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 September 30, 1996
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 October 31, 1996: 2,684,714 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Income (unaudited)
for the three months ended September 30, 1996 and 1995 4
and for the nine months ended September 30, 1996 and 1995 5
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1996 (unaudited)
and the year ended December 31, 1995 6
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1996 and 1995 7 - 8
Condensed Notes to the Consolidated Financial Statements 9 - 10
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 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
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
September 30, December 31,
1996 1995
____ ____
(unaudited)
Assets:
Cash and due from banks $ 5,377 $ 8,150
Short-term investments (Note 4) 111,068 117,505
______________________________________________________________________________
Total cash and cash equivalents 116,445 125,655
Term federal funds sold -- 5,000
Interest-bearing deposits in banks 1,723 941
Securities held to maturity, at amortized cost
(market value of $164 in 1996 and $402 in 1995) 164 402
Securities available for sale, at market value
(amortized cost of $493,734 in 1996 and $443,638
in 1995) 495,971 456,101
Trading securities, at market value 4,639 6,819
Loans: (Note 5)
Mortgage loans 224,525 220,603
Other loans 26,234 28,582
Less: allowance for loan losses (2,349) (2,529)
______________________________________________________________________________
Net loans 248,410 246,656
Premises and equipment 4,093 4,226
Real estate acquired through foreclosure 417 255
Accrued interest receivable 5,767 7,280
Deferred income tax asset, net 161 --
Other assets 1,342 1,207
______________________________________________________________________________
Total assets $879,132 $854,542
Liabilities and Stockholders' Equity:
Deposits $783,399 $753,657
Escrow deposits of borrowers 1,222 992
Employee stock ownership plan liability 1,093 1,093
Accrued income taxes payable 1,103 880
Deferred income taxes payable, net -- 3,880
Other liabilities 4,842 3,223
______________________________________________________________________________
Total liabilities 791,659 763,725
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, 5,473,375 and
5,424,671 shares issued, respectively 5,474 5,425
Additional paid-in capital 57,741 56,842
Retained earnings 63,986 58,773
______________________________________________________________________________
127,201 121,040
Treasury stock at cost, 2,789,411 and
2,683,065 shares, respectively (39,904) (36,370)
Net unrealized gains on securities
available for sale, net of tax effect 1,269 7,240
Common stock acquired by ESOP (1,093) (1,093)
______________________________________________________________________________
Total stockholders' equity 87,473 90,817
______________________________________________________________________________
Total liabilities and stockholders' equity $879,132 $854,542
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
September 30,
(In thousands except share data) 1996 1995
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 4,295 $ 4,126
Other loans 629 717
Mortgage-backed securities 5,341 3,379
Securities available for sale 3,053 3,850
Trading securities 95 493
Federal funds sold 1,011 1,541
Other investments 343 138
______________________________________________________________________________
Total interest and dividend income 14,767 14,244
______________________________________________________________________________
Interest expense:
Deposits 8,441 7,933
______________________________________________________________________________
Total interest expense 8,441 7,933
______________________________________________________________________________
Net interest income 6,326 6,311
Provision for loan losses 85 30
______________________________________________________________________________
Net interest income after provision
for loan losses 6,241 6,281
______________________________________________________________________________
Non-interest income:
Deposit account service fees 243 231
Gains (losses) on securities, net 262 (57)
Other 198 202
______________________________________________________________________________
Total non-interest income 703 376
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,779 1,845
Occupancy and equipment 472 480
Data processing 149 155
Professional services 70 97
Deposit insurance 4 (42)
Other 447 505
______________________________________________________________________________
Total non-interest expense 2,921 3,040
______________________________________________________________________________
Income before income taxes 4,023 3,617
Income tax expense 1,579 1,400
______________________________________________________________________________
Net income $ 2,444 $ 2,217
______________________________________________________________________________
Weighted average common shares outstanding:
Primary 2,716,114 2,774,112
Fully diluted 2,716,734 2,781,157
______________________________________________________________________________
Earnings per share (in dollars):
Primary $ 0.90 $ 0.80
Fully diluted 0.90 0.80
______________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine months ended
September 30,
(In thousands except share data) 1996 1995
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $12,767 $12,490
Other loans 1,894 2,137
Mortgage-backed securities 14,011 9,604
Securities available for sale 9,534 11,856
Trading securities 490 2,343
Federal funds sold 3,663 3,689
Other investments 922 193
______________________________________________________________________________
Total interest and dividend income 43,281 42,312
______________________________________________________________________________
Interest expense:
Deposits 24,589 22,801
______________________________________________________________________________
Total interest expense 24,589 22,801
______________________________________________________________________________
Net interest income 18,692 19,511
Provision for loan losses 150 140
______________________________________________________________________________
Net interest income after provision
for loan losses 18,542 19,371
______________________________________________________________________________
Non-interest income:
Deposit account service fees 699 691
Gains (losses) on securities, net 680 (18)
Other 665 740
______________________________________________________________________________
Total non-interest income 2,044 1,413
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 5,343 5,493
Occupancy and equipment 1,473 1,488
Data processing 454 460
Professional services 276 328
Deposit insurance 10 837
Other 1,451 1,512
______________________________________________________________________________
Total non-interest expense 9,007 10,118
______________________________________________________________________________
Income before income taxes 11,579 10,666
Income tax expense 4,542 4,154
______________________________________________________________________________
Net income $ 7,037 $ 6,512
______________________________________________________________________________
Weighted average common shares outstanding:
Primary 2,751,205 2,786,770
Fully diluted 2,751,755 2,807,217
______________________________________________________________________________
Earnings per share (in dollars):
Primary $ 2.56 $ 2.34
Fully diluted 2.56 2.32
______________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 1996 (unaudited)
and the Year Ended December 31, 1995
(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, 1994 $ 5,352 $55,609 $51,995 $(33,288) $(3,915) $(1,249) $74,504
Net income -- -- 8,759 -- -- -- 8,759
Cash dividends paid
($0.73 per share) -- -- (1,981) -- -- -- ( 1,981)
Net decrease in liability
to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 51 -- -- -- -- 51
Purchase of treasury stock -- -- -- (3,082) -- -- (3,082)
Exercise of stock options
and related tax benefits 73 1,182 -- -- -- -- 1,255
Change in net unrealized gains
(losses) on securities available for
sale, net of tax effect -- -- -- -- 11,155 -- 11,155
____________________________________________________________________________________________________________________
Balance at December 31, 1995 5,425 56,842 58,773 (36,370) 7,240 (1,093) 90,817
Net Income -- -- 7,037 -- -- -- 7,037
Cash dividends paid
($0.68 per share) -- -- (1,824) -- -- -- (1,824)
Purchase of treasury stock -- -- -- (3,534) -- -- (3,534)
Exercise of stock options
and related tax benefits 49 899 -- -- -- -- 948
Change in net unrealized gains
(losses) on securities available
for sale, net of tax effect -- -- -- -- (5,971) -- (5,971)
_____________________________________________________________________________________________________________________
Balance at September 30, 1996 $ 5,474 $57,741 $63,986 $(39,904) $ 1,269 $(1,093) $87,473
_____________________________________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
1996 1995
____ ____
(In thousands)
Cash flows from operating activities:
Net income $ 7,037 $ 6,512
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 325 351
Amortization of deposit acquisition premium 173 173
Amortization of loan valuation premium 47 48
Decrease in accrued interest receivable 1,513 92
Increase (decrease) in other liabilities 897 (2,515)
Increase (decrease) in accrued income taxes payable 223 (275)
Accretion of discounts on securities, net of
amortization of premiums (777) (858)
Net trading securities activity 2,059 95,386
(Gains) losses on securities available for sale (802) (444)
(Gains) losses on trading securities 122 414
Increase (decrease) in deferred mortgage loan
origination fees, net of amortization 102 (15)
Decrease in deferred income tax asset, net 214 274
Increase in other assets (135) (21)
Loans originated for sale (215) (455)
Loans sold 308 455
Provision for loan losses 150 140
Provision for losses and writedowns on real estate
acquired through foreclosure 42 23
(Gains) on sales of real estate acquired through
foreclosure (25) --
Increase in escrow deposits of borrowers 230 240
______________________________________________________________________________
Net cash provided by operating activities 11,488 99,525
______________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds -- (40,000)
Proceeds from maturities of term federal funds 5,000 35,000
Purchases of bank certificates of deposit (782) --
Proceeds from sales of investment securities
available for sale 31,877 36,521
Proceeds from maturities of investment securities
held to maturity and available for sale 73,225 34,147
Purchases of securities available for sale (53,209) (44,207)
Purchases of mortgage-backed securities (126,868) (47,336)
Principal repayments of mortgage-backed securities 27,404 15,421
Principal repayments of tax-exempt bonds 13 13
Loans originated (40,923) (21,850)
Loan principal payments received 38,123 28,178
Purchases of premises & equipment (192) (323)
Proceeds from sales of real estate acquired
through foreclosure 476 81
Net advances on real estate acquired through
foreclosure -- (7)
______________________________________________________________________________
Net cash (used in) investing activities (45,856) (4,362)
______________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Nine Months Ended
September 30,
1996 1995
____ ____
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits 29,569 (5,996)
Payments to acquire treasury stock (3,534) (2,083)
Issuance of common stock under stock option plan 695 495
Tax benefit resulting from stock options exercised 252 172
Dividends paid on common stock (1,824) (1,469)
______________________________________________________________________________
Net cash provided by (used in) financing
activities 25,158 (8,881)
______________________________________________________________________________
Net increase (decrease) in cash and
cash equivalents (9,210) 86,282
Cash and cash equivalents at beginning of period 125,655 32,161
______________________________________________________________________________
Cash and cash equivalents at end of period $116,445 $118,443
______________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $24,566 $22,863
Cash paid during the period for taxes, net of refunds 3,852 3,937
Non-cash transactions:
SFAS 115:
Increase (decrease) in stockholders' equity (5,971) 6,635
Decrease in deferred tax assets -- 5,036
Decrease in deferred tax liabilities (4,255) --
Transfers from loans to real estate acquired
through foreclosure 654 427
Transfers from other assets to securities
available for sale -- 66
Purchases of securities with an October 1996
settlement date 993 310
Sales of securities with an October 1996
settlement date 271 57
______________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
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 (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 September 30, 1996
and December 31, 1995, and its operating results for the three and nine months
ended September 30, 1996 and 1995. 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, 1995.
(2) Earnings Per Common Share
The computation of earnings per common share for the three and nine months
ended September 30, 1996 and 1995 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.
(3) Cash and Cash Equivalents:
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(4) Short-Term Investments
Short-term investments consist of the following:
________________________________________________________________________________
At At
(In thousands) September 30, 1996 December 31, 1995
________________________________________________________________________________
Federal funds sold (overnight) $ 86,976 $100,245
Term federal funds sold (with original
maturities of 90 days or less) -- 10,000
Money market funds 24,092 7,260
________________________________________________________________________________
Total short-term investments $111,068 $117,505
________________________________________________________________________________
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
(5) Commitments
At September 30, 1996, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$3,389,000 and commitments under existing home equity lines of credit and other
loans of approximately $19,810,000 which are not reflected on the consolidated
balance sheet. In addition, as of September 30, 1996, the Company had a
performance standby letter of credit conveyed to others in the amount
of $1,093,000 which is also not reflected on the consolidated balance sheet.
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1996
GENERAL
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this report.
The discussion may contain certain forward-looking statements. The Company's
management may from time to time express its expectations regarding future
performance of the Company. These forward-looking statements are inherently
uncertain, and actual results may differ from Company expectations.
For the quarter ended September 30, 1996, MASSBANK Corp. reported record
consolidated net income of $2,444,000 or $0.90 per share. These results
represent increases of 10.2% and 12.5%, respectively, from the $2,217,000 in
consolidated net income and $0.80 per share earned in 1995's third quarter.
The annualized return on average assets for the recent quarter increased
to 1.12% from 1.06% for the comparable quarter of 1995. In addition, the
Company improved its return on average realized equity for the third quarter
of 1996 to 11.42% from 10.79% in the same quarter of 1995.
The Company's earnings results this quarter were also favorably impacted
by securities gains of $262,000 compared to securities losses of $57,000 in the
third quarter of 1995 and a reduction in non-interest expenses of $119,000.
The Company's non-interest expense to average assets ratio continues to
improve reaching an all time low of 1.34% in the recent quarter.
For the nine months ended September 30, 1996, the Company reported
consolidated net income of $7,037,000 or $2.56 per share, up from $6,512,000 or
$2.34 per share ($2.32 per share on a fully-diluted basis) earned in the first
nine months of 1995.
MASSBANK Corp.'s increased earnings for the year-to-date period can be
attributed to a decrease in non-interest expense, due primarily to a sharp
decline in Federal Deposit Insurance Corporation ("FDIC") deposit insurance
premiums, and an increase in net gains on securities. These improvements were
partially offset by a decrease in net interest income.
The growth in the Company's earning assets coupled with a more favorable
mix of earning assets produced an increase in the Company's net interest income
for the second consecutive quarter. Net interest income for the third quarter
of 1996 increased by $75,000 when compared to the second quarter of 1996. Net
interest income totaled $6,326,000 for the three months ended September 30,
1996, up from $6,311,000 for the same quarter of last year. For the first nine
months of 1996 net interest income totaled $18,692,000 compared to $19,511,000
for the first nine months of 1995. The Company's net interest margin of 2.97%
for the quarter and 2.96% for the year-to-date period decreased from 3.09% and
3.19%, respectively, for the same periods in the prior year. Average earning
assets for the third quarter of 1996 increased to $856.0 million from $820.9
million in the corresponding quarter of 1995. For the first nine months of 1996
the Company's average earning assets were $846.5 million, up from $819.1 million
in the first nine months of 1995.
MASSBANK Corp.'s provision for loan losses was $85,000 for the recent
quarter and $150,000 year-to-date. This compares with $30,000 and $140,000,
respectively, for the corresponding periods in 1995. Non-performing assets were
$2,342,000 or 0.27% of total assets at September 30, 1996. The Bank's allowance
for loan losses totaled $2,349,000 at September 30, 1996, representing 122% of
non-performing loans compared to $2,529,000 representing 104% of non-performing
loans at the end of 1995.
The Company had total assets of $879.1 million at September 30, 1996, an
increase of $24.6 million over total assets reported at December 31, 1995.
Total deposits at September 30, 1996 were $783.4 million, up $29.7 million from
year end 1995. Stockholders' equity at September 30, 1996 equalled $87.5
million representing a book value of $32.59 per share, a decrease from $90.8
million representing a book value of $33.13 per share at December 31, 1995.
This decrease in stockholders' equity resulted primarily from unrealized
depreciation in the market value of the Bank's securities available for sale
portfolio due to the upward movement in market bond prices experienced during
this period. The unrealized gain of $7.2 million net of tax effect reported as
part of stockholders' equity at December 31, 1995 changed to an unrealized gain
of $1.3 million net of tax effect at September 30, 1996.
A more detailed discussion and analysis of the Company's financial condition
and results of operations follows.
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at September 30, 1996 and December 31, 1995 with gross unrealized gains and
losses, follows:
__________________________________________________________________________________________
Gross Gross
(In thousands) At September 30, 1996 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 164 $ -- $ -- $ 164
__________________________________________________________________________________________
Total securities held to maturity $ 164 $ -- $ -- $ 164
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $161,948 $ 1,431 $ (8) $163,371
U.S. Government agency obligations 8,898 26 (116) 8,808
Other bonds and obligations 999 2 -- 1,001
__________________________________________________________________________________________
Total $171,845 1,459 (124) 173,180
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 72,660 556 (827) 72,389
Federal Home Loan Mortgage
Corporation 228,201 986 (3,641) 225,546
Federal National Mortgage
Association 9,948 344 -- 10,292
Other 481 21 -- 502
__________________________________________________________________________________________
Total mortgage-backed securities 311,290 1,907 (4,468) 308,729
__________________________________________________________________________________________
Total debt securities 483,135 3,366 (4,592) 481,909
__________________________________________________________________________________________
Equity securities 10,599 3,497 (34) 14,062
__________________________________________________________________________________________
Total securities available for sale 493,734 $ 6,863 $ (4,626) $495,971
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 2,237
__________________________________________________________________________________________
Total securities available
for sale, net $495,971
__________________________________________________________________________________________
Trading securities $ 4,790 $ 4,639
__________________________________________________________________________________________
INVESTMENT SECURITIES (continued)
__________________________________________________________________________________________
Gross Gross
(In thousands) At December 31, 1995 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 402 $ -- $ -- $ 402
__________________________________________________________________________________________
Total securities held to maturity $ 402 $ -- $ -- $ 402
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $207,771 $ 4,387 $ (43) $212,115
U.S. Government agency obligations 13,994 178 -- 14,172
Other bonds and obligations 1,996 10 (2) 2,004
__________________________________________________________________________________________
Total 223,761 4,575 (45) 228,291
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 81,411 2,160 (19) 83,552
Federal Home Loan Mortgage
Corporation 116,500 2,339 (100) 118,739
Federal National Mortgage
Association 12,886 574 -- 13,460
Other 726 43 -- 769
__________________________________________________________________________________________
Total mortgage-backed securities 211,523 5,116 (119) 216,520
__________________________________________________________________________________________
Total debt securities 435,284 9,691 (164) 444,811
__________________________________________________________________________________________
Equity securities 8,354 2,961 (25) 11,290
__________________________________________________________________________________________
Total securities available for sale 443,638 $ 12,652 $ (189) $456,101
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 12,463
__________________________________________________________________________________________
Total securities available
for sale, net $456,101
__________________________________________________________________________________________
Trading securities $ 6,834 $ 6,819
__________________________________________________________________________________________
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of debt securities by
contractual maturity at September 30, 1996 and December 31, 1995 are as follows:
September 30, 1996
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 58,913 $ 59,266 $ -- $ --
After 1 year through 5 years 108,945 109,983 -- --
After 5 years through 10 years 3,987 3,931 114 114
After 10 years through 15 years -- -- 50 50
________ _______ ________ _______
171,845 173,180 164 164
Mortgage-backed securities 311,290 308,729 -- --
________ _______ ________ _______
$483,135 $481,909 $ 164 $ 164
December 31, 1995
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 83,942 $ 84,351 $ 225 $ 225
After 1 year through 5 years 136,834 140,792 -- --
After 5 years through 10 years 2,985 3,148 124 124
After 10 years through 15 years -- -- 53 53
________ _______ ______ ______
223,761 228,291 402 402
Mortgage-backed securities 211,523 216,520 -- --
________ _______ ______ ______
$435,284 $444,811 $ 402 $ 402
Investment securities consisting of securities held to maturity, securities
available for sale and trading securities increased $37.5 million from
December 31, 1995 to $500.8 million at September 30, 1996. This increase was
primarily in higher yielding 15 year mortgage-backed securities designated as
available for sale. Rising interest rates drove market bond prices higher
during the period ended September 30, 1996 and eroded the market value of
the Company's debt securities. At September 30, 1996 the Company's portfolio
of debt securities available for sale had net unrealized losses of $1.2 million
compared to net unrealized gains of $9.5 million at December 31, 1995. The
equity securities portfolio as of this date had net unrealized gains of $3.4
million, up from $2.9 million at year end 1995. The increase was fueled by the strong equity market during this period.
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
_______________________________________________________________________________________
At At
(In thousands) September 30, 1996 December 31, 1995
_______________________________________________________________________________________
Mortgage loans:
Residential $219,447 $212,652
Commercial 4,092 6,975
Construction 1,675 1,516
_______________________________________________________________________________________
225,214 221,143
Add: Premium on loans 341 388
Less: deferred mortgage loan origination fees (1,030) (928)
_______________________________________________________________________________________
Total mortgage loans 224,525 220,603
Other loans:
Consumer:
Installment 1,917 1,988
Guaranteed education 9,804 10,420
Other secured 1,850 2,012
Home equity lines of credit 11,751 13,144
Unsecured 262 265
_______________________________________________________________________________________
Total consumer loans 25,584 27,829
Commercial 650 753
_______________________________________________________________________________________
Total other loans 26,234 28,582
_______________________________________________________________________________________
Total loans $250,759 $249,185
_______________________________________________________________________________________
The Bank's loan portfolio increased slightly during the first nine months
of 1996 principally in the residential 1-4 family category as loan originations
during this period exceeded loan amortization and payoffs. Loan originations
in the first nine months of 1996 increased to $41.1 million from $22.3 million
in the corresponding period of 1995. Lower residential mortgage loan rates in
the first six months of 1996 when compared to the first six months of 1995
stimulated loan demand which resulted in loan growth for the Bank. Conversely,
a rise in interest rates in the third quarter of 1996 significantly reduced the
demand for residential mortgage loans. Loan originations totaled $7.7 million
in the recent quarter compared to $12.9 million in the third quarter of last year.
Future growth in the Bank's loan portfolio is expected to be moderate over the
near term.
NON-PERFORMING ASSETS
At At At
September 30, December 31, September 30,
(In thousands) 1996 1995 1995
____________________________________________________________________________________
Non-Performing Assets:
Non-accrual loans $ 1,925 $ 2,428 $ 2,023
Real estate acquired through foreclosure 417 255 442
____________________________________________________________________________________
Total non-performing assets $ 2,342 $ 2,683 $ 2,465
____________________________________________________________________________________
Allowance for possible loan losses $ 2,349 $ 2,529 $ 2,598
Allowance as percent of
non-accrual loans 122.0 % 104.2 % 128.4 %
Non-accrual loans as percent
of total loans 0.77% 0.97% 0.83%
Non-performing assets as percent
of total assets 0.27% 0.31% 0.29%
____________________________________________________________________________________
The Bank 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 nonaccrual status and to
reverse from income all interest previously accrued but not collected and to
discontinue all amortization of deferred loan fees. Non-performing assets
decreased slightly from December 31, 1995 to September 30, 1996 as noted in the
table above. The principal balance of non-accrual loans was $1.9 million, or
less than 1% of total loans and real estate acquired through foreclosure was
$417 thousand at September 30, 1996. Real estate formally acquired in
settlement of loans is recorded at the lower of the carrying value of the loan
or the fair value of the property received, less estimated costs to sell the
property following foreclosure.
The Bank did not have any impaired loans as of September 30, 1996.
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Nine Months Ended
September 30,
1996 1995
_______________________________________________________________________________
(In thousands)
Balance at beginning of period $ 2,529 $ 2,566
Provision for loan losses 150 140
Recoveries of loans previously charged-off 40 42
Less: Charge-offs (370) (150)
_________________________________________________________________________________
Balance at end of period $ 2,349 $ 2,598
_________________________________________________________________________________
Potential 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 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 September 30, 1996 the balance of the allowance for loan losses was
$2,349,000 representing 122.0% of total non-performing 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 $29.7 million or 3.9% to $783.4
million at September 30, 1996 from $753.7 million at December 31, 1995.
The composition of the Bank's total deposits at the dates shown are
summarized as follows:
September 30, December 31,
1996 1995
______________________________________________________________________________
(In thousands)
Demand and NOW $ 61,061 $ 66,413
Savings and money market accounts 357,617 356,598
Time certificates of deposit 365,959 332,057
Deposit acquisition premium,
net of amortization (1,238) (1,411)
________________________________________________________________________________
Total deposits $783,399 $753,657
________________________________________________________________________________
RESULTS OF OPERATIONS
COMPARISON OF THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
INTEREST AND DIVIDEND INCOME
Interest and dividend income from loans and investments increased by
$523,000 to $14,767,000 for the three months ended September 30, 1996 from
$14,244,000 for the three months ended September 30, 1995. This increase is
primarily attributable to a $35.1 million increase in the Company's average
earning assets partially offset by a decrease in yield on average earning
assets.
The Company's average total earning assets increased to $856.0 million
in the third quarter of 1996 from $820.9 million in the corresponding quarter
of 1995. The yield on the Company's average earning assets for the third
quarter of 1996 decreased 4 basis points to 6.90% from 6.94% for the same
quarter in 1995. The decrease in the yield on average earning assets when
compared to the third quarter of 1995 reflects a decrease in yield on overnight
federal funds sold and other similar short-term investments and the downward
repricing of adjustable rate real estate loans, home equity lines of credit,
and other loans. This was partially offset by a more favorable mix of the
bank's earning assets.
Interest and dividend income from loans and investments increased to
$43,281,000 for the nine months ended September 30, 1996 from $42,312,000 for
the nine months ended September 30, 1995. This increase is attributable to an
increase of $27.4 million in the Company's average earning assets partially
offset by a decrease in yield on average earning assets.
The Company's total average earning assets for the first nine months of
1996 were $846.5 million compared to $819.1 million for the same period a year
ago. The yield on the Company's average earning assets for the first nine
months of 1996 decreased by 7 basis points to 6.83% from 6.90% for the same
prior year period. Total investments contributed $935,000 in additional
income, while interest on loans contributed $34,000 more in income when
comparing the nine months ended September 30, 1996 to the nine months ended
September 30, 1995.
INTEREST EXPENSE
Total interest expense increased 6.4% to $8,441,000 for the three months
ended September 30, 1996 from $7,933,000 for the comparable 1995 period. This
increase is principally due to the bank's deposit growth and an increase in its
average cost of funds.
The average deposit volume for the third quarter of 1996 increased by
$32.6 million to $781.6 million from $749.0 million in the third quarter of
1995. The average cost of funds in the recent 1996 quarter was 4.30% compared
to 4.20% for the third quarter of 1995. The increase of 10 basis points is
due, in part, to a shift of deposits from lower fixed rate savings accounts to
higher yielding variable rate savings accounts and time certificates of
deposit.
The Bank has maintained regular (fixed rate) savings account rates flat
while selectively increasing longer term time certificate of deposit rates.
In addition, the Bank introduced a new higher yielding variable rate savings
account in June 1995. This strategy has negated the need for the Bank to raise
its regular savings account rates, but has enticed some bank customers to
transfer some of their deposits into the higher yielding accounts and thus
contributing to the Bank's higher cost of funds.
Total interest expense increased to $24,589,000 for the nine months ended
September 30, 1996 from $22,801,000 for the nine months ended September 30,
1995. The increase in average deposits of $17.8 million from the prior year,
and an increase of 25 basis points in the Company's average cost of funds from
4.05% in the first nine months of 1995 to 4.30% in the first nine months of 1996
increased interest expense on deposits by $1,788,000. The increase in the
Bank's cost of funds is principally due to a shift of deposits from lower
fixed rate savings accounts to higher yielding variable rate savings accounts
and time certificates of deposit for the reasons previously noted.
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 is based on
management's assessment of many factors including the risk characteristics of
the loan portfolio, underlying collateral, current and anticipated economic
conditions that may effect the borrowers ability to pay, and trends in loan
delinquencies and charge-offs.
As a result of management's assessment and analysis, the Bank provided
$85,000 and $150,000 for potential loan losses during the three months and nine
months ended September 30, 1996, an increase from $30,000 and $140,000 for the
same periods a year ago. Loan charge-offs net of recoveries were $156,000 and
$330,000 for the respective 1996 periods.
NON-INTEREST INCOME
Non-interest income consists of deposit account service fees, net gains
or losses on securities and other non-interest income.
Non-interest income increased $327,000 or 87.0% to $703,000 in the third
quarter of 1996 and increased $631,000 or 44.7% to $2,044,000 for the nine
months ended September 30, 1996 when compared to the comparable periods of 1995.
The increase is due principally to net gains on securities of $262,000 and
$680,000 recorded for the three and nine months ended September 30, 1996,
respectively, as compared to net losses on securities of $57,000 and $18,000
recorded for the comparable 1995 periods.
NON-INTEREST EXPENSE
Non-interest expenses for the third quarter of 1996 decreased 3.9% to
$2,921,000 from $3,040,000 for the third quarter of 1995. For the nine months
ended September 30, 1996, non-interest expenses decreased by $1,111,000 or
11.0% to $9,007,000 when compared to $10,118,000 for the nine months ended
September 30, 1995.
Non-interest expenses for the 1996 year-to-date period have been favorably
affected by a significantly lower deposit insurance expense. The significant
decrease in deposit insurance expense results from a reduction in the Federal
Deposit Insurance Corporation ("FDIC") deposit insurance rates for well
capitalized banks from $0.23 per hundred dollars of deposits paid in the first
nine months of 1995 to an annual minimum premium of $2 thousand paid in the
first nine months of 1996.
INCOME TAX EXPENSE
The Company, the Bank 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.
The provision for federal and state income taxes increased to $1,579,000
for the three months ended September 30, 1996 from $1,400,000 for the same
period in 1995.
For the nine months ended September 30, 1996 the Company's provision for
federal and state income taxes increased to $4,542,000 from $4,154,000 for the
same period in 1995.
The increase is due principally to higher income before taxes. The
Company's combined effective income tax rate for the first nine months of 1996
is 39.2% as compared to 38.9% for the same period a year ago.
FEDERAL TAXATION
General. The Company, the Bank and its subsidiaries will report their
income on a (October 31) fiscal year basis using the accrual method of
accounting and will be subject to federal income taxation in the same manner
as other corporations with some exceptions, including particularly the Bank's
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank and its subsidiaries or the
Company.
Bad Debt Reserve. In August, 1996, the provisions repealing the current
thrift bad debt rules were passed by Congress as part of "The Small Business
Job Protection Act of 1996." The new rules eliminate the 8% of taxable income
method for deducting additions to the tax bad debt reserves for all thrifts for
tax years beginning after December 31, 1995. These rules also require that all
thrift institutions recapture all or a portion of their bad debt reserves added
since the base year (last taxable year beginning before January 1, 1988). The
Bank has previously recorded a deferred tax liability equal to the bad debt
recapture and as such, the new rules will have no effect on net income or
federal income tax expense. The unrecaptured base year reserves will not be
subject to recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the pre-1988 bad debt
reserves continue to be subject to provision of present law referred to below
that require recapture in the case of certain excess distributions to
shareholders. The tax effect of pre-1988 bad debt reserves subject to recapture
in the case of certain excess distributions is approximately $7.3 million.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans or (ii) from the supplemental
reserve for losses on loans ("Excess Distributions"), then an amount based on
the amount distributed will be included in the Bank's taxable income. Non-
dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not
be considered to result in a distribution from the Bank's bad debt reserve.
Thus, any dividends to the Company that would reduce amounts appropriated to
the Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. If the
Bank makes a "non-dividend distribution," then approximately one and one-half
times the amount so used would be includable in gross income for federal
income tax purposes, assuming a 35% corporate income tax rate (exclusive of
state and local taxes). The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserve.
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, 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 September 30, 1996 the Bank had $87.0 million or
9.9% of total assets and $172.2 million or 19.6% of total assets invested
respectively in overnight federal funds sold and United States Treasury and
Government agency obligations.
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%. At September 30, 1996, the Bank had ratios of Tier 1 capital
to total assets of 9.63% and qualifying capital to risk-weighted assets of
33.90%. The Company had ratios of Tier 1 capital to total assets of 9.69% and
total qualifying capital to risk-weighted assets of 34.08% at September 30,
1996.
IMPACT OF INFLATION AND CHANGING PRICES
MASSBANK Corp.'s financial statements presented herein have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time, due to the fact that substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.
RECENT ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for
as a secured borrowing with a pledge of collateral. The Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and should be applied
prospectively. Earlier or retroactive application of this Statement is not
permitted. The Company has not yet determined the impact that this Statement
will have on the Company's consolidated financial statements.
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 September 30, 1996, 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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. 11.1: Statement regarding computation of per
share earnings.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSBANK Corp. & Subsidiaries
_____________________________
(Registrant)
Date November 8, 1996 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date November 8, 1996 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO