SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to____________
Commission File Number 0-15137
MASSBANK Corp.
(Exact name of registrant as specified in its charter)
Delaware 04-2930382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 HAVEN STREET
Reading, Massachusetts 01867
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (781) 662-0100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's classes of common stock,
as of the latest practicable date is:
Class: Common stock $1.00 per share.
Outstanding at July 31, 2000: 3,248,943 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Income (unaudited)
for the three months ended June 30, 2000 and 1999 4
and for the six months ended June 30, 2000 and 1999 5
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 2000 (unaudited)
and the year ended December 31, 1999 6 - 7
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2000 and 1999 8 - 9
Condensed Notes to the Consolidated Financial Statements 10 - 11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 33
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 33
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 34
ITEM 2. Changes in Securities 34
ITEM 3. Defaults Upon Senior Securities 34
ITEM 4. Submission of Matters to a Vote of Security Holders 34
ITEM 5. Other Information 34
ITEM 6. Exhibits and Reports on Form 8-K 34
Signature Page 35
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
June 30, December 31,
2000 1999
(unaudited)
Assets:
Cash and due from banks $ 11,163 $ 10,476
Short-term investments (Note 3) 141,615 110,928
________________________________________________________________________________
Total cash and cash equivalents 152,778 121,404
Interest-bearing deposits in banks 1,496 3,841
Securities held to maturity, at amortized cost
(market value of $230 in 2000 and 1999) 230 230
Securities available for sale, at market value (amortized
cost of $442,058 in 2000 and $453,844 in 1999) 441,216 457,502
Trading securities, at market value 2 6,042
Loans: (Note 4)
Mortgage loans 280,926 288,580
Other loans 36,698 36,785
Less: allowance for loan losses (2,564) (2,555)
________________________________________________________________________________
Net loans 315,060 322,810
Premises and equipment 4,033 4,127
Real estate acquired through foreclosure -- 62
Accrued interest receivable 4,813 5,045
Goodwill 1,239 1,288
Accrued income tax asset, net 117 292
Deferred income tax asset, net 1,695 --
Other assets 2,476 2,073
________________________________________________________________________________
Total assets $925,155 $924,716
Liabilities and Stockholders' Equity:
Deposits $819,812 $818,057
Escrow deposits of borrowers 1,349 1,477
Employee stock ownership plan liability 468 468
Deferred income taxes payable -- 199
Other liabilities 2,673 3,036
________________________________________________________________________________
Total liabilities 824,302 823,237
Stockholders' Equity:
Preferred stock, par value $1.00 per share;
2,000,000 shares authorized, none issued -- --
Common stock, par value $1.00 per share;
10,000,000 shares authorized, 7,412,132 and
7,407,432 shares issued, respectively 7,412 7,407
Additional paid-in capital 61,044 60,591
Retained earnings 89,520 85,873
________________________________________________________________________________
157,976 153,871
Accumulated other comprehensive income (loss): (Note 5)
Net unrealized gains (losses) on securities
available for sale, net of tax effect (681) 1,966
Treasury stock at cost, 4,170,689 and
4,096,189 shares, respectively (55,974) (53,890)
Common stock acquired by ESOP (468) (468)
________________________________________________________________________________
Total stockholders' equity 100,853 101,479
________________________________________________________________________________
Total liabilities and stockholders' equity $925,155 $924,716
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
June 30,
(In thousands except share data) 2000 1999
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 4,914 $ 5,138
Other loans 741 486
Securities available for sale:
Mortgage-backed securities 4,748 4,360
Other securities 2,380 2,258
Trading securities 12 75
Federal funds sold 2,002 1,704
Other investments 118 324
______________________________________________________________________________
Total interest and dividend income 14,915 14,345
______________________________________________________________________________
Interest expense:
Deposits 8,621 8,215
______________________________________________________________________________
Total interest expense 8,621 8,215
______________________________________________________________________________
Net interest income 6,294 6,130
Provision for loan losses 15 60
______________________________________________________________________________
Net interest income after provision for loan losses 6,279 6,070
______________________________________________________________________________
Non-interest income:
Deposit account service fees 172 178
Gains on securities, net 886 1,131
Other 235 269
______________________________________________________________________________
Total non-interest income 1,293 1,578
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,649 1,893
Occupancy and equipment 501 512
Data processing 117 116
Professional services 498 106
Advertising and marketing 63 47
Amortization of intangibles 83 83
Other 414 365
______________________________________________________________________________
Total non-interest expense 3,325 3,122
______________________________________________________________________________
Income before income taxes 4,247 4,526
Income tax expense 1,530 1,660
______________________________________________________________________________
Net income $ 2,717 $ 2,866
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,229,032 3,379,796
Diluted 3,304,904 3,495,618
Earnings per share (in dollars):
Basic $ 0.84 $ 0.85
Diluted 0.82 0.82
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six months ended
June 30,
(In thousands except share data) 2000 1999
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 9,924 $10,263
Other loans 1,457 921
Securities available for sale:
Mortgage-backed securities 9,558 8,815
Other securities 4,785 4,365
Trading securities 53 345
Federal funds sold 3,502 3,367
Other investments 346 642
______________________________________________________________________________
Total interest and dividend income 29,625 28,718
______________________________________________________________________________
Interest expense:
Deposits 17,042 16,448
______________________________________________________________________________
Total interest expense 17,042 16,448
______________________________________________________________________________
Net interest income 12,583 12,270
Provision for loan losses 30 110
______________________________________________________________________________
Net interest income after provision for loan losses 12,553 12,160
______________________________________________________________________________
Non-interest income:
Deposit account service fees 346 356
Gains on securities, net 1,853 2,509
Other 406 454
______________________________________________________________________________
Total non-interest income 2,605 3,319
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 3,469 3,762
Occupancy and equipment 1,073 1,059
Data processing 245 241
Professional services 666 220
Advertising and marketing 118 95
Amortization of intangibles 165 163
Other 769 750
______________________________________________________________________________
Total non-interest expense 6,505 6,290
______________________________________________________________________________
Income before income taxes 8,653 9,189
Income tax expense 3,108 3,410
______________________________________________________________________________
Net income $ 5,545 $ 5,779
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,246,078 3,415,146
Diluted 3,321,132 3,531,267
Earnings per share (in dollars):
Basic $ 1.71 $ 1.69
Diluted 1.67 1.64
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 2000 (unaudited)
(In thousands except share data)
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) BY ESOP TOTAL
________ __________ _________ __________ __________ _________ ________
Balance at December 31, 1999 $7,407 $60,591 $85,873 $(53,890) $ 1,966 $(468) $101,479
Net Income -- -- 5 ,545 -- -- -- 5,545
Other comprehensive (loss),
net of tax:
Unrealized losses on securities,
net of reclassification adjustment (Note 5) -- -- -- -- (2,647) -- (2,647)
_____
Comprehensive income 2,898
Cash dividends declared and paid
($0.585 per share) -- -- (1,903) -- -- -- (1,903)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 5 -- -- -- 5
Amortization of ESOP shares
committed to be released -- 45 -- -- -- -- 45
Purchase of Company stock for
deferred compensation plan -- 346 -- (346) -- -- --
Purchase of treasury stock -- -- -- (1,738) -- -- (1,738)
Exercise of stock options
and related tax benefits 5 62 -- -- -- -- 67
___________________________________________________________________________________________________________________________
Balance at June 30, 2000 $7,412 $61,044 $89,520 $(55,974) $ (681) $(468) $100,853
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Year Ended December 31, 1999 (unaudited)
(In thousands except share data)
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) BY ESOP TOTAL
________ __________ _________ __________ __________ _________ ________
Balance at December 31, 1998 $7,384 $60,003 $78,308 $(46,272) $11,691 $(625) $110,489
Net income -- -- 11,311 -- -- -- 11,311
Other comprehensive (loss), net of tax:
Unrealized (losses) on securities,
net of reclassification adjustment (Note 5) -- -- -- -- (9,725) -- (9,725)
______
Comprehensive income 1,586
Cash dividends declared and paid
($1.11 per share) -- -- (3,759) -- -- -- (3,759)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 13 -- -- -- 13
Net decrease in liability to ESOP -- -- -- -- -- 157 157
Amortization of ESOP shares
committed to be released -- 163 -- -- -- -- 163
Purchase of treasury stock -- -- -- (7,618) -- -- (7,618)
Exercise of stock options
and related tax benefits 23 425 -- -- -- -- 448
__________________________________________________________________________________________________________________________
Balance at December 31, 1999 $7,407 $60,591 $85,873 $(53,890) $ 1,966 $(468) $101,479
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
2000 1999
____ ____
(In thousands)
Cash flows from operating activities:
Net income $ 5,545 $ 5,779
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 447 469
Loan interest capitalized (22) (21)
Amortization of ESOP shares committed to be released 45 88
Decrease in accrued interest receivable 232 27
(Decrease) increase in other liabilities (363) 217
Increase (decrease) in current income taxes payable 175 (944)
Accretion of discounts on securities, net of amortization
of premiums (422) (547)
Net trading securities activity 6,559 25,180
Gains on securities available for sale, net (1,544) (2,486)
Gains on trading securities, net (309) (23)
(Decrease) increase in deferred mortgage loan
origination fees, net of amortization (70) 53
Deferred income tax benefit (42) (94)
Decrease (increase) in other assets 113 (217)
Provision for loan losses 30 110
Gains on sales of real estate acquired through foreclosure (8) --
Gains on sales of premises and equipment -- (2)
Decrease in escrow deposits of borrowers (128) (88)
__________________________________________________________________________________________
Net cash provided by operating activities 10,238 27,501
__________________________________________________________________________________________
Cash flows from investing activities:
Proceeds from maturities of term federal funds -- 25,000
Net decrease (increase) in interest bearing bank deposits 2,345 (1,516)
Proceeds from sales of investment securities available for sale 22,122 41,968
Proceeds from maturities of investment securities
available for sale 25,000 42,800
Purchases of investment securities
available for sale (44,000) (109,866)
Purchases of mortgage-backed securities (13,748) (46,659)
Principal repayments of mortgage-backed securities 23,650 41,159
Principal repayments of securities held to maturity -- 124
Principal repayments of securities available for sale 2 41
Loans originated (14,749) (61,042)
Loan principal payments received 22,535 34,514
Loans purchased -- (345)
Purchases of premises & equipment (162) (264)
Proceeds from sales of real estate acquired through foreclosure 70 86
Proceeds from sales of premises and equipment -- 2
__________________________________________________________________________________________
Net cash provided by (used in) investing activities 23,065 (33,998)
__________________________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Six Months Ended
June 30,
2000 1999
____ ____
(In thousands)
Cash flows from financing activities:
Net increase in deposits 1,640 5,146
Payments to acquire treasury stock (2,084) (3,905)
Purchase of Company stock for deferred compensation plan 346 --
Issuance of common stock under stock option plan 67 156
Dividends paid on common stock (1,903) (1,850)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 5 6
__________________________________________________________________________________________
Net cash used in financing activities (1,929) (447)
__________________________________________________________________________________________
Net increase (decrease) in cash and cash equivalents 31,374 (6,944)
Cash and cash equivalents at beginning of period 121,404 154,814
__________________________________________________________________________________________
Cash and cash equivalents at end of period $152,778 $147,870
__________________________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $17,047 $16,454
Cash paid during the period for taxes, net of refunds 2,965 4,402
Purchases of securities executed but not settled at
beginning of period which settled during the period 117 129
Sales of securities executed but not settled at
beginning of period which settled during the period 202 583
Non-cash transactions:
SFAS 115:
Decrease in accumulated other comprehensive income (2,647) (6,411)
Decrease in deferred tax liabilities (1,853) (4,326)
Purchases of securities executed but not settled at end of period 100 6,038
Sales of securities executed but not settled at end of period 701 755
__________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial condition and results of operations of MASSBANK Corp. (the
"Company") essentially reflect the operations of its subsidiary, MASSBANK (the
"Bank"). All significant intercompany balances and transactions have been
eliminated in consolidation.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, and in the opinion of management,
include all adjustments of a normal recurring nature necessary for the fair
presentation of the financial condition of the Company as of June 30, 2000 and
December 31, 1999, and its operating results for the three and six months ended
June 30, 2000 and 1999. The results of operations for any interim period are
not necessarily indicative of the results to be expected for the entire year.
Certain amounts in the prior year's consolidated financial statements
have been reclassified to permit comparison with the current fiscal year.
The information in this report should be read in conjunction with the
financial statements and related notes included in the Annual Report on Form
10-K for the year ended December 31, 1999.
(2) Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents consist of
cash and due from banks, and short-term investments with original maturities of
less than 90 days.
(3) Short-Term Investments
Short-term investments consist of the following:
________________________________________________________________________________
At At
(In thousands) June 30, 2000 December 31, 1999
________________________________________________________________________________
Federal funds sold (overnight) $140,142 $ 86,211
Money market funds 1,473 24,717
________________________________________________________________________________
Total short-term investments $141,615 $110,928
________________________________________________________________________________
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
(4) Commitments
At June 30, 2000, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$2,591,000 and commitments under existing home equity lines of credit and other
loans of approximately $31,279,000 which are not reflected on the consolidated
balance sheet. In addition, as of June 30, 2000, the Company had a performance
standby letter of credit conveyed to others in the amount of $468,000 which is
also not reflected on the consolidated balance sheet.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) 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" describes the total of all components of
comprehensive income including net income.
The Company's other comprehensive loss and related tax effect for the
six months ended June 30, 2000 and the year ended December 31, 1999 is as
follows:
For the Six Months Ended
June 30, 2000
____________________________________________________________________________________
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
______ __________ ______
Unrealized losses on securities:
Unrealized holding losses arising during period $ (2,956) $1,192 $(1,764)
Less: reclassification adjustment for
gains realized in net income (1,544) 661 (883)
______ ________ ______
Net unrealized losses (4,500) 1,853 (2,647)
______ ________ ______
Other comprehensive loss $ (4,500) $1,853 $(2,647)
______ ________ _____
For the Year Ended
December 31, 1999
____________________________________________________________________________________
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
______ __________ ______
Unrealized losses on securities:
Unrealized holding losses arising during period $(12,171) $ 4,716 $(7,455)
Less: reclassification adjustment for
gains realized in net income (3,954) 1,684 (2,270)
______ ________ ______
Net unrealized losses (16,125) 6,400 (9,725)
______ ________ ______
Other comprehensive loss $(16,125) $ 6,400 $(9,725)
______ ________ ______
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2000
Cautionary Statement.
Certain statements contained in this report or incorporated herein by
reference are "forward-looking statements." We may also make written or oral
forward-looking statements in other documents we file with the Securities and
Exchange Commission, in our annual reports to stockholders, in press releases
and other written materials, and in oral statements made by our officers,
directors or employees. You can identify forward-looking statements by the use
of the words "believe," "expect," "anticipate," "intend," "estimate," "assume"
and other similar expressions which predict or indicate future events and trends
and which do not relate to historical matters. You should not rely on forward-
looking statements, because they involve known and unknown risks, uncertainties
and other factors, some of which are beyond the control of the Company. These
risks, uncertainties and other factors may cause the actual results, performance
or achievements of the Company to be materially different from the anticipated
future results, performance or achievements expressed or implied by the forward-
looking statements.
Some of the factors that might cause these differences include the
following: fluctuations in interest rates, price volatility in the stock and
bond markets, inflation, government regulations and economic conditions and
competition in the geographic and business areas in which the Company conducts
its operations; and increases in loan defaults. You should carefully review all
of these factors, and you should be aware that there may be other factors that
could cause these differences. These forward-looking statements were based on
information, plans and estimates at the date of this report, and we do not
promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
Results of Operations for the three months ended June 30, 2000
GENERAL
For the quarter ended June 30, 2000, MASSBANK Corp. reported consolidated
net income of $2,717,000 or $0.84 in basic earnings per share ($0.82 diluted),
compared to net income of $2,866,000, or $0.85 in basic earnings per share
($0.82 diluted) in the second quarter of 1999.
The Company's second quarter 2000 earnings results include (net) non
recurring charges of $363,000 representing professional service fees and other
expenses incurred in protecting the Company's registered trademarks against
infringement by another financial institution. The other financial institution
attempted to use a trade name similar to MASSBANK and the Company took legal
action. The dispute has been resolved and the parties involved have entered
into a settlement agreement. The other financial institution has been
permanently enjoined by the Federal District Court from using certain names or
trade names that are similar to MASSBANK. Additionally, as part of the
settlement agreement, MASSBANK received a payment in the amount of $100,000 that
was applied against the expenses of $463,000 incurred in this case, resulting in
net pre-tax charges of $363,000. These charges, on an after tax basis, reduced
the Company's net income in the recent quarter by approximately $211,000 or
$0.06 in diluted and basic earnings per share.
Excluding the impact of non recurring charges, the Company's net income
for the quarter ended June 30, 2000 was $2,928,000 or $0.90 in basic earnings
per share ($0.88 diluted), compared to net income of $2,866,000 or $0.85 in
basic earnings per share ($0.82 diluted) in the second quarter of 1999,
representing an increase of 7.3% over the diluted earnings per share results of
the prior year.
The Company's earnings results for the recent quarter compared to the same
quarter of 1999 reflect an increase in net interest income of $164,000 due to an
improvement in net interest margin partially offset by a decrease in average
earning assets, a decrease in the provision for loan losses of $45,000, and a
decrease in the Company's effective income tax rate. These improvements were
offset by a decrease in non-interest income of $285,000 due essentially to lower
securities gains and an increase of $203,000 in non-interest expense due to
(net) non-recurring charges of $363,000 incurred by the Company in the
aforementioned trademarks dispute. Additionally, the earnings per share results
for the recent quarter were positively affected by the reduced number of average
common shares outstanding as a result of the Company's purchase of 169,482
shares of its common stock, in the last twelve months, pursuant to its stock
repurchase program.
AVERAGE BALANCE SHEETS
Three Months Ended
June 30,
2000 1999
______________ ______________
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
Assets:
Earning assets:
Federal funds sold $128,287 $ 2,002 6.26% $146,374 $ 1,704 4.67%
Short-term investments (2) 7,703 115 6.01 27,183 318 4.70
Investment securities 173,306 2,409 5.56 170,281 2,291 5.38
Mortgage-backed securities 270,231 4,748 7.03 258,589 4,360 6.74
Trading securities 860 12 5.32 5,967 75 5.05
Mortgage loans (1) 282,942 4,914 6.95 294,180 5,138 6.99
Other loans (1) 36,545 741 8.10 23,984 486 8.12
__________________________________________________ ________________
Total earning assets 899,874 $14,941 6.64% 926,558 $14,372 6.20%
Allowance for loan losses (2,573) (2,502)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 897,301 924,056
Other assets 21,949 19,963
__________________________________________________________________________________________
Total assets $919,250 $944,019
AVERAGE BALANCE SHEETS - (contined)
Three Months Ended
June 30,
2000 1999
______________ ______________
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
Liabilities:
Deposits:
Demand and NOW $ 76,842 $ 124 0.65% $ 76,086 $ 123 0.65%
Savings 345,497 2,929 3.40 352,506 2,991 3.40
Time certificates of deposit 394,686 5,568 5.66 400,042 5,101 5.11
__________________________________________________ ________________
Total deposits 817,025 8,621 4.23 828,634 8,215 3.98
Other liabilities 3,108 8,117
__________________________________________________________________________________________
Total liabilities 820,133 836,751
Stockholders' equity 99,117 107,268
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $919,250 $944,019
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,320 6,157
Less adjustment of tax-exempt
interest income 26 27
__________________________________________________________________________________________
Net interest income $ 6,294 $ 6,130
__________________________________________________________________________________________
Interest rate spread 2.41% 2.22%
__________________________________________________________________________________________
Net interest margin (3) 2.81% 2.66%
__________________________________________________________________________________________
(1) Loans on non-accrual status are included in the average balance.
(2) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
(3) Net interest income (tax equivalent basis) before provision for loan
losses divided by average interest-earning assets.
(4) Includes the effects of SFAS No. 115.
Net Interest Income
The Company's net interest income was $6,294,000 for the second quarter
of 2000, an increase of $164,000 over the same quarter a year ago. The recent
quarter's increase in net interest income reflects an improvement in the
Company's net interest margin. The Company's net interest margin increased to
2.81% in the second quarter of 2000 from 2.66% in the second quarter of the
prior year. This improvement was partially offset by a decrease in the
Company's average earning assets. Average earning assets in the recent quarter
were $899.9 million, down from $926.6 million in the second quarter of 1999.
Interest and Dividend Income
Interest and dividend income on a fully taxable equivalent basis for the
three months ended June 30, 2000, increased to $14,941,000 from $14,372,000
for the three months ended June 30, 1999. The increase in interest income
resulted from an improvement in yield on the Company's average earning assets
partially offset by a decrease in average earning assets, as noted above. As
reflected in the table on page 14 of this report, the yield on average earning
assets in the second quarter of 2000 improved 44 basis points to 6.64% from
6.20% in the same quarter of 1999.
The Federal Reserve Bank has raised the Federal Funds rate six times in the
last twelve months, raising the rate from 4.75% to 6.50%. This increase,
because of the Bank's high volume of Federal Funds sold, has helped to improve
the overall yield on MASSBANK's earning assets. Also contributing to the
increase in yield on earning assets were improvements in yield on the Bank's
investment securities and other short-term investments. This is due essentially
to the proceeds from sales and maturing securities being reinvested and earning
higher returns, due to an increase in market interest rates in the last twelve
months.
Interest Expense
Total interest expense for the three months ended June 30, 2000 was
$8,621,000, up from $8,215,000 for the same quarter last year. The Company's
average deposits, as shown in the table on page 15, decreased $11.6 million
to $817.0 million in the second quarter of 2000, from $828.6 million in the
second quarter of 1999. The increase in interest expense resulted from an
increase in average cost of funds partially offset by the decrease in interest
expense resulting from the lower deposit volume. The Company's average cost of
funds for the three months ended June 30, 2000 was 4.23%, up from 3.98% for the
comparable period in 1999.
Provision for Loan Losses
The provision for loan losses represents a charge against current earnings
and an addition to the allowance for loan losses. The provision for loan losses
in the second quarter of 2000 was $15,000 compared to $60,000 in the second
quarter of 1999. 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 loan portfolio, underlying collateral, current and
anticipated economic conditions, and trends in loan delinquencies and charge-
offs. At June 30, 2000, the allowance for loan losses was $2,564,000
representing 269.0% of nonaccrual loans. The Bank's nonaccrual loans totaled
$953,000 at June 30, 2000 compared to $959,000 a year earlier. Net charge-offs
for the recent quarter were $20,000 compared to $2,000 in net-charge-offs for
the same quarter last year. Management believes that the allowance for loan
losses as of June 30, 2000 is adequate to cover the risks inherent in the loan
portfolio under current conditions.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
on securities and other non-interest income.
Non-interest income decreased by $285,000 to $1,293,000 for the recent
quarter, from $1,578,000 for the comparable quarter of the prior year. This
decrease is due essentially to lower net securities gains in the second quarter
of 2000.
Net gains on securities totaled $886,000 in the second quarter of this year
compared to $1,131,000 in the second quarter of last year. Realized gains on
the sale of equity securities totaled $958,000 for the three months ended
June 30, 2000. These gains, however, were partially offset by net losses
realized on the sale of debt securities of $100,000. The Bank also recorded a
mark-to-market gain of $28,000 on its trading account during this same period.
The Bank's deposit account service fees and other non-interest income
totaled $172,000 and $235,000, respectively, in the second quarter of 2000
compared to $178,000 and $269,000, respectively, in the second quarter of 1999.
The decrease in other non-interest income reflects a decrease of $20,000 in
income earned on the Bank's deferred compensation plan assets during the recent
quarter compared to the same quarter last year. A corresponding reduction of
$20,000 is also reflected in non-interest expense.
Non-Interest Expense
Non-interest expense increased $203,000 to $3,325,000 in the second quarter
of 2000, from $3,122,000 in the same quarter of the prior year. This increase
is due largely to an increase of $363,000 in professional service fees and other
expenses incurred by the Company in protecting its registered trademarks against
infringement by another financial institution, as explained on page 13 of this
Form 10-Q.
Salaries and employee benefits, the largest component of non-interest
expense, decreased by $244,000 or 12.9% in the second quarter of 2000 to
$1,649,000 from $1,893,000 in the second quarter of the prior year. This
decrease is due essentially to two items. (1) A decrease of $163,000 in accrued
expenses resulting from a reduction in the estimated year-end payments to
employees and officers under the Company's profit sharing and incentive
compensation bonus plans. (2) A decrease of $50,000 in the Company's net
periodic pension cost for the recent quarter. The estimated profit sharing and
incentive compensation bonus expense for the recent quarter has been reduced
due, in large part, to the non-recurring expenses that the Company incurred
during the quarter in connection with the aforementioned trademarks dispute
which reduced the Company's net income for the quarter.
Occupancy and equipment expense decreased $11,000 to $501,000 in the second
quarter of 2000. This decrease reflects a reduction in equipment expense of
$30,000, due in part to lower equipment depreciation expense, partially offset
by an increase of $19,000 in occupancy expense due to higher real estate taxes.
Professional services expense increased by $392,000 or 369.8% to $498,000
in the recent quarter, from $106,000 for the same quarter last year. This
increase is due essentially to the legal fees the Company incurred in connection
with the aforementioned trademarks infringement dispute and an increase in legal
fees incurred in connection with other business matters.
All other expenses combined, consisting of data processing, advertising and
marketing, amortization of intangibles and other expenses, increased $66,000
from $611,000 for the three months ended June 30, 1999 to $677,000 for the
three months ended June 30, 2000. This is essentially the result of an increase
in advertising and marketing expense of $16,000; postage expense of $23,000;
deposit insurance of $17,000, and other expenses of $10,000.
Income Tax Expense
The Company, the Bank and its subsidiaries file a consolidated federal
income tax return. The Parent Company is subject to a State of Delaware
Franchise Tax and a State of Massachusetts Bank Excise Tax and the Bank's
subsidiaries are subject to a State of Massachusetts Corporate Excise Tax.
The Company recorded income tax expense of $1,530,000 in the second quarter
of 2000, a decrease of $130,000 when compared to the same quarter last year.
The decrease in income tax expense is due primarily to a decrease in income
before income taxes and a reduction in the Company's effective income tax rate.
The Company's income before income taxes was $4,247,000 in the recent quarter
compared to $4,526,000 for the same quarter a year ago. The effective income
tax rate for the three months ended June 30, 2000 was 36.0% down from 36.7% for
the three months ended June 30, 1999. The decrease in effective income tax
rate is due in part to the increased investment income generated by the Bank's
two security corporation subsidiaries which are taxed at a lower rate than the
Bank for state income tax purposes.
Results of Operations for the six months ended June 30, 2000
General
For the six months ended June 30, 2000, the Company reported consolidated
net income of $5,545,000 or $1.71 in basic earnings per share ($1.67 per share
on a diluted basis) compared to net income of $5,779,000 or $1.69 in basic
earnings per share ($1.64 per share on a diluted basis) earned in the first half
of 1999.
Net income for the first six months of 2000 includes (net) non-recurring
charges of $363,000 ($211,000 post tax) pertaining to the Company's trademarks
infringement dispute with another financial institution. Excluding the impact
of these charges, the Company's net income for the first half of 2000 was
$5,756,000 or $1.77 in basic earnings per share ($1.73 diluted) compared to
$5,779,000 or $1.69 in basic earnings per share ($1.64 diluted) for the same
period in 1999.
The Company's financial performance in the first six months of 2000 also
reflects an improvement in net interest income of $313,000 due to an improvement
in net interest margin partially offset by a decrease in average earning assets,
a decrease in the provision for loan losses of $80,000, and a decrease in the
Company's effective income tax rate. These improvements were offset by a
decrease in non-interest income of $714,000 due essentially to lower securities
gains and an increase of $215,000 in non-interest expense due to (net)
non-recurring charges of $363,000 incurred by the Company in the aforementioned
trademarks dispute. Additionally, the earnings per share results for the first
half of 2000 were positively affected by the reduced number of average common
shares outstanding as a result of the Company's purchase of 169,482 shares of
its common stock, in the last twelve months, pursuant to its stock repurchase
program.
AVERAGE BALANCE SHEETS
Six Months Ended
June 30,
2000 1999
______________ ______________
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
Assets:
Earning assets:
Federal funds sold $116,839 $ 3,502 6.03% $144,699 $ 3,367 4.69%
Short-term investments (2) 11,982 341 5.71 26,720 632 4.77
Investment securities 175,164 4,848 5.54 164,552 4,436 5.39
Mortgage-backed securities 273,404 9,558 6.99 260,488 8,815 6.77
Trading securities 2,069 53 5.10 15,570 345 4.47
Mortgage loans (1) 284,926 9,924 6.97 291,214 10,263 7.05
Other loans (1) 36,601 1,457 7.95 22,662 921 8.18
__________________________________________________ ________________
Total earning assets 900,985 $29,683 6.59% 925,905 $28,779 6.22%
Allowance for loan losses (2,566) (2,479)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 898,419 923,426
Other assets 21,260 19,827
__________________________________________________________________________________________
Total assets $919,679 $943,253
AVERAGE BALANCE SHEETS - (continued)
Six Months Ended
June 30,
2000 1999
______________ ______________
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
Liabilities:
Deposits:
Demand and NOW $ 74,946 $ 242 0.65% $ 74,804 $ 261 0.70%
Savings 347,957 5,906 3.41 350,098 5,905 3.40
Time certificates of deposit 394,348 10,894 5.56 400,189 10,282 5.18
__________________________________________________ ________________
Total deposits 817,251 17,042 4.19 825,091 16,448 4.02
Other liabilities 3,205 9,251
__________________________________________________________________________________________
Total liabilities 820,456 834,342
Stockholders' equity 99,223 108,911
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $919,679 $943,253
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 12,641 12,331
Less adjustment of tax-exempt
interest income 58 61
__________________________________________________________________________________________
Net interest income $12,583 $12,270
__________________________________________________________________________________________
Interest rate spread 2.40% 2.20%
__________________________________________________________________________________________
Net interest margin (3) 2.81% 2.66%
__________________________________________________________________________________________
(1) Loans on non-accrual status are included in the average balance.
(2) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
(3) Net interest income (tax equivalent basis) before provision for loan
losses divided by average interest-earning assets.
(4) Includes the effects of SFAS No. 115.
Net Interest Income
Net interest income totaled $12,583,000 for the six months ended June 30,
2000, compared to $12,270,000 for the same period in 1999. The $313,000
increase is primarily attributable to an improvement in the Company's net
interest margin, partially offset by a decrease in average earning assets.
The Company's net interest margin for the first six months of 2000 was
2.81% compared to 2.66% for the same period last year. Average earning assets
for the six months ended June 30, 2000 decreased $24.9 million to $901.0 million
from $925.9 million for the corresponding period in 1999.
The Company's interest rate spread increased to 2.40% for the first six
months of 2000, from 2.20% in the first six months of last year. The yield on
the Company's average earning assets in the first half of 2000 increased by
37 basis points to 6.59% from 6.22% in the corresponding period of 1999. This
increase was partially offset by an increase of 17 basis points in the Company's
average cost of funds, from 4.02% for the six months ended June 30, 1999 to
4.19% for the same period this year.
Provision for Loan Losses
The provision for loan losses for the first half of 2000 was $30,000
compared to $110,000 for the same period in 1999. This decrease is essentially
due to a decrease in the size of the Bank's loan portfolio and low net loan
charge-offs. Loan charge-offs net of recoveries for the six months ended
June 30, 2000 and 1999 were $21,000 and $2,000, respectively.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains on
securities and other non-interest income.
Non-interest income for the first six months of 2000 decreased $714,000 to
$2,605,000 compared to $3,319,000 for the same period of 1999. This decrease
is essentially due to lower net securities gains. Net securities gains totaled
$1,853,000 for the six months ended June 30, 2000 compared to $2,509,000 for
the six months ended June 30, 1999. Deposit account service fees and other
non-interest income combined decreased $58,000 to $752,000 for the first half
of 2000 from $810,000 for the first half of 1999. This reduction is due
primarily to a decrease of $20,000 in income earned on the Bank's deferred
compensation plan assets during the first six months of 2000 compared to the
same period last year, a decrease in loan prepayment penalties of $16,000, a
decrease in deposit account service fees of $10,000 and a decrease in
miscellaneous other non-interest income of $12,000.
The Bank's non-interest expense also reflects a corresponding reduction
of $20,000 in deferred compensation plan expense for the first half of 2000.
Non-Interest Expense
Non-interest expense for the first half of 2000 increased $215,000 to
$6,505,000 from $6,290,000 for the same period last year. This increase is due
to (net) non-recurring charges of $363,000 that the Company incurred in the
recent quarter in protecting its trademarks from infringement by another
financial institution. The Company's non-interest expense for the first six
months of 2000 excluding the aforementioned non-recurring charges decreased
2.4% or $148,000 to $6,142,000 from $6,290,000 for the comparable period last
year. The decrease was due primarily to a decrease in salaries and employee
benefits expenses.
Salaries and employee benefits, the largest component of non-interest
expense, decreased $293,000 or 7.8% to $3,469,000 for the first half of 2000
from $3,762,000 for the first half of last year. This reduction is primarily
due to a decrease of $178,000 in the Company's profit sharing and deferred
compensation plan expense, a decrease of $100,000 in the Company's net periodic
pension cost and a decrease of $46,000 in the Company's Employee Stock Ownership
Plan Expense. These reductions were partially offset by a decrease of $74,000
in deferred loan origination related salary expenses. A decrease in deferred
expenses means that more loan origination related salary expenses are being
reflected in the current period rather than being amortized over the life of
the loans, because there are fewer loans being originated.
All other expenses combined, consisting of occupancy and equipment, data
processing, professional services, advertising and marketing, amortization of
intangibles and other expenses totaled $3,036,000 for the first half of 2000,
reflecting an increase of $508,000 over the $2,528,000 in expenses incurred for
the same period last year. Excluding the net non-recurring charges of $363,000
incurred in connection with the Company's trademarks dispute, the Company's
all other expenses combined increased $145,000 or 5.7% compared to the same
period of 1999. This increase is due primarily to an increase of $90,000 in
legal fees incurred by the Company in connection with other business matters.
Income Tax Expense
The provision for federal and state income taxes decreased to $3,108,000
for the six months ended June 30, 2000 from $3,410,000 for the same period in
1999. This decrease is due primarily to a decrease in income before income
taxes for the first half of 2000 and a reduction in the Company's effective
income tax rate. The Company's combined effective income tax rate for the
first half of 2000 is 35.9% compared to 37.1% for the same period a year ago.
Financial Condition
The Company's total assets increased by $0.5 million to $925.2 million at
June 30, 2000 from $924.7 million at December 31, 1999. The increase in total
assets reflects an increase in total investments and other assets of $6.0
million and $2.2 million, respectively, partially offset by a decrease in total
loans of $7.7 million.
Total investments consisting of investment securities, interest-bearing
bank deposits and other short-term investments increased from $578.5 million at
December 31, 1999 to $584.5 million at June 30, 2000. The mix of the Company's
investments also changed during the first half of 2000. Short-term investments
increased by $30.7 million, while the Company's securities available for sale,
trading account and interest bearing bank deposits declined by $16.3 million,
$6.0 million and $2.4 million, respectively.
The Bank's total loan portfolio at June 30, 2000, prior to the allowance
for loan losses, amounted to $317.6 million compared to $325.3 million at
December 31, 1999. The decrease in the loan portfolio reflects a decline in the
Bank's loan originations during the first half of 2000 compared to the same
period of 1999. Higher market interest rates during the first half of 2000
compared to the first half of 1999 significantly reduced the demand for mortgage
refinancings resulting in lower loan originations for the Bank. Loan
originations were $14.7 million in the first half of 2000 compared to $61.0
million in the first half of last year. Loan originations for the first half of
1999 include a single commercial loan in the amount of $15.0 million.
Total deposits were $819.8 million at June 30, 2000 reflecting an increase
of $1.7 million from $818.1 million at year-end 1999.
Total stockholders' equity declined to $100.9 million at June 30, 2000 from
$101.5 million at December 31, 1999. The decrease results primarily from a
reduction in net unrealized gains, net of tax effect, on the Company's available
for sale securities in the amount of $2.6 million, and the cost of the treasury
stock that the Company repurchased during the first half of 2000 in the amount
of $2.1 million. These decreases were partially offset by an increase in
retained earnings and additional paid-in capital of $3.6 million and $0.5
million, respectively. As a result, the Company's book value per share at
June 30, 2000 increased to $30.99, from $30.65 at year-end 1999.
Investments
As previously noted, total investments consisting of investment securities,
short-term investments, and interest-bearing bank deposits equalled $584.5
million at June 30, 2000, up $6.0 million from $578.5 million at year-end 1999.
These investments are principally in federal funds sold, short-term U.S.
Treasury and government agency obligations and government agency fifteen year
mortgage-backed securities. The Bank also maintains an equity securities
portfolio, valued at $20.0 million as of June 30, 2000, that has yielded
substantial realized and unrealized gains. Nearly all of the Bank's investment
securities are classified as available for sale or trading securities.
Management evaluates its investment alternatives in order to properly manage
the mix of assets on its balance sheet. Investment securities available for
sale and trading securities provide liquidity, facilitate interest rate
sensitivity management and enhance the Bank's ability to respond to customers'
needs should loan demand increase and/or deposits decline.
The Bank continues to maintain a large proportion of its securities
portfolio in government agency mortgage-backed securities. These represent an
attractive investment with minimal credit risk, no servicing responsibilities,
and no delinquencies. The Bank's investment in mortgage-backed securities
totaled $271.4 million at June 30, 2000 versus $282.3 million at year-end 1999.
The Bank also maintains a portfolio of trading securities which consisted
of the following as of the dates shown:
June 30, December 31,
(In thousands) 2000 1999
_____________ ____________
U.S. Treasury obligations $ -- $ 4,956
Investments in mutual funds 2 1,086
_______ _______
Total $ 2 $ 6,042
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at June 30, 2000 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At June 30, 2000 Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 230 $ -- $ -- $ 230
__________________________________________________________________________________________
Total securities held to maturity $ 230 $ -- $ -- $ 230
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $141,463 $ 60 $ (731) $140,792
U.S. Government agency obligations 9,149 -- (87) 9,062
__________________________________________________________________________________________
Total 150,612 60 (818) 149,854
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 34,256 135 (468) 33,923
Federal Home Loan Mortgage
Corporation 236,358 230 (5,062) 231,526
Federal National Mortgage
Association 3,012 38 (35) 3,015
Collateralized mortgage
obligations 2,970 3 (48) 2,925
__________________________________________________________________________________________
Total mortgage-backed securities 276,596 406 (5,613) 271,389
__________________________________________________________________________________________
Total debt securities 427,208 466 (6,431) 421,243
__________________________________________________________________________________________
Equity securities 14,850 6,443 (1,320) 19,973
__________________________________________________________________________________________
Total securities available for sale 442,058 $ 6,909 $ (7,751) $441,216
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale (842)
__________________________________________________________________________________________
Total securities available
for sale, net 441,216
__________________________________________________________________________________________
Total investment securities, net $441,446
__________________________________________________________________________________________
Trading securities $ 1 $ 2
__________________________________________________________________________________________
FINANCIAL CONDITION
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investment securities
at December 31, 1999 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At December 31, 1999 Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 230 $ -- $ -- $ 230
__________________________________________________________________________________________
Total securities held to maturity $ 230 $ -- $ -- $ 230
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $138,518 $ 122 $ (1,025) $137,615
U.S. Government agency obligations 16,143 -- (128) 16,015
__________________________________________________________________________________________
Total 154,661 122 (1,153) 153,630
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 38,061 251 (490) 37,822
Federal Home Loan Mortgage
Corporation 239,607 311 (4,028) 235,890
Federal National Mortgage
Association 3,951 74 (45) 3,980
Collateralized mortgage
obligations 4,649 16 (22) 4,643
__________________________________________________________________________________________
Total mortgage-backed securities 286,268 652 (4,585) 282,335
__________________________________________________________________________________________
Total debt securities 440,929 774 (5,738) 435,965
__________________________________________________________________________________________
Equity securities 12,915 8,985 (363) 21,537
__________________________________________________________________________________________
Total securities available for sale 453,844 $ 9,759 $ (6,101) $457,502
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 3,658
__________________________________________________________________________________________
Total securities available
for sale, net 457,502
__________________________________________________________________________________________
Total investment securities, net $457,732
__________________________________________________________________________________________
Trading securities $ 6,072 $ 6,042
__________________________________________________________________________________________
Investments (continued)
The amortized cost and estimated market value of debt securities held to
maturity and debt securities available for sale by contractual maturity at
June 30, 2000 and December 31, 1999 are as follows:
June 30, 2000
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 57,905 $ 57,755 $ -- $ --
After 1 year but within 5 years 89,589 89,044 230 230
After 5 years but within 10 years 2,969 2,909 -- --
After 15 years 149 146 -- --
________ _______ ______ ______
150,612 149,854 230 230
Mortgage-backed securities 276,596 271,389 -- --
________ _______ ______ ______
$427,208 $421,243 $ 230 $ 230
December 31, 1999
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 59,837 $ 59,796 $ -- $ --
After 1 year but within 5 years 91,707 90,818 230 230
After 5 years but within 10 years 2,966 2,871 -- --
After 15 years 151 145 -- --
________ _______ ______ ______
154,661 153,630 230 230
Mortgage-backed securities 286,268 282,335 -- --
________ _______ ______ ______
$440,929 $435,965 $ 230 $ 230
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
_______________________________________________________________________________________
At At
(In thousands) June 30, 2000 December 31, 1999
_______________________________________________________________________________________
Mortgage loans:
Residential $278,488 $287,169
Commercial 3,252 2,471
Construction 435 232
_______________________________________________________________________________________
282,175 289,872
Add: Premium on loans 132 159
Less: Deferred mortgage loan origination fees (1,381) (1,451)
_______________________________________________________________________________________
Total mortgage loans 280,926 288,580
Other loans:
Consumer:
Installment 1,791 1,418
Guaranteed education 6,624 7,037
Other secured 1,119 1,318
Home equity lines of credit 11,921 11,737
Unsecured 207 225
_______________________________________________________________________________________
Total consumer loans 21,662 21,735
Commercial 15,036 15,050
_______________________________________________________________________________________
Total other loans 36,698 36,785
_______________________________________________________________________________________
Total loans $317,624 $325,365
_______________________________________________________________________________________
The Bank's loan portfolio decreased $7.8 million during the first six
months of 2000, from $325.4 million at December 31, 1999 to $317.6 million at
June 30, 2000. The decrease was primarily in the residential 1-4 family
mortgage loan category.
Loan originations decreased by $28.7 million to $7.7 million in the recent
quarter compared to $36.4 million in the second quarter of 1999. This is due,
in large part, to an increase in mortgage interest rates and the resulting
decline in mortgage loan refinancings.
For the first six months of 2000, loan originations were $14.7 million,
down from $61.0 million for the same period last year. Loan originations for
the first six months of 1999 include a single commercial loan in the amount of
$15.0 million.
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing
assets at June 30, 2000 and 1999, and December 31, 1999:
At At At
June 30, December 31, June 30,
(In thousands) 2000 1999 1999
____________________________________________________________________________________
Non-Performing Assets:
Non-accrual loans $ 953 $ 795 $ 959
Real estate acquired through foreclosure -- 62 --
____________________________________________________________________________________
Total non-performing assets $ 953 $ 857 $ 959
____________________________________________________________________________________
Allowance for loan losses $ 2,564 $ 2,555 $ 2,558
Allowance as a percent of
non-accrual loans 269.0 % 321.4 % 266.7 %
Allowance as a percent of
non-performing assets 269.0 % 298.1 % 266.7 %
Non-accrual loans as a percent
of total loans 0.30% 0.24% 0.29%
Non-performing assets as a percent
of total assets 0.10% 0.09% 0.10%
____________________________________________________________________________________
The Bank generally does not accrue interest on loans which are 90 days or
more past due. It is the Bank's policy to place such loans on non-accrual
status and to reverse from income all interest previously accrued but not
collected and to discontinue all amortization of deferred loan fees.
Non-performing assets increased slightly from December 31, 1999 to June 30,
2000 as noted in the table above. The principal balance of non-accrual loans
at June 30, 2000 was $953,000 representing 3/10 of 1% of total loans at June 30,
2000.
The Bank did not have any impaired loans as of June 30, 2000.
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Six Months Ended
June 30,
2000 1999
________________________________________________________________________________
(In thousands)
Balance at beginning of period $ 2,555 $ 2,450
Provision for loan losses 30 110
Recoveries of loans previously charged-off 2 3
Less: Charge-offs (23) (5)
________________________________________________________________________________
Balance at end of period $ 2,564 $ 2,558
________________________________________________________________________________
The allowance for loan losses is established through a provision for loan
losses charged to operations based on management's assessment of many factors
including the risk characteristics of the portfolio, underlying collateral,
current and anticipated economic conditions that may effect the borrowers
ability to pay, and trends in loan delinquencies and charge-offs. Realized
losses, net of recoveries, are charged directly to the allowance. While
management uses the information available in establishing the allowance for
losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
At June 30, 2000 the balance of the allowance for loan losses was
$2,564,000 representing 269.0% of non-accrual loans. Management believes that
the allowance for loan losses is adequate to cover the risks inherent in the
portfolio under current conditions.
DEPOSITS
Deposit accounts of all types have traditionally been the primary source
of funds for the Bank's lending and investment activities. The Bank's deposit
flows are influenced by prevailing interest rates, competition and other market
conditions. The Bank's management attempts to manage its deposits through
selective pricing and marketing.
The Bank's total deposits increased by $1.7 million to $819.8 million at
June 30, 2000 from $818.1 million at December 31, 1999.
The composition of the Bank's total deposits as of the dates shown are
summarized as follows:
June 30, December 31,
2000 1999
______________________________________________________________________________
(In thousands)
Demand and NOW $ 76,341 $ 72,938
Savings and money market accounts 345,095 353,090
Time certificates of deposit 398,748 392,516
Deposit acquisition premium,
net of amortization (372) (487)
______________________________________________________________________________
Total deposits $819,812 $818,057
______________________________________________________________________________
Recent Accounting Developments
"Accounting for Derivative Instruments and Hedging Activities"
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes comprehensive
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in its balance sheet and measure
those instruments at fair market value. Under this Statement, an entity that
elects to apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. In June 1999, FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000. The Company intends to adopt
SFAS No. 133 as of January 1, 2001. The Statements are not expected to have a
material effect on the Company's consolidated financial statements.
Liquidity and Capital Resources
The Bank must maintain a sufficient amount of cash and assets which can
readily be converted into cash in order to meet cash outflows from normal
depositor requirements and loan demands. The Bank's primary sources of funds
are deposits, loan amortization and prepayments, sales or maturities of
investment securities and income on earning assets. In addition to loan
payments and maturing investment securities, which are relatively predictable
sources of funds, the Bank maintains a high percentage of its assets invested
in overnight federal funds sold, which can be immediately converted into cash,
and United States Treasury and Government agency securities, which can be sold
or pledged to raise funds. At June 30, 2000 the Bank had $140.1 million
or 15.1% of total assets and $149.9 million or 16.2% of total assets invested,
respectively, in overnight federal funds sold and United States obligations.
The Bank is a Federal Deposit Insurance Corporation ("FDIC") insured
institution subject to the FDIC regulatory capital requirements. The FDIC
regulations require all FDIC insured institutions to maintain minimum levels
of Tier 1 capital. Highly rated banks (i.e., those with a composite rating
of 1 under the CAMEL rating system) are required to maintain a minimum leverage
ratio of Tier 1 capital to total assets of at least 3.00%. An additional 100
to 200 basis points are required for all but these most highly rated
institutions. The Bank is also required to maintain a minimum level of
risk-based capital. Under the risk-based capital standards, FDIC insured
institutions must maintain a Tier 1 capital to risk-weighted assets ratio of
4.00% and are generally expected to meet a minimum total qualifying capital to
risk-weighted assets ratio of 8.00%. The 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, qualifying subordinated debt and up to
45 percent of the pre-tax net unrealized holding gains on certain available for
sale equity securities. Tier I plus the Tier II capital components are referred
to as total qualifying capital. The capital ratios of the Bank and the Company
currently exceed the minimum regulatory requirements. At June 30, 2000, the
Bank had a leverage Tier I capital to total assets ratio of 10.66%, a Tier I
capital to risk-weighted assets ratio of 33.11% and a total capital to risk-
weighted assets ratio of 34.75%. The Company, on a consolidated basis, had
ratios of leverage Tier I capital to total assets of 10.80%, Tier I capital to
risk-weighted assets of 35.55% and total capital to risk-weighted assets of
35.18% at June 30, 2000.
Impact Of Inflation And Changing Prices
MASSBANK Corp.'s financial statements presented herein have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time, due to the fact that substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity and Liquidity
See discussion and analysis of interest rate sensitivity and liquidity
provided in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1999. There have been no material changes in reported market
risks faced by the Corporation since the filing of the Corporation's 1999
Annual Report on Form 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their
business. As of June 30, 2000, none of these actions individually
or in the aggregate is believed by management to be material to the
financial condition of MASSBANK Corp. or the Bank.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meting of Stockholders of MASSBANK Corp. held on
April 18, 2000, stockholders voted affirmatively on the following
proposal:
1.) To elect one Director to serve until the 2001 Annual Meeting
of Stockholders and four Directors to serve until the 2003
Annual Meeting of Stockholders.
Elected At Meeting Term:
Mathias B. Bedell 3 Years
Allan S. Bufferd 3 Years
Robert S. Cummings 1 Year
Leonard Lapidus 3 Years
Herbert G. Schurian 3 Years
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
1. Exhibit No. 11.1: Statement regarding computation of per
share earnings.
2. Exhibit No. 27: Financial Data Schedule.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSBANK Corp. & Subsidiaries
_____________________________
(Registrant)
Date: August 10, 2000 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: August 10, 2000 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
Sr. V.P., Treasurer and CFO