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, 1995
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: (617) 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, 1995: 2,731,994 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1995 (unaudited) and December 31, 1994 3
Consolidated Statements of Income (unaudited)
for the three months ended June 30, 1995 and 1994 4
and for the six months ended June 30, 1995 and 1994 5
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1995 (unaudited)
and the year ended December 31, 1994 6
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1995 and 1994 7 - 8
Condensed Notes to the Consolidated Financial Statements 9 - 12
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 2. Changes in Securities 25
ITEM 3. Defaults Upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holders 25
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form 8-K 25
Signature Page 26
2
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
June 30, December 31,
1995 1994 (unaudited)
Assets:
Cash and due from banks $ 10,517 $ 9,610
Federal funds sold 75,937 22,551
Interest bearing deposits 900 --
Other short-term investments 8,032 --
______________________________________________________________________________
Total cash and cash equivalents 95,386 32,161
Term federal funds sold 25,000 --
Investment securities (Note 4) 411 567
Mortgage-backed securities (Note 4) 185,057 172,263
Securities available for sale (Note 5) 246,553 257,644
Trading securities, at market value 36,312 115,610
Loans:
Mortgage loans 212,338 220,269
Other loans 29,644 30,547
Less allowance for possible loan losses (2,568) (2,566)
______________________________________________________________________________
Net loans 239,414 248,250
Premises and equipment 4,312 4,328
Real estate acquired through foreclosure
or substantively repossessed 430 129
Accrued interest receivable 6,463 6,870
Other assets 1,485 5,825
______________________________________________________________________________
Total assets $840,823 $843,647
Liabilities and Stockholders' Equity:
Deposits:
Demand and NOW $ 66,375 $ 67,496
Savings 376,317 458,401
Time certificates of deposit 306,519 235,421
Deposit acquisition premium, net of amortization (1,526) (1,642)
______________________________________________________________________________
Total deposits 747,685 759,676
Escrow deposits of borrowers 1,050 966
Employee stock ownership plan loan 1,249 1,249
Other liabilities 7,933 7,252
______________________________________________________________________________
Total liabilities 757,917 769,143
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, 5,373,138 and
5,352,138 shares issued, respectively 5,373 5,352
Additional paid-in capital 55,931 55,609
Retained earnings 55,332 51,995
Treasury stock at cost, 2,635,911 and
2,570,411 shares, respectively (34,932) (33,288)
Net unrealized gains (losses) on securities
available for sale, net of tax effect 2,451 (3,915)
Common stock acquired by ESOP (1,249) (1,249)
______________________________________________________________________________
Total stockholders' equity 82,906 74,504
______________________________________________________________________________
Total liabilities and stockholders' equity $840,823 $843,647
<FN>
See accompanying condensed notes to consolidated financial statements.
3
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
June 30,
(In thousands except share data) 1995 1994
_____________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 4,146 $ 4,291
Other loans 752 596
Mortgage-backed securities 3,137 2,768
Securities available for sale 4,004 3,174
Trading securities 760 1,524
Federal funds sold 1,373 266
Other investments 48 8
______________________________________________________________________________
Total interest and dividend income 14,220 12,627
______________________________________________________________________________
Interest expense:
Deposits 7,680 6,384
Borrowed funds -- 1
______________________________________________________________________________
Total interest expense 7,680 6,385
______________________________________________________________________________
Net interest income 6,540 6,242
Provision for possible loan losses 40 250
______________________________________________________________________________
Net interest income after provision for
possible loan losses 6,500 5,992
Non-interest income:
Deposit account service fees 233 247
Gains (losses) on securities, net 35 (570)
Interest on tax settlements 51 1,188
Other 290 298
______________________________________________________________________________
Total non-interest income 609 1,163
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,832 1,729
Occupancy and equipment 500 514
Data processing 153 159
Professional services 118 131
Deposit insurance 440 445
Real estate acquired through foreclosure expenses 24 69
Write-down in loan valuation premium -- 282
Other 490 508
______________________________________________________________________________
Total non-interest expense 3,557 3,837
______________________________________________________________________________
Income before income taxes 3,552 3,318
Income tax expense 1,383 1,224
______________________________________________________________________________
Net income $ 2,169 $ 2,094
______________________________________________________________________________
Earnings per share (in dollars):
Earnings per common and common equivalent share $ 0.78 $ 0.73
______________________________________________________________________________
Weighted average common shares and common stock
equivalents outstanding 2,789,240 2,855,772
______________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
4
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six months ended
June 30,
(In thousands except share data) 1995 1994
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 8,364 $ 8,569
Other loans 1,420 1,177
Mortgage-backed securities 6,225 4,899
Securities available for sale 8,006 6,569
Trading securities 1,850 2,849
Federal funds sold 2,148 724
Other investments 55 28
______________________________________________________________________________
Total interest and dividend income 28,068 24,815
______________________________________________________________________________
Interest expense:
Deposits 14,868 12,573
Borrowed funds -- 1
______________________________________________________________________________
Total interest expense 14,868 12,574
______________________________________________________________________________
Net interest income 13,200 12,241
Provision for possible loan losses 110 370
______________________________________________________________________________
Net interest income after provision for
possible loan losses 13,090 11,871
Non-interest income:
Deposit account service fees 460 496
Gains (losses) on securities, net 39 (545)
Interest on tax settlements 51 1,188
Other 487 519
______________________________________________________________________________
Total non-interest income 1,037 1,658
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 3,648 3,400
Occupancy and equipment 1,008 1,096
Data processing 305 323
Professional services 231 266
Deposit insurance 879 898
Real estate acquired through foreclosure expenses 75 121
Write-down in loan valuation premium -- 282
Other 932 1,017
______________________________________________________________________________
Total non-interest expense 7,078 7,403
______________________________________________________________________________
Income before income taxes 7,049 6,126
Income tax expense 2,754 2,247
______________________________________________________________________________
Net income $ 4,295 $ 3,879
_____________________________________________________________________________
Earnings per share (in dollars):
Earnings per common and common equivalent share $ 1.54 $ 1.34
______________________________________________________________________________
Weighted average common shares and common stock
equivalents outstanding 2,793,204 2,900,364
______________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
5
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 1995 (unaudited)
and the Year Ended December 31, 1994
(In thousands except share data)
NET UNREALIZED
GAINS (LOSSES)
ON SECURITIES COMMON
ADDITIONAL AVAILABLE FOR STOCK
COMMON PAID-IN RETAINED TREASURY SALE, NET OF ACQUIRED
STOCK CAPITAL EARNINGS STOCK TAX EFFECT BY ESOP TOTAL
________ __________ _________ __________ __________ ________ ________
Balance at December 31, 1993 $ 3,522 $56,300 $45,502 $(28,225) $ 4,152 $(1,176) $80,075
Net income -- -- 8,185 -- -- -- 8,185
Cash dividends declared
($0.60 per share) -- -- (1,692) -- -- -- ( 1,692)
Net increase in liability
to ESOP -- -- -- -- -- ( 73) ( 73)
Purchase of treasury stock -- -- -- (5,063) -- -- (5,063)
Stock options exercised 54 1,085 -- -- -- -- 1,139
Transfer resulting from
three-for-two stock split 1,776 (1,776) -- -- -- -- --
Change in net unrealized gains
(losses) on securities available for
sale, net of tax effect -- -- -- -- (8,067) -- (8,067)
____________________________________________________________________________________________________________________
Balance at December 31, 1994 5,352 55,609 51,995 (33,288) (3,915) (1,249) 74,504
Net Income -- -- 4,295 -- -- -- 4,295
Cash dividends declared
($0.35 per share) -- -- (958) -- -- -- (958)
Purchase of treasury stock -- -- -- (1,644) -- -- (1,644)
Stock options exercised 21 322 -- -- -- -- 343
Change in net unrealized
gains (losses) on securities
available for sale, net of
tax effect -- -- -- -- 6,366 -- 6,366
_____________________________________________________________________________________________________________________
Balance at June 30, 1995 $ 5,373 $55,931 $55,332 $(34,932) $ 2,451 $(1,249) $82,906
_____________________________________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
6
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
1995 1994
____ ____
(In thousands)
Cash flows from operating activities:
Net income $ 4,295 $ 3,879
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 241 255
Amortization of deposit acquisition premium 116 115
Amortization of loan valuation premium 32 329
Decrease in accrued interest receivable 407 1,005
Increase in other liabilities 553 4,002
Decrease in accrued and deferred income taxes payable (513) (146)
Accretion of discounts on securities, net of
amortization of premiums (565) (241)
Net trading securities activity 79,808 (7,911)
(Gains) losses on securities available for sale (510) 922
(Gains) losses on trading securities 422 (377)
Increase (decrease) in deferred mortgage loan
origination fees, net of amortization (42) 35
Decrease (increase) in deferred income tax asset, net 399 (1,453)
Decrease (increase) in other assets (316) 160
Loans originated for sale (214) (1,034)
Loans sold 214 1,285
Provision for possible loan losses 110 370
Provision for losses and writedowns on real estate
acquired through foreclosure or substantively
repossessed 19 36
Increase in escrow deposits of borrowers 84 12
______________________________________________________________________________
Net cash provided by operating activities 84,540 1,243
______________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds (40,000) --
Proceeds from maturities of term federal funds 15,000 --
Proceeds from sales of securities available for sale 36,312 16,210
Proceeds from maturities of investment securities
and securities available for sale 28,147 98,207
Purchases of securities available for sale (44,889) (74,443)
Purchases of mortgage-backed securities (18,687) (61,501)
Principal repayments of mortgage-backed securities 8,969 19,024
Principal repayments of tax-exempt bonds 9 9
Loans originated (9,227) (32,093)
Loan principal payments received 17,570 25,310
Purchases of premises & equipment (225) (297)
Proceeds from sale of real estate acquired
through foreclosure 80 532
Net advances on real estate acquired through
foreclosure (7) --
______________________________________________________________________________
Net cash (used in) investing activities (6,948) (9,042)
______________________________________________________________________________
7
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Six Months Ended
June 30,
1995 1994
____ ____
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits (12,107) 2,382
Net increase in borrowed funds -- 85
Payments to acquire treasury stock (1,644) (3,105)
Issuance of common stock under stock option plan 257 273
Tax benefit resulting from stock options exercised 85 143
Dividends paid on common stock (958) (795)
______________________________________________________________________________
Net cash (used in) financing activities (14,367) (1,017)
______________________________________________________________________________
Net increase (decrease) in cash and cash
equivalents 63,225 (8,816)
Cash and cash equivalents at beginning of period 32,161 35,177
______________________________________________________________________________
Cash and cash equivalents at end of period $95,386 $26,361
______________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the year for interest $14,869 $12,574
Cash paid during the year for taxes, net of refunds 2,735 2,534
Non-cash transactions:
SFAS 115:
Increase (decrease) in stockholders' equity 6,366 (5,331)
Increase (decrease) in deferred tax (assets)
liabilities 4,832 (4,048)
Foreclosures and in-substance foreclosures 410 142
______________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
Disclosure of accounting policy:
For purposes of reporting cash flows, cash and cash equivalents consist of
cash and due from banks, federal funds sold and term federal funds sold
with original maturities of less than 90 days.
8
MASSBANK CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial condition and results of operations of MASSBANK Corp. (the
"Company") essentially reflect the operations of its subsidiary, MASSBANK for
Savings (the "Bank"). All significant intercompany balances and transactions
have been eliminated in consolidation.
The accompanying unaudited consolidated 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, 1995 and December 31, 1994, operating results for the
three months ended June 30, 1995 and 1994, and cash flows for the six months
ended June 30, 1995 and 1994. 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 years' 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, 1994.
(2) Common Stock
In July, 1994, the Company declared a three-for-two split of the common
stock of the Company, to be effected by means of a 50 percent stock
distribution. One share for each two shares held by shareholders of record on
August 26, 1994, was distributed on September 9, 1994. Prior year weighted
average common shares and common stock equivalents outstanding and earnings
per share amounts appearing in the consolidated financial statements have been
restated to reflect the three-for-two stock split of September, 1994 to permit
comparison with the current fiscal year.
(3) Earnings Per Common Share
The computation of earnings per common share for the three months and six
months ended June 30, 1995 and 1994 is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Stock options, when dilutive are included as common stock equivalents
using the Treasury stock method.
9
(4) Securities Held To Maturity
The book value and approximate market value of investment securities and
mortgage-backed securities held to maturity are as follows:
__________________________________________________________________________________________
At At
(In thousands) June 30, 1995 December 31, 1994
__________________________________________________________________________________________
Amortized Market Amortized Market
Cost Value Cost Value
________ ________ ________ _______
(unaudited)
Investment Securities:
Other bonds and obligations $ 411 $ 411 $ 567 $ 563
________ ________ ________ ________
Total investment securities $ 411 $ 411 $ 567 $ 563
________ ________ ________ ________
Mortgage-Backed Securities:
Government National Mortgage Association $ 86,447 $ 86,965 $ 90,153 $ 84,457
Federal Home Loan Mortgage Corporation 83,235 83,448 64,921 61,174
Federal National Mortgage Association 14,505 14,987 16,220 16,237
Other 870 916 969 998
_________ ________ ________ ________
Total mortgage-backed securities $185,057 $186,316 $172,263 $162,866
Investment and mortgage-backed securities are stated at cost, adjusted for
amortization of premiums and accretion of discounts, using a method that
approximates the level-yield method.
An analysis of unrealized gains and losses on investment and mortgage-backed
securities held to maturity is as follows:
__________________________________________________________________________________________
(In thousands) June 30, 1995 December 31, 1994
__________________________________________________________________________________________
Unrealized Unrealized
Gains Losses Gains Losses
________ ________ ________ ________
(unaudited)
Other bonds and obligations $ -- $ -- $ -- $ (4)
Mortgage-backed securities 2,589 (1,330) 229 (9,626)
________ ________ ________ _________
Total unrealized gains (losses) $ 2,589 $(1,330) $ 229 $ (9,630)
10
(5) Securities Available For Sale
The amortized cost and approximate market values of securities available
for sale are as follows:
__________________________________________________________________________________________
(In thousands) June 30, 1995 December 31, 1994
__________________________________________________________________________________________
Amortized Market Amortized Market
Cost Value Cost Value
________ ________ ________ ________
(unaudited)
U.S. Treasury obligations $225,402 $227,892 $250,354 $242,787
U.S. Government agency obligations 8,990 9,167 5,987 6,043
Other bonds and obligations 1,994 1,985 1,992 1,914
Marketable and other equity securities 5,855 7,509 6,197 6,900
________ ________ ________ ________
Total securities available for sale $242,241 $246,553 $264,530 $257,644
________ ________ ________ ________
Securities held for indefinite periods of time and not intended to be held
to maturity are classified as available for sale. The Company records
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.
Gains or losses on sales of securities are recognized at the time of sale
using the specific identification method.
An analysis of unrealized holding gains and losses on securities available
for sale is as follows:
__________________________________________________________________________________________
(In thousands) June 30, 1995 December 31, 1994
__________________________________________________________________________________________
Unrealized Unrealized
Gains Losses Gains Losses
______ ______ ______ ______
(unaudited)
U.S. Treasury obligations $3,073 $ (583) $ 146 $(7,713)
U.S. Government agency obligations 177 -- 56 --
Other bonds and obligations 5 (14) -- (78)
Marketable and other equity securities 1,660 (6) 792 (89)
_______ _______ _______ _______
Total unrealized gains (losses) $4,915 $ (603) $ 994 $(7,880)
_______ ________ _______ _______
(6) Trading Securities
Investments classified as trading securities are stated at market with
unrealized gains and losses included in earnings.
11
(7) Loans
The composition of the Bank's loan portfolio is summarized as follows:
_______________________________________________________________________________________
(In thousands June 30, 1995 December 31, 1994
_______________________________________________________________________________________
Mortgage loans:
Residential $204,490 $211,930
Commercial 7,391 8,155
Construction 866 603
________ ________
212,747 220,688
Add: Premium on loans 420 452
Less: deferred mortgage loan origination fees (829) (871)
_________ ________
Total mortgage loans 212,338 220,269
Other loans:
Consumer
Installment 1,961 1,972
Guaranteed education 10,504 10,152
Other secured 1,994 2,598
Home equity lines of credit 14,080 14,674
Unsecured 279 269
________ ________
Total consumer loans 28,818 29,665
Commercial 826 882
________ ________
Total other loans 29,644 30,547
_________ ________
Total loans $241,982 $250,816
(8) Commitments
At June 30, 1995, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$3,280,000 and commitments under existing home equity lines of credit and other
loans of approximately $20,181,000 which are not reflected on the consolidated
balance sheet. In addition, as of June 30, 1995, the Company had a performance
standby letter of credit conveyed to others in the amount of $1,249,000 which
is also not reflected on the consolidated balance sheet.
(9) Employee Stock Ownership Plan
Effective May 28, 1986, the Company established an employee stock
ownership plan ("ESOP"). Under the plan, the ESOP has borrowed funds from a
third party bank to invest in the Company's common stock. As this obligation
will be liquidated primarily through future contributions to the ESOP by the
Company, the obligation is reflected as a liability of the Company and a
reduction of shareholders' equity on the consolidated balance sheet. As of
June 30, 1995 and December 31, 1994, such outstanding liabilities totaled
$1,249,000.
12
(10) Changes in Accounting Principle
Employee Stock Ownership Plans ("ESOPs")
Effective January 1, 1994, the Company adopted the American Institute of
Certified Public Accounts ("AICPA") Statement of Position ("SOP") 93-6,
"Employers' Accounting for Employee Stock Ownership Plans". This SOP replaces
existing accounting guidance and brings about changes in the way employees
report transactions with leveraged ESOPs. Adoption of the Statement did not
have a significant effect on MASSBANK's financial statements.
Impaired Loans
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan", and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures". These statements require changes in both
the disclosure and impairment measurement of non-performing loans. Certain
loans which had previously been reported as non-performing and insubstance fore-
closures are currently required to be disclosed as impaired loans.
Additionally, certain loans are exempt from the provisions of these statements
including large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, such as consumer and residential
mortgage loans.
Commercial and commercial real estate loans are considered to be impaired
when it is probable that the Company will not be able to collect all amounts
due according to the contractual terms of the loan agreement.
The amount of impairment for all impaired loans is determined by the
difference between the present value of the expected cash flows related to the
loan using the original contractual interest rate, and its recorded value, or,
as a practical expedient at the loans observable market price or the fair value
of the collateral if the loan is collateral dependent.
Loans are placed on non-accrual when payment of principal or interest is
past due 90 days or more. Previously accrued income that has not been collec-
ted is reversed from current income, and subsequent cash receipts are applied
to reduce the unpaid principal balance. Loans are returned to accrual status
when collection of all contractual principal and interest is reasonably
assured and there has been sustained repayment performance. Adoption of
Statements 114 and 118 did not have a significant effect on the Company's
financial statements.
The Company did not have any impaired loans at June 30, 1995. The average
balance of impaired loans for the quarter ended June 30, 1995 was not
significantly different than the ending balance. There was no interest income
recognized on impaired loans during the recent quarter.
Activity in the allowance for loan losses account during the six months
ended June 30, 1995 was:
(in thousands)
Balance, December 31, 1994 $ 2,566
Provision 110
Loan losses charged off (150)
Less recoveries 42
________
Net charge-offs (108)
________
Balance, June 30, 1995 $ 2,568
(11) 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.
13
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1995
General
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this report.
MASSBANK Corp.'s (the "Company's") financial condition and results of
operations essentially reflect the operations of its subsidiary, MASSBANK for
Savings (the "Bank").
The Company's 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. The Company has consistently maintained positive
net interest income. Net income is also affected by the provision for
possible loan losses and by the level of non-interest income (including gains
or losses on securities), non-interest expenses and income taxes. Each of
these major elements of consolidated net income is discussed in succeeding
paragraphs.
FINANCIAL CONDITION
Total assets of the Company decreased by approximately $2.8 million from
$843.6 million at December 31, 1994 to $840.8 million at June 30, 1995. The
decrease in total assets is primarily attributable to a decrease in total
deposits partially offset by an increase in other liabilities and total
stockholders' equity.
The Bank's total deposits, escrow deposits of borrowers and other
liabilities combined declined by $11.2 million during the first half of 1995.
This decrease was partially offset by an increase of $8.4 million in total
stockholders' equity.
Stockholders' equity at June 30, 1995 equalled $82.9 million compared to
$74.5 million at December 31, 1994. The increase is primarily due to an
increase in retained earnings of $3.3 million during the six months ended
June 30, 1995 combined with a $6.4 million after tax improvement in the
securities available for sale valuation reserve.
For the three months ended June 30, 1995, average earning assets
equalled $819.6 million, a decrease of $12.6 million, from $832.2 million for
the same period in 1994.
Average interest bearing liabilities totaled $752.2 million for the first
quarter of 1995 compared to $769.7 million for the same quarter of 1994.
Loans
The Bank's loan portfolio has decreased during the first half of 1995
from $250.8 million at December 31, 1994 to $242.0 million at June 30, 1995.
loan originations during this period have not kept pace with the level of loan
amortization and payoffs in the Bank's portfolio. Loan originations in the
first half of 1995 declined to $9.4 million, compared to $33.1 million for the
same period in 1994, due primarily to the lack of loan demand in the Bank's
market area.
14
Investments
MASSBANK's investment portfolio, consisting of federal funds sold, term
federal funds sold, investment and mortgage-backed securities, securities
available for sale, trading securities and other short-term investments
remained fairly stable during the first half of 1995 increasing slightly to
$578.2 million or 68.8% of total assets at June 30, 1995, from $568.6 million
or 67.4% of total assets at December 31, 1994.
However, the market value of the Bank's securities portfolio increased by
$21.9 million from December 31, 1994 to June 30, 1995 resulting in net
unrealized gains of $5.6 million in the securities portfolio as of June 30,
1995 due to a continuing rally in the bond market during this period.
Deposits
Deposit accounts of all types have historically 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. Management attempts to manage its deposits through
selective pricing.
MASSBANK's total deposits decreased $12.0 million in the first half of
1995, from $759.7 million at December 31, 1994 to $747.7 million at June 30,
1995. Attractive returns on U.S. Treasuries and other alternative investment
opportunities have lured away some of the Bank's depositors.
ASSET QUALITY
Net loans represented 28.5% of total assets at June 30, 1995 as compared
to 29.4% of total assets at December 31, 1994. The Bank's securities and
other short-term investments, representing 68.8% of total assets at June 30,
1995, consist primarily of U.S. Treasuries, Government Agency obligations,
high quality mortgage-backed securities, federal funds sold and investments in
mutual funds of approximately $5.7 million. At June 30, 1995, the Bank's loan
portfolio consisted of residential mortgages of $205.0 million, commercial
mortgages of $7.4 million, consumer loans of $28.8 million and commercial
loans of approximately $0.8 million. Non-performing assets were $1.9 million
at June 30, 1995, representing 0.23% of total assets. This compares to $2.2
million, or 0.26% of total assets, at December 31, 1994. At June 30, 1995,
the Bank's allowance for possible loan losses was approximately $2.6 million,
representing 169.0% of non-performing loans and 1.06% of total loans. The
Bank believes that its allowance for possible loan losses is adequate to cover
the risks inherent in the loan portfolio under current conditions.
Results of Operations for the Three Months Ended
June 30, 1995 Compared to the Corresponding Period in 1994
General
MASSBANK Corp. reported record net income of $2,169,000 or $0.78 per
share for the second quarter of 1995, compared with net income of $2,094,000
or $0.73 per share earned in the same quarter of 1994. All share information
set forth in this report has been adjusted to reflect the 3-for-2 split of the
Company's common stock, effective September 9, 1994.
The Company's favorable earnings results for the second quarter of 1995
compared to the same quarter of 1994 can be attributed primarily to an
improvement in net interest margin, coupled with a lower provision for
possible loan losses. The earnings results for the recent quarter also
reflect a decrease in non-interest income which is partially offset by a
decrease in non-interest expense.
15
Net Interest Income
Net interest income before provision for possible loan losses totaled
$6,540,000 in the second quarter of 1995 compared to $6,242,000 in the
comparable quarter of 1994. As detailed in the average balance sheets on the
following pages, this is the result of an improvement in the Company's net
interest margin and interest rate spread. The interest rate spread was 2.85%
for the second quarter of 1995 compared to 2.75% for the same quarter in 1994.
The net interest margin for the three months ended June 30, 1995 and 1994 was
3.21% and 3.02%, respectively.
Interest and Dividend Income
Interest and dividend income increased by $1,593,000 or 12.6% to
$14,220,000 for the three months ended June 30, 1995 from $12,627,000 for the
same period in 1994.
The increase in interest and dividend income is primarily attributable to
an increase in yield on earning assets partially offset by a decrease in the
Company's average earning assets. The Company's average yield on total
earning assets for the second quarter of 1995 increased 87 basis points to
6.95% from 6.08% for the same period in 1994. This improvement is due
primarily to rising interest rates.
The average total earning assets of the Company decreased to $819.6
million in the second quarter of 1995 from $832.2 million for the
corresponding quarter of 1994.
Interest Expense
Total interest expense increased 20.3% to $7,680,000 for the three months
ended June 30, 1995 from $6,385,000 for the same period in 1994. The increase
in interest expense was primarily due to an increase in the Company's cost of
funds, partially offset by a decrease of $17.6 million in the Company's
average deposits and borrowed funds. During the second quarter of 1995, the
Company's average cost of funds increased 77 basis points to 4.10% from 3.33%
in the second quarter of 1994. This increase was primarily due to the rise in
market interest rates over the last twelve months, which increased rates on
customer deposits, and a shift in mix of deposits as customers have migrated
to higher yielding time deposits. Average deposits and borrowed funds for the
three months ended June 30, 1995 were $752.1 million compared to $769.7
million for the same period in 1994.
16
AVERAGE BALANCE SHEETS
Three Months Ended
June 30, 1995 June 30, 1994
______________ ______________
(1) Interest Average (1) Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
__________________________________________________________________________________________
Assets:
Earning assets:
Federal funds sold $ 89,821 $ 1,373 6.13% $ 27,166 $ 266 3.93%
Mortgage-backed securities 174,037 3,137 7.21 156,945 2,768 7.06
Securities available for sale 256,560 4,034 6.29 236,778 3,201 5.41
Trading securities 51,160 760 5.94 157,354 1,524 3.87
Other investments 3,361 50 5.95 972 12 4.86
Mortgage loans (2) 214,393 4,146 7.74 223,626 4,291 7.67
Other loans (2) 30,285 752 9.94 29,420 596 8.13
__________________________________________________ ________________
Total earning assets 819,617 $14,252 6.95% 832,261 $12,659 6.08%
__________________________________________________________________________________________
Allowance for possible
loan losses (2,597) (2,170)
__________________________________________________________________________________________
Total earning assets
less allowance for
possible loan losses 817,020 830,091
Other assets 20,982 23,338
__________________________________________________________________________________________
Total assets $838,002 $853,429
__________________________________________________________________________________________
17
AVERAGE BALANCE SHEETS (continued)
Three Months Ended
June 30, 1995 June 30, 1994
______________ ______________
(1) Interest Average (1) Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
__________________________________________________________________________________________
Liabilities:
Deposits:
Demand and NOW $ 64,657 $ 163 1.01% $ 66,129 $ 170 1.03%
Savings 388,408 3,207 3.31 535,588 4,407 3.30
Time certificates of deposit 299,101 4,310 5.78 167,579 1,807 4.32
__________________________________________________ ________________
Total deposits 752,166 7,680 4.10 769,296 6,384 3.33
Borrowed funds -- -- -- 437 1 0.46
__________________________________________________ ________________
Total deposits and
borrowed funds 752,166 7,680 4.10% 769,733 6,385 3.33%
Other liabilities 4,763 8,328
__________________________________________________________________________________________
Total liabilities 756,929 778,061
__________________________________________________________________________________________
Stockholders' equity 81,073 75,368
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $838,002 $853,429
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,572 6,274
Less adjustment of tax-exempt
interest income 32 32
__________________________________________________________________________________________
Net interest income $6,540 $6,242
__________________________________________________________________________________________
Interest rate spread 2.85% 2.75%
__________________________________________________________________________________________
Net interest margin (3) 3.21% 3.02%
__________________________________________________________________________________________
(1) Includes SFAS No. 115 adjustment.
(2) Loans on non-accrual status are included in the average balance.
(3) Annualized net interest income (tax equivalent basis) before provision
for possible loan losses divided by average interest-earning assets.
18
Provision for Possible Loan Losses
Possible losses on loans are provided for under the allowance method of
accounting. The allowance is increased by provisions charged to operations
based on management's assessment of many factors including the risk
characteristics of the portfolio, underlying collateral, current and
anticipated economic conditions that may affect the 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 possible
loan losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
As a result of management's assessment and analysis, the Bank provided
$40,000 for potential loan losses during the second quarter of 1995 compared to
$250,000 for the same quarter in 1994. Loan charge-offs net of recoveries,
were $69,000 and $232,000 for the respective periods. Non-performing assets
decreased to $1,950,000 as of June 30, 1995 from $2,227,000 as of December 31,
1994. At June 30, 1995 the balance of the allowance for possible loan losses
was $2,568,000 compared to $2,566,000 at the end of 1994. The reserve for loan
losses remains strong at 169.0% of total non-performing loans.
Non-Performing Assets
June 30, December 31, June 30,
(In thousands) 1995 1994 1994
______________________________________________________________________________
Non-Performing Assets:
Non-accrual loans $ 1,520 $ 2,098 $ 1,794
Real estate acquired through foreclosure
or substantively repossessed 430 129 273
______________________________________________________________________________
Total non-performing assets $ 1,950 $ 2,227 $ 2,067
______________________________________________________________________________
Allowance for possible loan losses $ 2,568 $ 2,566 $ 2,353
Allowance as percent of
non-accrual loans 169.0% 122.3% 131.2%
Non-accrual loans as percent
of total loans 0.63% 0.84% 0.70%
Non-performing assets as percent
of total assets 0.23% 0.26% 0.24%
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan", and SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" effective January 1, 1995. However, the Bank did not have any
impaired loans as of June 30, 1995.
19
Non-Interest Income
Non-interest income consists of deposit account service fees, gains or
losses on securities and other non-interest income.
Non-interest income for the quarter was $609,000, down from $1,163,000 a
year ago due primarily to extraordinary items (i.e. interest on tax
settlements of $1,188,000 and securities losses of $570,000 recorded in the
second quarter of 1994.
Non-Interest Expense
Non-interest expenses for the three months ended June 30, 1995 decreased
to $3,557,000 from $3,837,000 for the corresponding period in 1994.
The reduction was primarily due to a $282,000 write-down in loan
valuation premium in 1994
Income Tax Expense
The Company and its subsidiaries file consolidated federal income tax
returns on an October 31, year-end. The Parent Company is subject to a State
of Delaware Franchise Tax and a State of Massachusetts Bank Excise Tax and the
Bank's subsidiaries are subject to a State of Massachusetts Corporate Excise
Tax. Provisions for deferred income taxes are made as a result of timing
differences between financial and income tax methods of accounting.
The provision for federal and state income taxes increased to $2,169,000
for the three months ended June 30, 1995 from $2,094,000 for the same period
in 1994. The increase is due to higher income before taxes and an increase in
the Company's combined effective income tax rate from 36.9% for the second
quarter of 1994 to 38.9% for the second quarter of 1995. The Company's
estimated effective income tax rate for 1994 was reduced due to the resolution
of a federal income tax matter.
Results of Operations for the Six Months Ended
June 30, 1995 Compared to the Corresponding Period in 1994
General
For the first half of 1995, the Company reported net income of $4,295,000
or $1.54 per share, up 10.7% from the $3,879,000 or $1.34 per share earned in
the first six months of 1994.
The Company's favorable earnings results for the six months ended
June 30, 1995 compared to the same period in 1994 can be attributed primarily
to an improvement in net interest margin, coupled with a lower provision for
possible loan losses. The earnings results for 1995 also reflect a decrease
in non-interest income which is partially offset by a decrease in non-interest
expense.
Net Interest Income
Net interest income before provision for possible loan losses totaled
$13,200,000 in the first half of 1995 compared to $12,241,000 in the same
period of 1994. As detailed in the average balance sheets on the following
pages, this is the result of an improvement in the Company's net interest
margin and interest rate spread. The interest rate spread was 2.90% for the
six months ended June 30, 1995 compared to 2.67% for the same period a year
ago. The net interest margin for the six months ended June 30, 1995 and 1994
was 3.24% and 2.95%, respectively.
Interest and Dividend Income
Interest and dividend income increased by $3,253,000 or 13.1% to
$28,068,000 for the six months ended June 30, 1995 from $24,815,000 for the
same period in 1994.
20
The increase in interest and dividend income is primarily attributable to
an increase in yield on earning assets partially offset by a decrease in the
Company's average earning assets. The Company's average yield on total earning
assets for the first half of 1995 increased 91 basis points to 6.88% from 5.97%
for the same period in 1994. This improvement is due primarily to rising
interest rates.
The average total earning assets of the Company decreased to $818.2
million in the first half of 1995 from $833.8 million for the corresponding
period of 1994.
Interest Expense
Total interest expense increased 18.2% to $14,868,000 for the six months
ended June 30, 1995 from $12,574,000 for the same period in 1994. The increase
in interest expense was primarily due to an increase in the Company's cost of
funds, partially offset by a decrease of $14.6 million in the Company's average
deposits and borrowed funds. During the first half of 1995, the Company's
average cost of funds increased 68 basis points to 3.98% from 3.30% in the
first half of 1994. This increase was primarily due to the rise in market
interest rates over the last twelve months, which increased rates on customer
deposits, and a shift in mix of deposits as customers have migrated to higher
yeilding time deposits. Average deposits and borrowed funds for the six months
ended June 30, 1995 were $753.7 million compared to $768.3 million for the same
period in 1994.
AVERAGE BALANCE SHEETS
Six Months Ended
June 30, 1995 June 30, 1994
______________ ______________
(1) Interest Average (1) Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
__________________________________________________________________________________________
Assets:
Earning assets:
Federal funds sold $ 71,779 $ 2,148 6.03% $ 42,765 $ 724 3.41%
Mortgage-backed securities 173,116 6,225 7.19 137,175 4,899 7.15
Securities available for sale 258,773 8,066 6.23 247,476 6,627 5.36
Trading securities 65,860 1,850 5.62 153,348 2,849 3.73
Other investments 1,957 60 6.13 1,756 37 4.15
Mortgage loans (2) 216,279 8,364 7.73 221,635 8,569 7.73
Other loans (2) 30,465 1,420 9.36 29,675 1,177 8.00
__________________________________________________ ________________
Total earning assets 818,229 $28,133 6.88% 833,830 $24,882 5.97%
__________________________________________________________________________________________
Allowance for possible
loan losses (2,586) (2,233)
__________________________________________________________________________________________
Total earning assets
less allowance for
possible loan losses 815,643 831,597
Other assets 21,921 22,168
__________________________________________________________________________________________
Total assets $837,564 $853,765
__________________________________________________________________________________________
21
AVERAGE BALANCE SHEETS (continued)
Six Months Ended
June 30, 1995 June 30, 1994
______________ ______________
(1) Interest Average (1) Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
__________________________________________________________________________________________
Liabilities:
Deposits:
Demand and NOW $ 64,791 $ 328 1.02% $ 65,680 $ 341 1.05%
Savings 409,182 6,718 3.31 536,833 8,763 3.29
Time certificates of deposit 279,768 7,822 5.64 165,550 3,469 4.23
__________________________________________________ ________________
Total deposits 753,741 14,868 3.98 768,063 12,573 3.30
Borrowed funds -- -- -- 277 1 0.58
__________________________________________________ ________________
Total deposits and
borrowed funds 753,741 14,868 3.98% 768,340 12,574 3.30%
Other liabilities 4,807 7,764
__________________________________________________________________________________________
Total liabilities 758,548 776,104
__________________________________________________________________________________________
Stockholders' equity 79,016 77,661
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $837,564 $853,765
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 13,265 12,308
Less adjustment of tax-exempt
interest income 65 67
__________________________________________________________________________________________
Net interest income $13,200 $12,241
__________________________________________________________________________________________
Interest rate spread 2.90% 2.67%
__________________________________________________________________________________________
Net interest margin (3) 3.24% 2.95%
__________________________________________________________________________________________
(1) Includes SFAS No. 115 adjustment.
(2) Loans on non-accrual status are included in the average balance.
(3) Annualized net interest income (tax equivalent basis) before provision
for possible loan losses divided by average interest-earning assets.
22
Provision for Possible Loan Losses
The provision for loan losses charged against income was $110,000 for the
six months ended June 30, 1995 compared to $370,000 for the same period in
1994. Loan charge-offs net of recoveries totaled $108,000 for the first half
of 1995. The allowance for possible loan losses at June 30, 1995 stands at
$2,568,000, which equals 169.0% of non-performing loans and 1.06% of total
loans.
Non-Interest Income
Non-interest income consists of deposit account service fees, gains or
losses on securities and other non-interest income.
Non-interest income for the six months ended June 30, 1995 was
$1,037,000, down from $1,658,000 a year ago due primarily to extraordinary
items (i.e. interest on tax settlements of $1,188,000 and securities losses of
$545,000 recorded in the first half of 1994).
Non-Interest Expense
Non-interest expenses for the six months ended June 30, 1995 decreased to
$7,078,000 from $7,403,000 for the corresponding period in 1994.
The reduction was primarily due to a $282,000 write-down in loan
valuation premium in 1994.
Income Tax Expense
Total income tax expense for the first half of 1995 was $4,295,000
compared to $3,879,000 for the same period in 1994.
The increase is due to higher income before taxes coupled with an
increase in the Company's combined effective income tax rate from 36.7% for
the six months ended June 30, 1994 to 39.1% for the same period in 1995. The
Company's estimated effective income tax rate for 1994 was reduced due to the
resolution of a federal income tax matter. In addition, the Bank's use of
subsidiaries with securities corporation status for state income tax purposes
has also helped to reduce the estimated effective income tax rate for 1994 and
1995.
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 outflow from normal
depositor requirements and loan demands. The Bank's primary sources of funds
are deposits, loan amortization and prepayments, sale 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, 1995 the Bank had $75.9 million or
9.0% of total assets and $271.6 million or 32.3% of total assets invested
respectively in overnight federal funds sold and United States Treasury and
Government agency obligations.
23
The Bank is an 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 Tier 1 capital of at least 3% of their total assets.
All other banks are required to have Tier 1 capital of 4% to 5%. The FDIC has
authority to impose higher requirements for individual banks. The Bank is
also required to maintain a minimum level of risk-based capital. Under the
new risk-based capital standards, FDIC insured institutions generally are
expected to meet a minimum total qualifying capital to risk-weighted assets
ratio of 8.00% as of December 31, 1992. At June 30, 1995, the Bank had ratios
of Tier 1 capital to total assets of 9.39% and qualifying capital to risk-
weighted assets of 38.85%. The Company had ratios of Tier 1 capital to total
assets of 9.43% and total qualifying capital to risk-weighted assets of
39.00% at June 30, 1995.
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 institutions
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.
24
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, 1995, none of these actions individually
or in the aggregate is believed by management to be material to the
financial condition of MASSBANK Corp. or the Bank.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of MASSBANK Corp. on
April 18, 1994, stockholders voted affirmatively on the
following proposal:
To elect each Class III Director to serve until the 1998 Annual
Meeting of Stockholders and until their successors are chosen
and qualified.
Elected at Meeting
__________________
Samuel Altschuler
Gerard H. Brandi
Peter W. Carr
Robert E. Dyson
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. 1: Statement regarding computation of per share
earnings.
b. Reports on Form 8-K
None.
25
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 11, 1995 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date August 11, 1995 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO
26