5.73% 5.73% 5.65% 5.83% 5.88% 5.53% Variable rate certificates of deposit 25,005 27,368 22,097 186 10 -- 74,666 74,680 Average interest rate 6.33% 6.50% 6.64% 5.98% 5.98% -- 6.48% NOW accounts -- -- -- -- -- 47,944 47,944 47,944 Average interest rate -- -- -- -- -- 1.14% 1.14% Escrow deposits of borrowers 1,502 -- -- -- -- -- 1,502 1,502 Average interest rate 0.25% -- -- -- -- -- 0.25% Deposit acquisition premium, net of amortization (198) (230) (230) (231) (29) -- (918) -- - ---------------------------------------------------------------------------------------------------------------------------------- Total interest sensitive liabilities $294,118 $86,373 $42,472 $11,377 $10,303 $347,794 $792,437 $794,247 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Securities rates presented are on a tax equivalent basis. The Company uses certain assumptions to estimate fair values and expected maturities. For interest-sensitive assets, expected maturities are based upon contractual maturity, and projected repayments and prepayments of principal. For interest-sensitive deposit liabilities, maturities are based on contractual maturity and estimated deposit runoff based on the Bank's own historical experience. The actual maturity of the Company's financial instruments could vary significantly from what has been presented in the above table if actual experience differs from the assumptions used. OTHER MARKET RISKS The Company's investment securities portfolio includes equity securities with a market value of approximately $17.5 million at December 31, 1997. The net unrealized gains on these securities totaled $8.2 million at year-end 1997. Movements in equity prices may effect the amount of securities gains or losses which the Company realizes from the sale of these securities and thus may have an impact on earnings. 33 11 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.
- ------------------------------------------------------------------------------------------------------------------ 1997 COMPARED TO 1996 1996 COMPARED TO 1995 (IN THOUSANDS) INCREASE (DECREASE) INCREASE (DECREASE) YEARS ENDED DECEMBER 31, DUE TO DUE TO - ------------------------------------------------------------------------------------------------------------------ Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------ INTEREST AND DIVIDEND INCOME: Federal funds sold $ 634 $ 122 $ 756 $ 265 $ (537) $ (272) Short-term investments 148 52 200 986 (30) 956 Investment securities (1,708) (325) (2,033) (3,580) 441 (3,139) Trading securities 174 (2) 172 (2,043) (27) (2,070) Mortgage-backed securities 3,069 (54) 3,015 6,449 (342) 6,107 Mortgage loans 795 (24) 771 675 (420) 255 Other loans (218) (39) (257) (263) (76) (339) - ------------------------------------------------------------------------------------------------------------------ Total interest and dividend income 2,894 (270) 2,624 2,489 (991) 1,498 - ------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: Deposits: Demand and NOW 17 (55) (38) (10) (68) (78) Savings (92) 64 (28) (1,006) 376 (630) Time certificates of deposit 1,913 (228) 1,685 2,995 (121) 2,874 - ------------------------------------------------------------------------------------------------------------------ Total interest expense 1,838 (219) 1,619 1,979 187 2,166 - ------------------------------------------------------------------------------------------------------------------ Net interest income $ 1,056 $ (51) $ 1,005 $ 510 $(1,178) $ (668) ==================================================================================================================
34 12 AVERAGE BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- 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 $106,890 $ 5,840 5.46% $ 95,253 $ 5,084 5.34% $ 90,589 $ 5,356 5.91% Short-term investments(2) 26,369 1,459 5.53 23,656 1,259 5.32 5,168 303 5.86 Investment securities 166,949 10,554 6.32 194,229 12,586 6.48 250,318 15,710 6.28 Mortgage-backed securities 321,521 22,368 6.96 277,409 19,353 6.98 184,976 13,246 7.16 Trading securities 12,741 735 5.77 9,719 563 5.79 45,012 2,633 5.85 Mortgage loans(1) 235,587 17,704 7.51 225,005 16,933 7.53 216,060 16,678 7.72 Other loans(1) 24,584 2,224 9.05 26,993 2,481 9.19 29,848 2,820 9.45 =============================================== =================== ==================== Total earning assets 894,641 60,884 6.81% 852,264 58,259 6.84% 821,971 56,746 6.90% - --------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (2,245) (2,414) (2,587) - --------------------------------------------------------------------------------------------------------------------------- Total earning assets less allowance for loan losses 892,396 849,850 819,384 Other assets 18,956 19,194 20,765 - --------------------------------------------------------------------------------------------------------------------------- Total assets $911,352 $869,044 $840,149 =========================================================================================================================== LIABILITIES: Deposits: Demand and NOW $ 65,895 536 0.81% $ 63,969 574 0.90% $ 64,946 652 1.00% Savings 355,395 12,240 3.44 358,056 12,268 3.43 387,449 12,898 3.33 Time certificates of deposit 386,062 21,905 5.67 352,385 20,220 5.74 300,141 17,346 5.78 =============================================== =================== ==================== Total deposits 807,352 34,681 4.30 774,410 33,062 4.27 752,536 30,896 4.11 - --------------------------------------------------------------------------------------------------------------------------- Other liabilities 7,296 6,106 5,365 Total liabilities 814,648 780,516 757,901 - --------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY: 96,704 88,528 82,248 Total liabilities and stockholders' equity $911,352 $869,044 $840,149 - --------------------------------------------------------------------------------------------------------------------------- Net interest income (tax- equivalent basis) 26,203 25,197 25,850 Less adjustment of tax- exempt interest income (151) (150) (135) - --------------------------------------------------------------------------------------------------------------------------- Net interest income $26,052 $25,047 $25,715 - --------------------------------------------------------------------------------------------------------------------------- Interest rate spread 2.51% 2.57% 2.79% - --------------------------------------------------------------------------------------------------------------------------- Net interest margin(3) 2.93% 2.96% 3.15% ===========================================================================================================================
(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 loan losses divided by average interest-earning assets. (4) Includes the effects of SFAS No. 115. 35 13 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 EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This Statement supersedes APB Opinion No. 15 regarding the presentation of earnings per share ("EPS") on the face of the income statement. SFAS No. 128 replaces the presentation of Primary EPS with a Basic EPS calculation that excludes the dilutive effect of common stock equivalents. The Statement requires a dual presentation of Basic and Dilutive EPS, which is computed similarly to Fully Diluted EPS pursuant to APB Opinion No. 15 for all entities with complex capital structures. This Statement is effective for fiscal years ending after December 15, 1997 and requires restatement of all prior-period EPS data presented. The adoption of this pronouncement did not have a material impact on the Company's earnings per share presentation. DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure". This Statement establishes standards for disclosing information about an entity's capital structure. It applies to all entities and is effective for reporting periods ending after December 15, 1997. The Company's disclosures comply with these new requirements. REPORTING COMPREHENSIVE INCOME In June 1997, the FASB issued of SFAS No. 130, "Reporting Comprehensive Income." This Statement establishes standards for the reporting and displaying of comprehensive income. Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." It includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. The term "comprehensive income" is used in the Statement to describe the total of all components of comprehensive income including net income. Statement 130 is effective for interim and annual periods beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect application of the provisions of the Statement. The Statement is not expected to have a material impact on the Company's financial presentation. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for reporting information about operating segments. An operating segment is defined as a component of an enterprise for which separate financial information is available and reviewed regularly by the enterprise's chief operating decision maker in order to make decisions about resources to be allocated to the segment and also to evaluate the segment's performance. SFAS No. 131 requires a company to disclose certain balance sheet and income statement information by operating segment, as well as provide a reconciliation of operating segment information to the company's consolidated balances. This Statement is effective for reporting periods beginning after December 15, 1997. This Statement is not expected to have a material impact on the Company's financial presentation. 36 14 Independent Auditors' Report [KPMG PEAT MARWICK LLP LETTERHEAD] 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Boston, Massachusetts January 12, 1998 KPMG PEAT MARWICK LLP 37 15 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $ 6,808 $ 6,612 Short-term investments (Note 2) 109,755 134,310 - ---------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 116,563 140,922 - ---------------------------------------------------------------------------------------------------------------- Term federal funds sold 20,000 10,000 Interest-bearing deposits in banks 2,083 1,751 Securities held to maturity, at amortized cost (market value of $372 in 1997 and $160 in 1996) (Note 3) 372 160 Securities available for sale, at market value (amortized cost of $466,749 in 1997 and $464,857 in 1996) (Note 3) 482,224 471,752 Trading securities, at market value (Note 4) 21,260 4,672 Loans (Notes 5, 7 and 11): Mortgage loans 248,798 224,139 Other loans 23,505 25,522 - ---------------------------------------------------------------------------------------------------------------- Total loans 272,303 249,661 Less: allowance for loan losses (Note 6) (2,334) (2,237) - ---------------------------------------------------------------------------------------------------------------- Net loans 269,969 247,424 - ---------------------------------------------------------------------------------------------------------------- Premises and equipment (Note 9) 4,369 4,095 Real estate acquired through foreclosure (Note 7) -- 503 Accrued interest receivable 5,395 5,647 Goodwill 1,487 -- Other assets 1,681 1,311 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 925,403 $ 888,237 ================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits (Notes 10 and 11): Demand and NOW $ 66,859 $ 62,734 Savings 352,875 357,658 Time certificates of deposit 391,034 369,139 Deposit acquisition premium, net of amortization (918) (1,181) - ---------------------------------------------------------------------------------------------------------------- Total deposits 809,850 788,350 Escrow deposits of borrowers 1,502 1,271 Employee stock ownership plan liability (Note 16) 781 937 Accrued and deferred income taxes payable (Note 12) 6,167 2,594 Other liabilities 3,324 2,835 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 821,624 795,987 - ---------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities (Notes 8 and 9) -- -- Stockholders' equity (Notes 12, 15, 16 and 17): Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued -- -- Common stock, par value $1.00 per share; 10,000,000 shares authorized, 7,336,800 and 5,476,125 shares issued, respectively 7,337 5,476 Additional paid-in capital 58,737 57,858 Retained earnings 70,984 65,756 - ---------------------------------------------------------------------------------------------------------------- 137,058 129,090 Treasury stock at cost, 3,766,022 and 2,789,411 shares, respectively (41,569) (39,904) Net unrealized gains on securities available for sale, net of tax effect (Note 3) 9,071 4,001 Common stock acquired by ESOP (Note 16) (781) (937) - ---------------------------------------------------------------------------------------------------------------- Total stockholders' equity 103,779 92,250 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 925,403 $ 888,237 ================================================================================================================
See accompanying notes to consolidated financial statements. 38 16 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------ INTEREST AND DIVIDEND INCOME: Mortgage loans $ 17,704 $ 16,933 $ 16,678 Other loans 2,224 2,481 2,820 Securities available for sale: Mortgage-backed securities 22,368 19,353 13,246 Other securities 10,385 12,425 15,553 Trading securities 735 563 2,633 Federal funds sold 5,840 5,084 5,356 Other investments 1,477 1,270 325 - -------------------------------------------------------------------------------------------------- Total interest and dividend income 60,733 58,109 56,611 - -------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits: NOW 536 574 652 Savings 12,240 12,268 12,898 Time certificates of deposit 21,905 20,220 17,346 - -------------------------------------------------------------------------------------------------- Total interest expense 34,681 33,062 30,896 - -------------------------------------------------------------------------------------------------- Net interest income 26,052 25,047 25,715 PROVISION FOR LOAN LOSSES (Note 6) 260 160 170 Net interest income after provision for loan losses 25,792 24,887 25,545 - -------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Deposit account service fees 924 932 923 Gains on securities, net 1,939 868 92 Other 935 865 933 - -------------------------------------------------------------------------------------------------- Total non-interest income 3,798 2,665 1,948 - -------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 7,743 7,215 7,260 Occupancy and equipment 2,096 1,977 1,991 Data processing 438 608 608 Professional services 407 340 414 Merger and acquisition related expense 156 -- -- Advertising and marketing 187 220 228 Amortization of intangibles 251 230 230 Deposit insurance 116 13 914 Contributions 664 60 39 Other 1,367 1,461 1,494 - -------------------------------------------------------------------------------------------------- Total non-interest expense 13,425 12,124 13,178 - -------------------------------------------------------------------------------------------------- Income before income taxes 16,165 15,428 14,315 INCOME TAX EXPENSE (Note 12) 5,998 6,001 5,556 - -------------------------------------------------------------------------------------------------- Net income $ 10,167 $ 9,427 $ 8,759 ================================================================================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 3,524,657 3,556,660 3,605,480 Diluted 3,663,310 3,658,505 3,741,460 EARNINGS PER SHARE (in dollars): Basic $ 2.88 $ 2.65 $ 2.43 Diluted 2.77 2.58 2.34 ==================================================================================================
See accompanying notes to consolidated financial statements. 39 17 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,167 $ 9,427 $ 8,759 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 853 735 757 Amortization of ESOP shares committed to be released 184 63 51 Charitable contribution of appreciated securities 622 5 -- Decrease (increase) in accrued interest receivable 464 1,633 (410) Increase (decrease) in other liabilities 56 (388) (2,924) Increase (decrease) in current income taxes payable 435 (75) (363) Accretion of discounts on securities, net of amortization of premiums (1,178) (1,052) (1,137) Net trading securities activity (16,480) 2,065 109,289 (Gains) losses on securities available for sale (1,831) (950) 407 (Gains) losses on trading securities (108) 82 (499) Increase in deferred mortgage loan origination fees, net of amortization 168 114 57 Deferred income tax (benefit) expense (372) 238 276 Decrease (increase) in other assets 553 (74) (186) Loans originated for sale (770) (215) (455) Loans sold 770 378 455 Provision for loan losses 260 160 170 Provisions for losses and writedowns on real estate acquired through foreclosure (21) 32 25 Gains on sales of real estate acquired through foreclosure (34) (26) -- Gains on sales of premises and equipment (1) (2) -- Increase in escrow deposits of borrowers 231 279 26 - ----------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (6,032) 12,429 114,298 - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash and cash equivalents for acquisitions (2,874) -- -- Purchases of term federal funds (30,000) (10,000) (50,000) Proceeds from maturities of term federal funds 20,000 5,000 45,000 Increase in interest-bearing bank deposits (1,649) (810) (941) Proceeds from maturities of interest-bearing bank deposits 1,240 -- -- Proceeds from sales of investment securities available for sale 42,741 49,940 46,035 Proceeds from maturities of investment securities held to maturity and available for sale 59,000 86,225 45,147 Purchases of investment securities available for sale (63,696) (56,196) (57,789) Purchases of investment securities held to maturity (230) -- -- Purchases of mortgage-backed securities (63,661) (135,854) (61,092) Principal repayments of mortgage-backed securities 42,246 36,858 22,084 Principal repayments of securities held to maturity 18 17 18 Principal repayments of securities available for sale 85 -- -- Loans originated (57,787) (51,152) (39,222) Loan principal payments received 48,560 49,118 40,116 Loans purchased (201) -- -- Purchases of premises and equipment (491) (310) (360) Proceeds from sale of premises and equipment 9 2 -- Proceeds from sale of real estate acquired through foreclosure 964 511 265 Net advances on real estate acquired through foreclosure (30) -- (7) - ----------------------------------------------------------------------------------------------------------- Net cash used in investing activities (5,756) (26,651) (10,746) - -----------------------------------------------------------------------------------------------------------
40 (Continued) 18 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- --------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits (8,523) 34,463 (6,250) Payments to acquire treasury stock (1,665) (3,534) (3,082) Issuance of common stock under stock option plan 466 738 891 Tax benefit resulting from stock options exercised 260 266 364 Cash dividends paid on common stock (3,124) (2,459) (1,981) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 15 15 -- - --------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (12,571) 29,489 (10,058) - --------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (24,359) 15,267 93,494 Cash and cash equivalents at beginning of year 140,922 125,655 32,161 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 116,563 $ 140,922 $ 125,655 - --------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW DISCLOSURES: CASH TRANSACTIONS: Cash paid during the year for interest $ 34,671 $ 33,026 $ 30,984 Cash paid during the year for taxes 5,237 5,557 5,230 NON-CASH TRANSACTIONS: SFAS 115: Increase (decrease) in stockholders' equity 5,070 (3,239) 11,155 Increase (decrease) in deferred tax liabilities 3,510 (2,329) 8,194 Securities reclassified from held to maturity to available for sale -- -- 202,800 Transfers from loans to real estate acquired through foreclosure 376 765 409 Transfers from other assets to securities available for sale -- -- 214 Purchase of securities incomplete (not settled) as of year end 32 -- 138 Sales of securities incomplete (not settled) as of year end -- 30 -- Cost of donated securities 2 -- -- - --------------------------------------------------------------------------------------------------------------------- In connection with the acquisition of Glendale Co-operative Bank in July, 1997, assets acquired and liabilities assumed were as follows: Assets acquired $ 31,561 -- -- Goodwill 1,530 -- -- Liabilities assumed 30,217 -- -- - ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 41 19 MASSBANK CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - ------------------------------------------------------------------------------------ Additional Common paid-in Retained stock capital earnings - ------------------------------------------------------------------------------------ Balance at December 31, 1994 $ 5,352 $ 55,609 $ 51,995 Net Income -- -- 8,759 Cash dividends declared ($0.5475 per share) -- -- (1,981) Net decrease in liability to ESOP -- -- -- Amortization of ESOP shares committed to be released -- 51 -- Purchase of treasury stock -- -- -- Exercise of stock options and related tax benefits 73 1,182 -- Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- -- -- - ------------------------------------------------------------------------------------ Balance at December 31, 1995 5,425 56,842 58,773 Net Income -- -- 9,427 Cash dividends declared ($0.69 per share) -- -- (2,459) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 15 Net decrease in liability to ESOP -- -- -- Amortization of ESOP shares committed to be released -- 63 -- Purchase of treasury stock -- -- -- Exercise of stock options and related tax benefits 51 953 -- Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- -- -- - ------------------------------------------------------------------------------------ Balance at December 31, 1996 5,476 57,858 65,756 Net Income -- -- 10,167 Cash dividends declared ($0.885 per share) -- -- (3,124) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- 15 Net decrease in liability to ESOP -- -- -- Amortization of ESOP shares committed to be released -- 184 -- Purchase of treasury stock -- -- -- Exercise of stock options and related tax benefits 31 695 -- Transfer resulting from four-for-three stock split 1,830 -- (1,830) Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- -- -- - ------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 $ 7,337 $ 58,737 $ 70,984 ====================================================================================
- ----------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1997, 1996 and 1995 - ----------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) on securities Common available for stock Treasury sale, net of acquired stock tax effect by ESOP Total - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 $ (33,288) $ (3,915) $ (1,249) $ 74,504 Net Income -- -- -- 8,759 Cash dividends declared ($0.5475 per share) -- -- -- (1,981) Net decrease in liability to ESOP -- -- 156 156 Amortization of ESOP shares committed to be released -- -- -- 51 Purchase of treasury stock (3,082) -- -- (3,082) Exercise of stock options and related tax benefits -- -- -- 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 (36,370) 7,240 (1,093) 90,817 Net Income -- -- -- 9,427 Cash dividends declared ($0.69 per share) -- -- -- (2,459) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- -- 15 Net decrease in liability to ESOP -- -- 156 156 Amortization of ESOP shares committed to be released -- -- -- 63 Purchase of treasury stock (3,534) -- -- (3,534) Exercise of stock options and related tax benefits -- -- -- 1,004 Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- (3,239) -- (3,239) - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 (39,904) 4,001 (937) 92,250 Net Income -- -- -- 10,167 Cash dividends declared ($0.885 per share) -- -- -- (3,124) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP -- -- -- 15 Net decrease in liability to ESOP -- -- 156 156 Amortization of ESOP shares committed to be released -- -- -- 184 Purchase of treasury stock (1,665) -- -- (1,665) Exercise of stock options and related tax benefits -- -- -- 726 Transfer resulting from four-for-three stock split -- -- -- -- Change in net unrealized gains (losses) on securities available for sale, net of tax effect -- 5,070 -- 5,070 - ----------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ (41,569) $ 9,071 $ (781) $ 103,779 ===========================================================================================================
See accompanying notes to consolidated financial statements. 42 20 MASSBANK CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1997, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MASSBANK Corp. (the "Company") is a Delaware chartered holding company whose principal subsidiary is MASSBANK (the "Bank"). The Bank operates fifteen full service banking offices in Reading, Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford, Dracut, Lowell and Everett 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, Readibank Properties, Inc., Readibank Investment Corporation and Melbank Investment Corporation. The accounts of MASSBANK's subsidiary, Readibank Equipment Corportation, which was sold in October, 1997 are also included through the sale date. 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 1997 and prior years have been restated to reflect the Company's four-for-three stock split of September 15, 1997. INVESTMENTS IN DEBT AND EQUITY SECURITIES 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. 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. 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, 1997, stockholders' equity included approximately $9.1 million, representing the net unrealized gains on securities available for sale, less applicable income taxes. Investments classified as trading securities are stated at market value with unrealized gains and losses included in earnings. Income on debt securities 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. 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 generally 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. 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 are 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. 43 21 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for probable losses that are inherent in the Company's loan portfolio. The allowance for loan losses is increased by provisions charged to operations based on management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may affect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the information available in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. 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 loans determined to be substantially repossessed. Real estate loans that are substantially repossessed include only those loans for which the Bank has taken possession of the collateral but has not completed legal foreclosure proceedings. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Real estate acquired through foreclosure 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. GOODWILL The excess of purchase price over the fair value of net assets of acquired companies is classified and reported as goodwill. Goodwill is being amortized using the straight-line method, over 15 years. 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. EMPLOYEES' STOCK OWNERSHIP PLAN ("ESOP") The Company recognizes compensation cost equal to the fair value of the ESOP shares committed to be released. Dividends on unallocated ESOP shares are reported as a reduction of accrued interest on the ESOP loan. The Company reports loans from outside lenders to its ESOP as a liability on its balance sheet and reports interest cost on the debt. For earnings per share (EPS) computations, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are not considered outstanding. STOCK-BASED COMPENSATION On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The Statement establishes financial accounting and reporting standards for stock-based compensation plans. SFAS No. 123 encourages, but does not require, a fair value based method of accounting for stock-based compensation plans. The statement allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. For those entities electing to use the intrinsic value based method, SFAS No. 123 requires pro forma disclosures of net income and earnings per share computed as if the fair value based method had been applied. The Company continues to account for stock-based compensation costs under APB Opinion No. 25. 44 22 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) EARNINGS PER COMMON SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." This Statement supersedes APB Opinion No. 15 regarding the presentation of earnings per share ("EPS") on the face of the income statement. SFAS No. 128 replaces the presentation of Primary EPS with a Basic EPS calculation that excludes the dilutive effect of common stock equivalents. The Statement requires a dual presentation of Basic and Diluted EPS, which is computed similarly to Fully Diluted EPS pursuant to APB Opinion No. 15 for all entities with complex capital structures. This Statement is effective for fiscal years ending after December 15, 1997 and requires restatement of all prior-period EPS data presented. The adoption of this pronouncement did not have a material impact on the Company's earnings per share presentation. For earnings per share computations, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are not considered outstanding. All share information set forth herein has been adjusted to reflect the 4-for-3 split of the Company's common stock effective September 15, 1997. 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 $3.6 million and $3.2 million at December 31, 1997 and 1996, respectively. INCOME TAXES 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. Based on the Bank's historical and current pre-tax earnings, management believes it is more likely than not that the Bank will realize its existing gross deferred tax asset. The Company and its subsidiaries file state and consolidated federal income tax returns on an October 31 year-end. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," requires the deferral of implementation as it relates to repurchase agreements, dollar-rolls, securities lending and similar transactions until years beginning after December 31, 1997. Earlier or retrospective applications of this Statement is not permitted. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on an approach that focuses on control, whereby after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of this pronouncement did not have a significant effect on the Company's financial position or results of operations. DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure." This Statement establishes standards for disclosing information about an entity's capital structure. It applies to all entities and is effective for reporting periods ending after December 15, 1997. The Company's disclosures comply with these new requirements. REPORTING COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and displaying of comprehensive income. Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." It includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. The term "comprehensive income" is used in the Statement to describe the total of all components of comprehensive income including net income. 45 23 REPORTING COMPREHENSIVE INCOME (CONTINUED) Statement 130 is effective for interim and annual periods beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect application of the provisions of the Statement. The Statement is not expected to have a material impact on the Company's financial presentation. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for reporting information about operating segments. An operating segment is defined as a component of an enterprise for which separate financial information is available and reviewed regularly by the enterprise's chief operating decision maker in order to make decisions about resources to be allocated to the segment and also to evaluate the segment's performance. SFAS No. 131 requires a company to disclose certain balance sheet and income statement information by operating segment, as well as provide a reconciliation of operating segment information to the company's consolidated balances. This Statement is effective for reporting periods beginning after December 15, 1997. This Statement is not expected to have a material impact on the Company's financial presentation. 2. SHORT-TERM INVESTMENTS Short-term investments consist of the following:
- ------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------- Federal funds sold (overnight) $ 85,241 $109,902 Money market funds 24,514 24,408 - ------------------------------------------------------------------------------------- Total short-term investments $109,755 $134,310 =====================================================================================
The investments above are stated at cost which approximates market value. 3. INVESTMENT SECURITIES The amortized cost and market value of investment securities follows:
- ----------------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED Market (IN THOUSANDS) AT DECEMBER 31, 1997 COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Other bonds and obligations $ 372 $ -- $ -- $ 372 - ----------------------------------------------------------------------------------------------------------------------- Total securities held to maturity 372 -- -- 372 - ----------------------------------------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations 121,399 1,622 -- 123,021 U.S. Government agency obligations 9,800 24 (11) 9,813 - ----------------------------------------------------------------------------------------------------------------------- Total 131,199 1,646 (11) 132,834 - ----------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 60,493 1,247 (31) 61,709 Federal Home Loan Mortgage Corporation 248,744 4,257 (180) 252,821 Federal National Mortgage Association 7,733 258 -- 7,991 Collateralized mortgage obligations 7,836 62 -- 7,898 Other 298 14 -- 312 - ----------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 325,104 5,838 (211) 330,731 - ----------------------------------------------------------------------------------------------------------------------- Total debt securities 456,303 7,484 (222) 463,565 - ----------------------------------------------------------------------------------------------------------------------- Investments in mutual funds 1,110 4 -- 1,114 Equity securities 9,336 8,227 (18) 17,545 - ----------------------------------------------------------------------------------------------------------------------- Total securities available for sale 466,749 $ 15,715 $ (240) $482,224 - ----------------------------------------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 15,475 - ----------------------------------------------------------------------------------------------------------------------- Total securities available for sale, net 482,224 - ----------------------------------------------------------------------------------------------------------------------- Total investment securities, net $482,596 =======================================================================================================================
46 24 3. INVESTMENT SECURITIES (continued) The amortized cost and market value of investment securities follows:
- ----------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (IN THOUSANDS) At December 31, 1996 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Other bonds and obligations $ 160 $ -- $ -- $ 160 - ----------------------------------------------------------------------------------------------------------------------- Total securities held to maturity 160 -- -- 160 - ----------------------------------------------------------------------------------------------------------------------- Securities available for sale: Debt securities: U.S. Treasury obligations 139,197 1,509 -- 140,706 U.S. Government agency obligations 7,899 31 (53) 7,877 Other bonds and obligations 1,000 -- -- 1,000 - ----------------------------------------------------------------------------------------------------------------------- Total 148,096 1,540 (53) 149,583 - ----------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Government National Mortgage Association 69,903 987 (480) 70,410 Federal Home Loan Mortgage Corporation 226,130 1,878 (1,920) 226,088 Federal National Mortgage Association 9,261 356 -- 9,617 Other 453 27 -- 480 - ----------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 305,747 3,248 (2,400) 306,595 - ----------------------------------------------------------------------------------------------------------------------- Total debt securities 453,843 4,788 (2,453) 456,178 - ----------------------------------------------------------------------------------------------------------------------- Equity securities 11,014 4,624 (64) 15,574 - ----------------------------------------------------------------------------------------------------------------------- Total securities available for sale 464,857 $ 9,412 $ (2,517) $471,752 - ----------------------------------------------------------------------------------------------------------------------- Net unrealized gains on securities available for sale 6,895 - ----------------------------------------------------------------------------------------------------------------------- Total securities available for sale, net 471,752 - ----------------------------------------------------------------------------------------------------------------------- Total investment securities, net $471,912 =======================================================================================================================
During the years ended December 31, 1997, 1996 and 1995, the Company realized gains and losses on sales of securities available for sale as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- REALIZED Realized Realized GAINS LOSSES Gains Losses Gains Losses - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 38 $ (35) $ 118 $ (103) $ 4 $ (889) Mortgage-backed securities -- (301) -- (166) -- -- Marketable equity securities 2,201 (96) 1,146 (45) 574 (96) Other equity securities 25 -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total realized gains (losses) $2,264 $ (432) $1,264 $ (314) $ 578 $ (985) ===================================================================================================================================
Proceeds from sales of debt securities available for sale during 1997, 1996 and 1995 were $34.1 million, $40.8 million and $41.9 million, respectively. Proceeds from sales of marketable equity securities available for sale during 1997, 1996 and 1995, were $8.6 million, $9.1 million and $4.1 million, respectively. There were no sales of investment securities held-to-maturity during 1997, 1996 and 1995. 47 25 3. INVESTMENT SECURITIES (continued) The amortized cost and 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, 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ AMORTIZED MARKET Amortized Market COST VALUE Cost Value - ------------------------------------------------------------------------------------------------------------------------ Investment securities held to maturity: Other bonds and obligations: Maturing after 1 year but within 5 years $ 230 $ 230 $ -- $ -- Maturing after 5 years but within 10 years 97 97 111 111 Maturing after 10 years but within 15 years 45 45 49 49 - ------------------------------------------------------------------------------------------------------------------------ Total debt securities held to maturity 372 372 160 160 - ------------------------------------------------------------------------------------------------------------------------ Investment securities available for sale: U.S. Treasury obligations: Maturing within 1 year 35,869 36,001 55,820 56,120 Maturing after 1 year but within 5 years 85,530 87,020 80,390 81,566 Maturing after 5 years but within 10 years -- -- 2,987 3,020 - ------------------------------------------------------------------------------------------------------------------------ Total 121,399 123,021 139,197 140,706 - ------------------------------------------------------------------------------------------------------------------------ U.S. Government agency obligations: Maturing within 1 year 2,000 2,006 -- -- Maturing after 1 year but within 5 years 6,600 6,614 6,899 6,904 Maturing after 5 years but within 10 years 1,000 994 1,000 973 Maturing after 15 years 200 199 -- -- - ------------------------------------------------------------------------------------------------------------------------ Total 9,800 9,813 7,899 7,877 - ------------------------------------------------------------------------------------------------------------------------ Other bonds and obligations: Maturing within 1 year -- -- 1,000 1,000 - ------------------------------------------------------------------------------------------------------------------------ Total -- -- 1,000 1,000 - ------------------------------------------------------------------------------------------------------------------------ Mortgage-backed securities: Maturing within 1 year 312 311 -- -- Maturing after 1 year but within 5 years 8,826 8,984 2,408 2,458 Maturing after 5 years but within 10 years 30,677 31,617 15,975 16,544 Maturing after 10 years but within 15 years 279,147 283,631 287,364 287,593 Maturing after 15 years 6,142 6,188 -- -- - ------------------------------------------------------------------------------------------------------------------------ Total 325,104 330,731 305,747 306,595 - ------------------------------------------------------------------------------------------------------------------------ Total debt securities available for sale 456,303 463,565 453,843 456,178 - ------------------------------------------------------------------------------------------------------------------------ Net unrealized gains on debt securities available for sale 7,262 -- 2,335 -- - ------------------------------------------------------------------------------------------------------------------------ Total debt securities available for sale, net carrying value $463,565 $463,565 $456,178 $456,178 - ------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities are shown at their contractual maturity but are expected to have shorter average lives due to prepayments. 48 26 4. TRADING SECURITIES The amortized cost and market values of trading securities are as follows:
- ------------------------------------------------------------------------------------------------------ (IN THOUSANDS) AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------------ AMORTIZED MARKET Amortized Market COST VALUE Cost Value - ------------------------------------------------------------------------------------------------------ U.S. Treasury obligations $18,548 $18,542 $ -- $ -- Investments in mutual funds 2,757 2,718 4,790 4,672 - ------------------------------------------------------------------------------------------------------ Total trading securities $21,305 $21,260 $ 4,790 $ 4,672 ======================================================================================================
During the years ended December 31, 1997, 1996 and 1995, the Company realized gains and losses on sales of trading securities as follows:
- --------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- REALIZED Realized Realized GAINS LOSSES Gains Losses Gains Losses - --------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 22 $-- $-- $-- $ 20 $-- Investments in mutual funds -- (33) -- (44) -- (133) Marketable equity securities 46 -- 65 -- 4 -- - --------------------------------------------------------------------------------------------------------------------------------- Total realized gains (losses) $ 68 $ (33) $ 65 $ (44) $ 24 $(133) =================================================================================================================================
Proceeds from sales of trading securities during 1997, 1996 and 1995 were $16.3 million, $3.1 million and $26.5 million, respectively. Unrealized gains or (losses) included in income in 1997, 1996 and 1995 were $73 thousand, $(103) thousand and $608 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 mortgage 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. 49 27 5. LOANS (continued) The composition of the Bank's loan portfolio is summarized as follows:
- ----------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 1996 - ----------------------------------------------------------------------------------------------------- Mortgage loans: Residential: Conventional: Fixed rate $ 193,319 $ 168,000 Variable rate 50,163 48,832 FHA and VA 1,843 2,515 Commercial 3,861 4,121 Construction 492 1,388 - ----------------------------------------------------------------------------------------------------- Total mortgage loans 249,678 224,856 Add: premium on loans 343 325 Less: deferred mortgage loan origination fees (1,223) (1,042) - ----------------------------------------------------------------------------------------------------- Mortgage loans, net 248,798 224,139 - ----------------------------------------------------------------------------------------------------- Other loans: Consumer: Installment 2,199 1,967 Guaranteed education 8,934 9,729 Other secured 1,600 1,611 Home equity lines of credit 10,470 11,316 Unsecured 266 271 - ----------------------------------------------------------------------------------------------------- Total consumer loans 23,469 24,894 Commercial 36 628 - ----------------------------------------------------------------------------------------------------- Total other loans 23,505 25,522 - ----------------------------------------------------------------------------------------------------- Total loans $ 272,303 $ 249,661 =====================================================================================================
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, 1997 follows:
- ------------------------------------------------------ (IN THOUSANDS) - ------------------------------------------------------ Balance at December 31, 1996 $ 395 Additions 48 Repayments (103) - ------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 $ 340 ======================================================
50 28 6. ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows:
- -------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Balance at beginning of year $ 2,237 $ 2,529 $ 2,566 Glendale Co-operative Bank acquisition 105 -- -- Provision for loan losses 260 160 170 Recoveries of loans previously charged-off 59 90 42 - -------------------------------------------------------------------------------------------------- Total 2,661 2,779 2,778 - -------------------------------------------------------------------------------------------------- Less charge-offs: Mortgage loans (221) (480) (124) Other loans (106) (62) (125) - -------------------------------------------------------------------------------------------------- Balance at end of year $ 2,334 $ 2,237 $ 2,529 ==================================================================================================
The following table shows the allocation of the allowance for loan losses by category of loans at December 31, 1997, 1996 and 1995.
- ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- PERCENTAGE Percentage Percentage OF LOANS of Loans of Loans AMOUNT TO TOTAL Amount to Total Amount to Total - ------------------------------------------------------------------------------------------------------------------- Mortgage loans: Residential $1,544 90% $1,915 88% $2,101 86% Commercial 12 1 3 2 104 3 Consumer loans 160 9 119 10 237 11 Other loans -- -- 57 -- 61 -- Unallocated 618 -- 143 -- 26 -- - ------------------------------------------------------------------------------------------------------------------- Total $2,334 100% $2,237 100% $2,529 100% ===================================================================================================================
7. NON-PERFORMING ASSETS The following schedule summarizes non-performing assets at the dates shown:
- -------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Total nonaccrual loans $ 1,771 $1,601 $2,428 Total real estate acquired through foreclosure -- 503 255 - -------------------------------------------------------------------------------------------------------- Total non-performing assets $ 1,771 $2,104 $2,683 ======================================================================================================== Percent of non-performing loans to total loans 0.65% 0.64% 0.97% Percent of non-performing assets to total assets 0.19% 0.24% 0.31%
The reduction in interest income associated with nonaccrual loans is as follows:
- ----------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Interest income that would have been recorded under original terms $163 $149 $204 Interest income actually recorded 97 78 60 - ----------------------------------------------------------------------------------------------------------------------- Reduction in interest income $ 66 $ 71 $144 =======================================================================================================================
During 1997 and 1996 the Company had no impaired loans. During 1995, its average recorded investment in impaired loans was negligible. 51 29 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, 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to originate residential mortgage loans $ 4,090 $ 4,264 Unadvanced portions of construction loans 496 332 Unused credit lines, including unused portions of equity lines of credit 19,445 19,546 ==================================================================================================================
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, 1997 1996 (IN YEARS) - ------------------------------------------------------------------------------------------------------------------- Premises: Land $1,227 $1,168 -- Buildings 3,642 3,395 15 - 45 Building and leasehold improvements 1,635 1,587 3 - 30 Equipment 3,405 3,093 3 - 20 - ------------------------------------------------------------------------------------------------------------------- 9,909 9,243 Less: accumulated depreciation and amortization 5,540 5,148 - ------------------------------------------------------------------------------------------------------------------- Total premises and equipment, net $4,369 $4,095 ==================================================================================================================
The Bank is obligated under a number of noncancelable operating leases for various banking offices. These operating leases expire at various dates through 2008 with options for renewal. Rental expenses for the years ended December 31, 1997, 1996 and 1995 amounted to $522 thousand, $508 thousand and $494 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, 1997, are as follows:
- ------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS - ------------------------------------------------------------------------- 1998 $ 481 1999 438 2000 234 2001 234 2002 143 Later years 465 - ------------------------------------------------------------------------- Total $ 1,995 =========================================================================
52 30 10. DEPOSITS Deposits are summarized as follows:
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------- AMOUNT RATE AMOUNT RATE - ------------------------------------------------------------------------------------------------------------- Demand and NOW: NOW accounts $ 47,944 1.14% $ 45,352 1.16% Demand accounts 18,915 -- 17,382 -- - ------------------------------------------------------------------------------------------------------------- Total demand and NOW 66,859 0.82 62,734 0.84 - ------------------------------------------------------------------------------------------------------------- Savings: Regular savings and special notice accounts 329,348 3.47 333,834 3.49 Money market accounts 23,527 3.09 23,824 3.12 - ------------------------------------------------------------------------------------------------------------- Total savings 352,875 3.44 357,658 3.47 - ------------------------------------------------------------------------------------------------------------- Time certificates: Fixed rate certificates 316,368 5.53 303,722 5.52 Variable rate certificates 74,666 6.48 65,417 6.37 - ------------------------------------------------------------------------------------------------------------- Total time certificates 391,034 5.71 369,139 5.67 - ------------------------------------------------------------------------------------------------------------- Deposit acquisition premium, net of amortization (918) -- (1,181) -- - ------------------------------------------------------------------------------------------------------------- Total deposits $809,850 4.32% $788,350 4.29% =============================================================================================================
The maturity distribution and related rate structure of the Bank's time certificates at December 31, 1997 follows:
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------- AVERAGE AMOUNT INTEREST RATE - ------------------------------------------------------------------------------------------------------------- Due within 3 months $106,163 5.52% Due within 3 - 6 months 78,224 5.44 Due within 6 - 12 months 96,851 5.70 Due within 1 - 2 years 75,522 6.01 Due within 2 - 3 years 32,096 6.36 Due within 3 - 5 years 2,064 5.73 Thereafter 114 5.88 - ------------------------------------------------------------------------------------------------------------- Total $391,034 5.71% =============================================================================================================
At December 31, the Bank had individual time certificates of deposit of $100 thousand or more maturing as follows:
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------- Due within 3 months $22,757 $18,834 Due within 3 - 6 months 9,298 7,479 Due within 6 - 12 months 17,969 15,327 Due within 1 - 2 years 12,293 13,545 Due within 2 - 3 years 8,602 5,411 Due within 3 - 5 years 114 439 - ------------------------------------------------------------------------------------------------------------- Total $71,033 $61,035 =============================================================================================================
53 31 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 carrying amounts of the interest-bearing deposits in banks and term federal funds sold reported in the balance sheet at December 31, 1997 and 1996 approximate fair value. SECURITIES The fair value of investment securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. 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. The carrying amount and estimated fair values of the Company's investment securities are as follows:
- ------------------------------------------------------------------------------------------------------ (IN THOUSANDS) AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------------ CARRYING CALCULATED Carrying Calculated AMOUNT FAIR VALUE Amount Fair Value - ------------------------------------------------------------------------------------------------------ Securities held to maturity $ 372 $ 372 $ 160 $ 160 Securities available for sale 482,224 482,224 471,752 471,752 Trading securities 21,260 21,260 4,672 4,672 - ------------------------------------------------------------------------------------------------------ Total securities $503,856 $503,856 $476,584 $476,584 ======================================================================================================
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, 1997 1996 - ------------------------------------------------------------------------------------------------------ CARRYING CALCULATED Carrying Calculated AMOUNT FAIR VALUE Amount Fair Value - ------------------------------------------------------------------------------------------------------ Real estate: Residential: Adjustable $ 50,068 $ 50,709 $ 49,261 $ 49,240 Fixed 194,881 199,220 170,774 171,766 Commercial: Adjustable 3,833 3,867 4,034 4,047 Fixed 16 16 70 75 Consumer and other 23,505 23,438 25,522 25,527 - ------------------------------------------------------------------------------------------------------ Total loans 272,303 277,250 249,661 250,655 Less: allowance for loan losses (2,334) -- (2,237) -- - ------------------------------------------------------------------------------------------------------ Net loans $269,969 $277,250 $247,424 $250,655 ======================================================================================================
54 32 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, 1997 and 1996. 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, 1997 1996 - ------------------------------------------------------------------------------------------------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value - ------------------------------------------------------------------------------------------------------------- Demand accounts $ 18,915 $ 18,915 $ 17,382 $ 17,382 NOW accounts 47,944 47,944 45,352 45,352 Regular savings and special notice accounts 329,348 329,348 333,834 333,834 Money market accounts 23,527 23,527 23,824 23,824 Time certificates 391,034 391,926 369,139 371,368 Deposit acquisition premium, net of amortization (918) -- (1,181) -- - ------------------------------------------------------------------------------------------------------------- Total deposits 809,850 811,660 788,350 791,760 Escrow deposits of borrowers 1,502 1,502 1,271 1,271 - ------------------------------------------------------------------------------------------------------------- Total $811,352 $813,162 $789,621 $793,031 =============================================================================================================
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, 1997 and 1996 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. 55 33 12. INCOME TAXES Income tax payable was allocated as follows:
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------- Current income tax payable: Federal $1,192 $ 633 State 48 172 - ------------------------------------------------------------------------------------------------------------- Total current income tax payable 1,240 805 - ------------------------------------------------------------------------------------------------------------- Deferred income tax payable: Federal 3,735 1,327 State 1,192 462 - ------------------------------------------------------------------------------------------------------------- Total deferred income tax payable 4,927 1,789 - ------------------------------------------------------------------------------------------------------------- Total income tax payable $6,167 $2,594 =============================================================================================================
Income tax expense (benefit) was allocated as follows:
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Current income tax expense: Federal $5,096 $4,641 $4,209 State 1,034 1,122 1,071 - ------------------------------------------------------------------------------------------------------------- Total current tax expense 6,130 5,763 5,280 - ------------------------------------------------------------------------------------------------------------- Deferred income tax expense (benefit): Federal (102) 194 183 State (26) 53 115 Change in valuation reserve (4) (9) (22) - ------------------------------------------------------------------------------------------------------------- Total deferred tax expense (benefit) (132) 238 276 - ------------------------------------------------------------------------------------------------------------- Total income tax expense $5,998 $6,001 $5,556 =============================================================================================================
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 as a result of the following:
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Computed "expected" income tax expense at statutory rate $5,658 $5,400 $5,010 Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal benefit 656 764 771 Dividends received deduction (95) (94) (72) Other (217) (60) (131) Change in valuation reserve (4) (9) (22) - ------------------------------------------------------------------------------------------------------------- Income tax expense $5,998 $6,001 $5,556 - ------------------------------------------------------------------------------------------------------------- Effective income tax rate 37.10% 38.90% 38.81% =============================================================================================================
56 34 12. INCOME TAXES (continued) At December 31, 1997 and 1996, the Bank had gross deferred tax assets and gross deferred tax liabilities as follows:
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------- Deferred tax assets: Loan losses $ 257 $ 248 Deferred loan fees, net 195 256 Deferred compensation and pension cost 546 409 Depreciation 83 35 Purchase accounting 468 194 Other 26 36 - ------------------------------------------------------------------------------------------------------------- Gross deferred tax asset 1,575 1,178 - ------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Valuation of securities 6,404 2,894 Other unrealized securities gains 86 56 Other 12 17 - ------------------------------------------------------------------------------------------------------------- Gross deferred tax liability 6,502 2,967 - ------------------------------------------------------------------------------------------------------------- Net deferred tax liability $4,927 $1,789 =============================================================================================================
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, 1997. The primary sources of recovery of the gross federal deferred tax asset are federal income taxes paid in 1997, 1996 and 1995 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. As a result of the Tax Reform Act of 1996, the special tax bad debt provisions were amended to eliminate the reserve method. However, the tax effect of the pre-1988 bad debt reserve amount of approximately $7.3 million remains subject to recapture in the event that the Bank pays dividends in excess of its reserves and profits. 57 35 13. ACQUISITION (UNAUDITED) On July 21, 1997, MASSBANK Corp., through the Bank, acquired all the outstanding common stock of Glendale Co-operative Bank ("Glendale") for $7.38 million in cash. Glendale was a Massachusetts chartered co-operative bank founded in 1928 which operated from a single office in the city of Everett. Glendale was merged with and into the Bank on the acquisition date. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations of Glendale have been included in MASSBANK Corp.'s consolidated financial statements from the date of acquisition. The excess of the purchase price over the fair value of the net identifiable assets acquired of $1.53 million has been recorded as goodwill and is being amortized on a straight line basis over 15 years. The following unaudited condensed pro forma financial information presents the combined results of operations of MASSBANK Corp. and Glendale as if the acquisition had occurred as of the beginning of 1997 and 1996, after giving effect to certain adjustments, including amortization of goodwill. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had MASSBANK Corp. and Glendale constituted a single entity during such periods.
- ------------------------------------------------------------------------------------------------------------- (UNAUDITED) (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------- Interest and dividend income $ 62,879 $60,341 Interest expense 35,878 34,275 - ------------------------------------------------------------------------------------------------------------- Net interest income 27,001 26,066 Provision for loan losses 260 160 - ------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 26,741 25,906 Non-interest income 3,923 2,844 Non-interest expense 14,045 12,796 - ------------------------------------------------------------------------------------------------------------- Income before income taxes 16,619 15,954 Income tax expense 6,186 6,219 - ------------------------------------------------------------------------------------------------------------- Net Income $ 10,433 $ 9,735 - ------------------------------------------------------------------------------------------------------------- Earnings per share (in dollars): Basic $ 2.96 $ 2.74 Diluted 2.85 2.66 - -------------------------------------------------------------------------------------------------------------
14. EARNINGS PER SHARE The following is a calculation of earnings per share for the years indicated:
- ----------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE DATA) BASIC DILUTED Basic Diluted Basic Diluted - ----------------------------------------------------------------------------------------------------------------- Net income $ 10,167 $ 10,167 $ 9,427 $ 9,427 $ 8,759 $ 8,759 Average shares outstanding 3,575,962 3,575,962 3,616,769 3,616,769 3,674,385 3,674,385 Dilutive stock options -- 138,653 -- 101,845 -- 135,980 Unallocated Employee Stock Ownership Plan ("ESOP") shares not committed to be released (51,305) (51,305) (60,109) (60,109) (68,905) (68,905) - ----------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 3,524,657 3,663,310 3,556,660 3,658,505 3,605,480 3,741,460 Earnings per share (in dollars) $ 2.88 $ 2.77 $ 2.65 $ 2.58 $ 2.43 $ 2.34 =================================================================================================================
58 36 15. 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 to otherwise violate legal or regulatory requirements. Substantially all of the Company's retained earnings are unrestricted at December 31, 1997. 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 I capital. Highly rated banks (i.e., those with a composite rating of 1 under the CAMEL rating system) are required to maintain a minimum leverage ratio of Tier I capital to total average assets of at least 3.00%. An additional 100 to 200 basis points are required for all but these most highly rated institutions. The Bank is also required to maintain a minimum level of risk-based capital. Under the new risk-based capital standards, FDIC insured institutions must maintain a Tier I capital to risk-weighted assets ratio of 4.00% and are generally expected to meet a minimum total qualifying capital to risk-weighted assets ratio of 8.00%. The new risk-based capital guidelines take into consideration risk factors, as defined by the regulators, associated with various categories of assets, both on and off the balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk adjusted assets to determine the risk-based capital ratios. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus the Tier II capital components is referred to as total qualifying capital. The capital ratios of the Company and its principal subsidiary "MASSBANK" set forth below currently exceed the minimum ratios for "well capitalized" banks as defined by federal regulators.
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FOR CAPITAL TO BE WELL AT DECEMBER 31, 1997 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1) - ------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------- TIER I CAPITAL (TO AVERAGE ASSETS): MASSBANK Corp. (consolidated) $92,303 10.23% $27,071 3.00% N/A -- MASSBANK (the "Bank") 88,852 9.85 27,071 3.00 $45,118 5.00% TIER I CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 92,303 34.14 10,814 4.00 N/A -- MASSBANK (the "Bank") 88,852 32.87 10,814 4.00 16,221 6.00 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 94,637 35.01 21,628 8.00 N/A -- MASSBANK (the "Bank") 91,186 33.73 21,628 8.00 27,035 10.00 =============================================================================================================
(1) This column presents the minimum amounts and ratios that a financial institution must have to be categorized as adequately capitalized.
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FOR CAPITAL TO BE WELL AT DECEMBER 31, 1996 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1) - ------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------- TIER I CAPITAL (TO AVERAGE ASSETS): MASSBANK Corp. (consolidated) $87,068 10.09% $25,899 3.00% N/A -- MASSBANK (the "Bank") 85,688 9.93 25,899 3.00 $43,165 5.00% TIER I CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 87,068 33.41 10,423 4.00 N/A -- MASSBANK (the "Bank") 85,688 32.88 10,423 4.00 15,634 6.00 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): MASSBANK Corp. (consolidated) 89,305 34.27 20,846 8.00 N/A -- MASSBANK (the "Bank") 87,925 33.74 20,846 8.00 26,057 10.00 =============================================================================================================
(1) This column presents the minimum amounts and ratios that a financial institution must have to be categorized as adequately capitalized. 59 37 16. EMPLOYEE BENEFITS PENSION PLAN The Bank sponsors a noncontributory 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, 1997, 1996 and 1995, the plan's latest valuation dates:
- -------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT OCTOBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Vested $4,028 $3,636 $3,845 Non-vested 35 25 55 - -------------------------------------------------------------------------------------------------------------------------------- Total accumulated benefit obligation $4,063 $3,661 $3,900 ================================================================================================================================ Actuarial present value of projected benefit obligation for service rendered to date $4,990 $4,287 $4,622 Plan assets at fair value 5,810 5,090 4,181 - -------------------------------------------------------------------------------------------------------------------------------- Excess (deficiency) of plan assets over projected benefit obligation $ 820 $ 803 $ (441) ================================================================================================================================ Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: Discount rate 7.25% 7.50% 7.00% Rate of increase in compensation levels 4.50% 4.50% 4.00% ================================================================================================================================
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:
- -------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT OCTOBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Unrecognized net asset at October 31, being recognized over 21 years $ 211 $ 232 $ 254 Unrecognized net gains or (losses) 886 670 (412) Accrued pension cost (277) (99) (283) - -------------------------------------------------------------------------------------------------------------------------------- Excess (deficiency) of plan assets over projected benefit obligation $ 820 $ 803 $ (441) ================================================================================================================================
Net pension expense for the years ended December 31, included the following components: - -------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Service cost -- benefits earned during the period $ 367 $ 309 $ 319 Accrual of discount 322 308 303 Actual return on plan assets (769) (632) (686) Net amortization and deferral 257 283 412 - -------------------------------------------------------------------------------------------------------------------------------- Net pension expense $ 177 $ 268 $ 348 ================================================================================================================================ Assumptions used to develop the net pension expense data were: Discount rate 7.50% 7.00% 7.50% Expected long-term rate of return on assets 8.00% 8.00% 7.50% Rate of increase in compensation levels 4.50% 4.00% 5.50% ================================================================================================================================
60 38 16. EMPLOYEE BENEFITS (continued) PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLANS The Bank's Profit Sharing and Incentive Compensation Bonus Plans provide for payments 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. Payments of $417 thousand, $418 thousand and $413 thousand were awarded under the plan in 1997, 1996 and 1995, respectively. EMPLOYEE STOCK OWNERSHIP PLAN The Bank has an Employees' Stock Ownership Plan ("ESOP") for the benefit of each employee who has completed at least 1,000 hours of service with the Company in the previous twelve months. 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, 1997 and 1996, such outstanding liabilities totaled $781 thousand and $937 thousand, respectively. Shares of the Company's common stock purchased with the loan proceeds are held in a suspense account. As the loan is repaid, a proportionate number of shares are released for allocation to plan participants. The shares are allocated to plan participants annually, on a pro rata basis, based on compensation. The ESOP acquired unallocated shares in 1986 when the plan was first established and more recently in 1993. At December 31, 1997, the ESOP held 44,000 unallocated shares and 116,963 shares which have been allocated to participants. The fair value of the unallocated shares at December 31, 1997 was $2,096 thousand. Dividends on unallocated shares are used to offset a portion of the interest paid on the ESOP loan. Dividends on allocated shares held by the ESOP are allocated to plan participants proportionately based on the number of shares in the participant's allocated account. Total compensation and interest expense applicable to the ESOP amounted to $398 thousand, $314 thousand and $303 thousand for the years ended December 31, 1997, 1996 and 1995, respectively. EMPLOYEE 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. 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 $132 thousand, $99 thousand and $94 thousand in 1997, 1996 and 1995, 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. All but 42/3 of the 690,000 shares reserved for issuance under the plan were issued. 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 190,000 shares. Both incentive stock options and non-qualified stock options may be granted under the plans. As of December 31, 1997, there were 146,760.7 non-qualified stock options and 213,439.3 incentive stock options granted and outstanding to purchase shares under the plans. The maximum option term is ten years. Further stock options may be granted pursuant to the 1994 Stock Incentive Plan 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. 61 39 16. EMPLOYEE BENEFITS (continued) A summary of the status of the Company's fixed stock option plan as of December 31, 1997, 1996 and 1995, and changes during the years ended on those dates is presented below:(1)
- -------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- WEIGHTED Weighted Weighted SHARES AVERAGE Shares Average Shares Average UNDER EXERCISE Under Exercise Under Exercise FIXED OPTIONS OPTION PRICE Option Price Option Price - -------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 347,166.7 $15.46 369,776 $13.60 423,154.7 $12.19 Granted 48,333.3 30.09 46,000 23.40 44,333.3 17.54 Exercised (35,300) 13.19 (68,605.3) 10.74 (96,710.7) 9.21 Forfeited -- -- (4) 8.63 (1,001.3) 17.24 - -------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 360,200 $17.65 347,166.7 $15.46 369,776 $13.60 ================================================================================================================================ Options exercisable at year-end 360,200 347,166.7 369,776 ================================================================================================================================
The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 1997:
- --------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1997 OPTIONS OUTSTANDING OPTIONS EXERCISABLE - --------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG. RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE - -------------------------------------------------------------------------------------------------------------------------------- $6.88 to $10.75 73,966.7 3.6 years $8.73 73,966.7 $8.73 16.00 to 17.34 190,566.7 5.7 years 16.62 190,566.7 16.62 18.28 to 19.88 3,666.6 7.5 years 19.44 3,666.6 19.44 23.25 to 30.09 92,000 8.6 years 26.87 92,000 26.87 - -------------------------------------------------------------------------------------------------------------------------------- $6.88 to $30.09 360,200 6.0 years $17.65 360,200 $17.65 ================================================================================================================================
(1) All share information presented has been adjusted to reflect the 4-for-3 and 3-for-2 split of the Company's common stock effective September 15, 1997 and September 9, 1994, respectively As discussed in Note 1, the Company adopted SFAS No. 123 on January 1, 1996, but continues to account for its stock option plan using the intrinsic value based method prescribed by APB Opinion No. 25. Accordingly, no compensation cost for this plan has been recognized in the Consolidated Statements of Income for 1997. In determining the pro forma disclosures required by SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming the stock option plan was accounted for using the fair value method prescribed by SFAS No. 123, the weighted average assumptions used and the grant date fair value of options granted in 1997, 1996 and 1995:
- -------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Net income As reported $ 10,167 $ 9,427 $8,759 Pro forma 9,916 9,230 8,598 - -------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share As reported $ 2.88 $ 2.65 $ 2.43 Pro forma 2.81 2.60 2.38 - -------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share As reported $ 2.77 $ 2.58 $ 2.34 Pro forma 2.70 2.52 2.30 ================================================================================================================================ Weighted average fair value $ 8.84 $ 8.04 $ 6.93 Expected life 7.4 years 7.2 years 7.4 years Risk-free interest rate 6.47% 5.64% 7.66% Expected volatility 22.0% 23.0% 23.0% Expected dividend yield 2.3% 2.7% 2.7% ================================================================================================================================
62 40 17. 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 $0.01 per Right until ten days after a person becomes a 15% shareholder of MASSBANK Corp. or until certain other triggering events have occurred. 18. PARENT COMPANY FINANCIAL STATEMENTS The following are the condensed financial statements for MASSBANK Corp. (the "Parent Company") only:
BALANCE SHEETS - ---------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) AT DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS: Cash $ 13 $ 20 Interest-bearing deposits in banks 3,390 1,365 Investment in subsidiaries 101,109 91,807 Other assets 77 14 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 104,589 $ 93,206 ================================================================================================================================== LIABILITIES: Employee stock ownership plan liability (Note 16) $ 781 $ 937 Due to subsidiaries -- 3 Other liabilities 29 16 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 810 956 ================================================================================================================================== STOCKHOLDERS' EQUITY (Notes 12, 15, 16 and 17): Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued -- Common stock, par value $1.00 per share; 10,000,000 shares authorized, 7,336,800 and 5,476,125 shares issued, respectively 7,337 5,476 Additional paid-in capital 58,737 57,858 Retained earnings 70,984 65,756 - ---------------------------------------------------------------------------------------------------------------------------------- 137,058 129,090 Treasury stock at cost, 3,766,022 and 2,789,411 shares, respectively (41,569) (39,904) Net unrealized gains on securities available for sale, net of tax effect (Note 3) 9,071 4,001 Common stock acquired by ESOP (Note 16) (781) (937) - ---------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 103,779 92,250 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $104,589 $93,206 ==================================================================================================================================
63 41 18. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Income: Dividends received from subsidiaries $ 6,400 $5,750 $4,400 Interest and dividend income 56 20 22 - ------------------------------------------------------------------------------------------------------------------- 6,456 5,770 4,422 Non-interest expense 118 103 95 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 6,338 5,667 4,327 Income tax benefit 40 14 130 - ------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiaries 6,378 5,681 4,457 Equity in undistributed earnings of subsidiaries 3,789 3,746 4,302 - ------------------------------------------------------------------------------------------------------------------- Net income $10,167 $9,427 $8,759 - -------------------------------------------------------------------------------------------------------------------
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, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 10,167 $ 9,427 $ 8,759 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (3,789) (3,746) (4,302) Decrease (increase) in other assets -- 25 (25) Decrease in accrued income taxes payable (59) (21) (80) Deferred income tax benefit (4) (2) -- Increase in other liabilities 13 6 10 (Decrease) increase in amount due to subsidiaries (3) (121) 121 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 6,325 5,568 4,483 - ------------------------------------------------------------------------------------------------------------------- Cash flow from financing activities: Payments to acquire treasury stock (1,665) (3,534) (3,082) Issuance of common stock under stock option plan 467 738 891 Tax benefit resulting from stock options exercised -- 28 8 Dividends paid on common stock (3,124) (2,459) (1,981) Tax benefit resulting from dividends paid on unallocated shares held by the ESOP 15 15 -- - ------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (4,307) (5,212) (4,164) - ------------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 2,018 356 319 Cash and cash equivalents at beginning of year 1,385 1,029 710 - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 3,403 $ 1,385 $ 1,029 - -------------------------------------------------------------------------------------------------------------------
During the years ended December 31, 1997, 1996 and 1995, the Company made cash payments for income taxes of $16 thousand, $23 thousand and $13 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 $42 thousand, $41 thousand and $28 thousand during the years ended December 31, 1997, 1996 and 1995, respectively. 64 42 19. TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 1992 1991 1990 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 10,167 $9,427 $ 8,759 $8,185 $6,695 $ 4,677 $ 2,250 $ 725 Basic earnings per share(2) 2.88 2.65 2.43 2.19 1.71 1.22 0.59 0.16 Cash dividends declared per share(2) 0.88 1/2 0.69 0.54 3/4 0.45 0.34 0.26 1/2 0.22 3/4 0.22 Book value per share, at year end(2) 29.06 25.75 24.84 20.09 20.46 18.37 17.54 16.20 Return on average assets 1.12% 1.08% 1.04% 0.96% 0.79% 0.61% 0.60% 0.23% Return on average realized equity(1) 11.11% 11.01% 10.81% 10.62% 8.98% 6.79% 3.39% 1.03% ================================================================================================================================ - ------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1989 1988 - ------------------------------------------------------------- Net income $2,668 $4,917 Basic earnings per share(2) 0.50 0.86 Cash dividends declared per share(2) 0.21 0.19 Book value per share, at year end(2) 15.16 14.21 Return on average assets 0.86% 1.56% Return on average realized equity(1) 3.38% 6.20% =============================================================
(1) Excludes average net unrealized gains or losses on securities available for sale. (2) All share information presented has been adjusted to reflect the 4-for-3 and 3-for-2 split of the Company's common stock effective September 15, 1997 and September 9, 1994, respectively. 20. QUARTERLY DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT 4th 3rd 2nd 1st PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------------------------------------------------- Interest and dividend income $15,496 $15,460 $15,017 $14,760 Interest expense 8,840 8,937 8,555 8,349 - ------------------------------------------------------------------------------------------------- Net interest income 6,656 6,523 6,462 6,411 Provision for loan losses 95 45 52 68 - ------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,561 6,478 6,410 6,343 Non-interest income 882 886 1,136 894 Non-interest expense 3,115 3,191 3,924 3,195 - ------------------------------------------------------------------------------------------------- Income before income taxes 4,328 4,173 3,622 4,042 Income tax expense 1,672 1,584 1,173 1,569 - ------------------------------------------------------------------------------------------------- Net income $ 2,656 $ 2,589 $ 2,449 $ 2,473 ================================================================================================= Earnings per share (in dollars):(1) Basic $ 0.75 $ 0.74 $ 0.69 $ 0.70 Diluted 0.72 0.70 0.67 0.68 - ------------------------------------------------------------------------------------------------- Weighted average common shares outstanding:(1) Basic 3,521 3,520 3,529 3,530 Diluted 3,683 3,671 3,653 3,647 ================================================================================================= - ------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1996 - ------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT 4th 3rd 2nd 1st PER SHARE DATA) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------- Interest and dividend income $14,828 $14,767 $14,390 $14,124 Interest expense 8,473 8,441 8,139 8,009 - ------------------------------------------------------------------------------------------------- Net interest income 6,355 6,326 6,251 6,115 Provision for loan losses 10 85 35 30 - ------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,345 6,241 6,216 6,085 Non-interest income 621 703 724 617 Non-interest expense 3,117 2,921 3,030 3,056 - ------------------------------------------------------------------------------------------------- Income before income taxes 3,849 4,023 3,910 3,646 Income tax expense 1,459 1,579 1,540 1,423 - ------------------------------------------------------------------------------------------------- Net income $ 2,390 $ 2,444 $ 2,370 $ 2,223 ================================================================================================= Earnings per share (in dollars):(1) Basic $ 0.68 $ 0.69 $ 0.66 $ 0.62 Diluted 0.66 0.67 0.65 0.60 - ------------------------------------------------------------------------------------------------- Weighted average common shares outstanding:(1) Basic 3,524 3,526 3,574 3,604 Diluted 3,629 3,621 3,673 3,711 =================================================================================================
(1) Computation of earnings per share is further described in Note 1. 65 43 MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA YEARS ENDED DECEMBER 31, 1997 AND 1996 MASSBANK Corp.'s common stock is currently traded on the Nasdaq Stock Market under the symbol "MASB." At December 31, 1997 there were 3,570,778 shares outstanding and 957 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(1) CASH ------------------------- DIVIDENDS HIGH LOW DECLARED - ------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1997 - ------------------------------------------------------------------------------------ Fourth Quarter 48 1/4 41 $ 0.24 Third Quarter 47 1/2 35 5/8 0.24 Second Quarter 35 13/16 29 29/32 0.2025 First Quarter 31 7/8 28 1/8 0.2025 - ------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1996 - ------------------------------------------------------------------------------------ Fourth Quarter 29 1/16 24 27/32 $ 0.18 Third Quarter 25 11/16 24 3/8 0.18 Second Quarter 25 5/16 24 9/16 0.165 First Quarter 25 7/8 23 1/4 0.165 - ------------------------------------------------------------------------------------
(1) Stock prices have been adjusted to reflect the 4-for-3 split of the Company's common stock effective September 15, 1997. CORPORATE INFORMATION MASSBANK Corp. 123 Haven Street Reading, MA 01867 (781) 662-0100 FAX (781) 942-1022 Savings and Mortgage 24-Hour-Rate Lines (781) 662-0154 (978) 446-9285 Notice of Shareholders' Meeting The Annual Meeting of the Shareholders of MASSBANK Corp. will be held at 10:00 A.M. on Tuesday, April 21, 1998 at the Tara Ferncroft Conference Center 50 Ferncroft Road Danvers, MA 01923 Trademark MASSBANK and its logo are registered trademarks of the Company Form 10-K Shareholders may obtain without charge a copy of the Company's 1997 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' 1997 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 66 44 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 Editorial Page Editor, Lowell Sun Publishing Co., Inc. *Robert S. Cummings Senior Partner, Peabody and Brown Louise A. Hickey Retired, Melrose-Wakefield Hospital Leonard Lapidus United States Government Official *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 OFFICERS Gerard H. Brandi Chairman, President and Chief Executive Officer Donald R. Washburn Senior Vice President, Lending Donna H. West Senior Vice President, Community Banking Raymond A. Brearey Vice President, 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 Marianne J. Carpenter Assistant Treasurer Charles F. Coupe Information Officer Janet L. Daniels Assistant Vice President Aunali Dohadwala Auditor Karen J. Downs Assistant Treasurer Karen L. Flammia Assistant Vice President Melissa J. Flanagan Assistant Treasurer Ana M. Foster Compliance and Security Officer Gerard F. Frechette Loan 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 Mindy S. Peloquin Assistant Treasurer Thomas J. Queeney Assistant Vice President Renald A. Robillard Assistant Treasurer Alice B. Sweeney Assistant Comptroller Richard A. Tatarczuk Assistant Vice President and Comptroller Patricia A. Witts 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 Donna H. West 67 45 MASSBANK BRANCH OFFICES d/b/a MASSBANK of Reading* 123 Haven Street Reading, MA 01867 (781) 942-8188 MASSBANK of Chelmsford 296 Chelmsford Street Eastgate Plaza Chelmsford, MA 01824 (978) 256-3751 17 North Road Chelmsford, MA 01824 (978) 256-3733 MASSBANK of Dracut 45 Broadway Road Dracut, MA 01826 (978) 441-0040 MASSBANK of Everett 738 Broadway Everett, MA 02149 (617) 387-5115 MASSBANK of Lowell 50 Central Street Lowell, MA 01852 (978) 446-9200 755 Lakeview Avenue Lowell, MA 01850 (978) 446-9216 MASSBANK of Medford 4110 Mystic Valley Parkway Wellington Circle Plaza Medford, MA 02155 (781) 395-4899 MASSBANK of Melrose 476 Main Street Melrose, MA 02176 (781) 662-0100 27 Melrose Street Towers Plaza Melrose, MA 02176 (781) 662-0165 MASSBANK of Stoneham 240 Main Street Stoneham, MA 02180 (781) 662-0177 MASSBANK of Tewksbury 1800 Main Street Tewksbury, MA 01876 (978) 851-0300 MASSBANK of Westford 203 Littleton Road Westford, MA 01886 (978) 692-3467 MASSBANK of Wilmington 370 Main Street Wilmington, MA 01887 (978) 658-4000 219 Lowell Street Lucci's Plaza Wilmington, MA 01887 (978) 658-5775 *Main Office 68 EX-22 5 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 22 List of Subsidiaries of MASSBANK Corp. MASSBANK Corp. is the parent company of: MASSBANK (the "Bank") MASSBANK has three wholly-owned subsidiaries: Readibank Properties, Inc. Readibank Investment Corporation Melbank Investment Corporation Information reflected is as of March 1, 1998. EX-23 6 CONSENT OF INDEPENDENT KPMG PEAT MARWICK LLP 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, 1998, relating to the consolidated balance sheets of MASSBANK Corp. and subsidiaries as of December 31, 1997 and 1996 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, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of MASSBANK Corp. /s/ KPMG Peat Marwick LLP Boston Massachusetts March 26, 1998 EX-27.FY97 7 FINANCIAL DATA SCHEDULE
9 0000799166 MASSBANK CORP. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 6,808 2,083 105,241 21,260 482,224 372 372 272,303 (2,334) 925,403 809,850 1,502 9,491 781 0 0 7,337 96,442 925,403 19,928 33,488 7,317 60,733 34,681 34,681 26,052 260 1,939 13,425 16,165 16,165 0 0 10,167 2.88 2.77 2.93 1,771 0 0 1,771 2,237 (327) 59 2,334 1,716 0 618
EX-27.FY96 8 FINANCIAL DATA SCHEDULE
9 0000799166 MASSBANK CORP. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 6,612 1,751 119,902 4,672 471,752 160 160 249,661 (2,237) 888,237 788,350 1,271 5,429 937 0 0 5,476 86,774 888,237 19,414 32,341 6,354 58,109 33,062 33,062 25,047 160 868 12,124 15,428 15,428 0 0 9,427 2.65 2.58 2.96 1,601 0 0 1,601 2,529 (542) 90 2,237 2,094 0 143
EX-27.FY95 9 FINANCIAL DATA SCHEDULE
9 0000799166 MASSBANK CORP. 1,000 12-MOS 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 2.43 2.34 3.15 2,428 0 0 2,428 2,566 (249) 42 2,529 2,503 0 26
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