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 March 31, 1997
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 April 30, 1997: 2,687,964 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 (unaudited) and December 31, 1996 3
Consolidated Statements of Income (unaudited)
for the three months ended March 31, 1997 and 1996 4
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1997 (unaudited)
and the year ended December 31, 1996 5
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1997 and 1996 6 - 7
Condensed Notes to the Consolidated Financial Statements 8 - 9
Average Consolidated Balance Sheets
for the three months ended March 31, 1997 and 1996 10 - 11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 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)
March 31, December 31,
1997 1996
(unaudited)
Assets:
Cash and due from banks $ 7,656 $ 6,612
Short-term investments (Note 4) 105,423 134,310
______________________________________________________________________________
Total cash and cash equivalents 113,079 140,922
Term federal funds sold 15,000 10,000
Interest-bearing deposits in banks 1,780 1,751
Securities held to maturity, at amortized cost
(market value of $155 in 1997 and $160 in 1996) 155 160
Securities available for sale, at market value
(amortized cost of $495,527 in 1997
and $464,857 in 1996) 495,702 471,752
Trading securities, at market value 13,229 4,672
Loans: (Note 5)
Mortgage loans 226,921 224,139
Other loans 24,687 25,522
Less: allowance for loan losses (2,210) (2,237)
______________________________________________________________________________
Net loans 249,398 247,424
Premises and equipment 4,064 4,095
Real estate acquired through foreclosure 443 503
Accrued interest receivable 5,817 5,647
Deferred income tax asset, net 1,023 --
Other assets 1,427 1,311
______________________________________________________________________________
Total assets $901,117 $888,237
Liabilities and Stockholders' Equity:
Deposits $794,973 $788,350
Escrow deposits of borrowers 1,406 1,271
Employee stock ownership plan liability 937 937
Accrued income taxes payable 371 805
Deferred income taxes payable, net -- 1,789
Other liabilities 13,485 2,835
______________________________________________________________________________
Total liabilities 811,172 795,987
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, 5,480,125 and
5,476,125 shares issued, respectively 5,480 5,476
Additional paid-in capital 57,941 57,858
Retained earnings 67,516 65,756
______________________________________________________________________________
130,937 129,090
Treasury stock at cost, 2,794,411 and
2,789,411 shares, respectively (40,106) (39,904)
Net unrealized gains on securities
available for sale, net of tax effect 51 4,001
Common stock acquired by ESOP (937) (937)
______________________________________________________________________________
Total stockholders' equity 89,945 92,250
______________________________________________________________________________
Total liabilities and stockholders' equity $901,117 $888,237
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
March 31,
(In thousands except share data) 1997 1996
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 4,237 $ 4,199
Other loans 560 646
Securities available for sale:
Mortgage-backed securities 5,365 3,930
Other securities 2,682 3,327
Trading securities 95 200
Federal funds sold 1,482 1,579
Other investments 339 243
______________________________________________________________________________
Total interest and dividend income 14,760 14,124
______________________________________________________________________________
Interest expense:
Deposits 8,349 8,009
______________________________________________________________________________
Total interest expense 8,349 8,009
______________________________________________________________________________
Net interest income 6,411 6,115
Provision for loan losses 68 30
______________________________________________________________________________
Net interest income after provision for loan losses 6,343 6,085
______________________________________________________________________________
Non-interest income:
Deposit account service fees 222 218
Gains on securities, net 468 207
Other 204 192
______________________________________________________________________________
Total non-interest income 894 617
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,869 1,772
Occupancy and equipment 503 517
Data processing 145 153
Professional services 137 109
Merger and acquisition related expense 40 --
Advertising and marketing 56 54
Amortization of intangibles 58 58
Other 387 393
______________________________________________________________________________
Total non-interest expense 3,195 3,056
______________________________________________________________________________
Income before income taxes 4,042 3,646
Income tax expense 1,569 1,423
______________________________________________________________________________
Net income $ 2,473 $ 2,223
______________________________________________________________________________
Weighted average common shares outstanding:
Primary 2,735,154 2,783,426
Fully diluted 2,736,719 2,784,454
______________________________________________________________________________
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 CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1997 (unaudited)
and the Year Ended December 31, 1996
(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, 1995 $ 5,425 $56,842 $58,773 $(36,370) $ 7,240 $(1,093) $90,817
Net income -- -- 9,427 -- -- -- 9,427
Cash dividends declared and paid
($0.92 per share) -- -- (2,459) -- -- -- ( 2,459)
Tax benefit resulting from dividends
paid on unallocated shares held by
the ESOP 15 15
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 63 -- -- -- -- 63
Purchase of treasury stock -- -- -- (3,534) -- -- (3,534)
Exercise of stock options
and related tax benefits 51 953 -- -- -- -- 1,004
Change in net unrealized gains
(losses) on securities available
for sale, net of tax effect -- -- -- -- (3,239) -- (3,239)
____________________________________________________________________________________________________________________
Balance at December 31, 1996 5,476 57,858 65,756 (39,904) 4,001 (937) 92,250
Net Income -- -- 2,473 -- -- -- 2,473
Cash dividends declared and paid
($0.27 per share) -- -- (716) -- -- -- (716)
Tax benefit resulting from dividends
paid on unallocated shares held by
the ESOP 3 3
Purchase of treasury stock -- -- -- (202) -- -- (202)
Exercise of stock options
and related tax benefits 4 83 -- -- -- -- 87
Change in net unrealized gains
(losses) on securities available
for sale, net of tax effect -- -- -- -- (3,950) -- (3,950)
_____________________________________________________________________________________________________________________
Balance at March 31, 1997 $ 5,480 $57,941 $67,516 $(40,106) $ 51 $ (937) $89,945
_____________________________________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
1997 1996
____ ____
(In thousands)
Cash flows from operating activities:
Net income $ 2,473 $ 2,223
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 115 107
Amortization of deposit acquisition premium 58 57
Amortization of loan valuation premium 16 16
(Increase) decrease in accrued interest receivable (170) 501
Increase (decrease) in other liabilities 250 (4)
Decrease in current income taxes payable (434) (560)
Accretion of discounts on securities, net of
amortization of premiums (259) (238)
Net trading securities activity (8,589) (34,896)
Gains on securities available for sale (500) (355)
Losses on trading securities 32 148
Increase in deferred mortgage loan
origination fees, net of amortization 45 34
Deferred income tax expense (benefit) (42) 25
Increase in other assets (146) (113)
Loans originated for sale -- (45)
Loans sold -- 163
Provision for loan losses 68 30
Provisions for losses and writedowns on real estate
acquired through foreclosure -- 8
Gains on sales of real estate acquired through
foreclosure (7) --
Increase in escrow deposits of borrowers 135 106
______________________________________________________________________________
Net cash used in operating activities (6,955) (32,793)
______________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds (5,000) --
Purchases of bank certificates of deposit (29) (726)
Proceeds from sales of investment securities
available for sale 9,279 11,543
Proceeds from maturities of investment securities
held to maturity and available for sale 13,000 36,225
Purchases of investment securities available for sale (30,835) (10,576)
Purchases of mortgage-backed securities (19,713) (56,137)
Principal repayments of mortgage-backed securities 8,789 7,578
Principal repayments of tax-exempt bonds 4 5
Loans originated (12,798) (12,365)
Loan principal payments received 10,478 11,363
Purchases of premises & equipment (84) (37)
Proceeds from sales of real estate acquired
through foreclosure 284 --
______________________________________________________________________________
Net cash used in investing activities (26,625) (13,127)
______________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Three Months Ended
March 31,
1997 1996
____ ____
(In thousands)
Cash flows from financing activities:
Net increase in deposits 6,565 11,670
Payments to acquire treasury stock (202) (1,225)
Issuance of common stock under stock option plan 70 329
Tax benefit resulting from stock options exercised 17 196
Dividends paid on common stock (716) (597)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 3 --
______________________________________________________________________________
Net cash provided by financing activities 5,737 10,373
______________________________________________________________________________
Net decrease in cash and cash equivalents (27,843) (35,547)
Cash and cash equivalents at beginning of period 140,922 125,655
______________________________________________________________________________
Cash and cash equivalents at end of period $113,079 $ 90,108
______________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $ 8,338 $ 8,005
Cash paid during the period for taxes, net of refunds 2,023 1,762
Purchase of securities incomplete (not settled) at
beginning of period which settled during the period 30 138
Non-cash transactions:
SFAS 115:
Decrease in stockholders' equity (3,950) (4,490)
Decrease in deferred tax liabilities (2,770) (3,212)
Transfers from loans to real estate acquired
through foreclosure 217 29
Purchases of securities incomplete (not settled)
at end of period 10,551 40
Sales of securities incomplete (not settled) at
end of period 151 119
______________________________________________________________________________
<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
March 31, 1997 and December 31, 1996, and its operating results for the three
months ended March 31, 1997 and 1996. 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, 1996.
(2) Earnings Per Common Share
The computation of earnings per common share for the three months ended
March 31, 1997 and 1996 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.
For earnings per share computations, ESOP shares that have been committed
to be released are considered outstanding. ESOP shares that have not been
committed to be released are not considered outstanding.
(3) Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents consist of
cash and due from banks, and short-term investments with original maturities of
less than 90 days.
(4) Short-Term Investments
Short-term investments consist of the following:
____________________________________________________________________________________
At At
(In thousands) March 31, 1997 December 31, 1996
____________________________________________________________________________________
Federal funds sold (overnight) $ 85,707 $109,902
Money market funds 19,716 24,408
____________________________________________________________________________________
Total short-term investments $105,423 $134,310
____________________________________________________________________________________
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) Commitments
At March 31, 1997, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$6,851,000 and commitments under existing home equity lines of credit and
other loans of approximately $19,320,000 which are not reflected on the
consolidated balance sheet. In addition, as of March 31, 1997, the Company
had a performance standby letter of credit conveyed to others in the amount of
$937,000 which is also not reflected on the consolidated balance sheet.
AVERAGE BALANCE SHEETS
Three Months Ended
March 31,
1997 1996
______________ ______________
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
Assets:
Earning assets:
Federal funds sold $112,977 $ 1,482 5.32% $117,766 $ 1,579 5.39%
Short-term investments (2) 25,666 336 5.31 18,003 240 5.36
Investment securities 170,616 2,724 6.39 212,569 3,366 6.33
Mortgage-backed securities 308,492 5,365 6.96 228,215 3,930 6.89
Trading securities 6,476 95 5.97 14,321 200 5.62
Mortgage loans (1) 225,649 4,237 7.51 221,016 4,199 7.60
Other loans (1) 25,233 560 8.88 28,172 646 9.18
__________________________________________________ ________________
Total earning assets 875,109 14,799 6.77% 840,062 $14,160 6.74%
Allowance for loan losses 2,200 2,539
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 872,909 837,523
Other assets 17,805 18,717
__________________________________________________________________________________________
Total assets $890,714 $856,240
__________________________________________________________________________________________
AVERAGE BALANCE SHEETS - Continued
Three Months Ended
March 31,
1997 1996
______________ ______________
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
Liabilities:
Deposits:
Demand and NOW $ 63,359 $ 128 0.82% $ 64,355 $ 155 0.97%
Savings 357,098 3,053 3.47 357,018 3,015 3.39
Time certificates of deposit 371,170 5,168 5.65 335,830 4,839 5.80
__________________________________________________ ________________
Total deposits 791,627 8,349 4.28 757,203 8,009 4.25
Other liabilities 5,778 7,722
__________________________________________________________________________________________
Total liabilities 797,405 764,925
Stockholders' Equity 93,309 91,315
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $890,714 $856,240
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,450 6,151
Less adjustment of tax-exempt
interest income 39 36
__________________________________________________________________________________________
Net interest income $ 6,411 $ 6,115
__________________________________________________________________________________________
Interest rate spread 2.49% 2.49%
__________________________________________________________________________________________
Net interest margin (3) 2.95% 2.93%
__________________________________________________________________________________________
(1) Loans on non-accrual status are included in the average balance.
(2) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
(3) Net interest income (tax equivalent basis) before provision for loan
losses divided by average interest-earning assets.
(4) Includes the effects of SFAS No. 115.
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1997
The discussions set forth below and elsewhere herein contain certain
statements that may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. A number of important factors
could cause actual results to differ materially from those in the forward-
looking statements. Those factors include fluctuations in interest rates,
inflation, government regulations and economic conditions and competition in
the geographic and business areas in which the Company conducts its operations.
Results of Operations
General
For the quarter ended March 31, 1997, MASSBANK Corp. reported consolidated
net income of $2,473,000 or $0.90 per share. These results represent
increases of 11.2% and 12.5%, respectively, from the $2,223,000 in consolidated
net income and $0.80 per share earned in 1996's first quarter. The Company's
favorable performance in the recent quarter can be attributed to increases in
net interest income and net securities gains. These improvements were
partially offset by increases in non-interest expense and a higher provision
for loan losses.
The Company's profitability measurements also showed improvement in the
recent quarter. MASSBANK Corp.'s annualized return on average assets for the
first quarter of 1997 increased to 1.11% from 1.04% for the comparable quarter
of 1996.
The annualized return on average realized equity increased to 11.08% in
the recent quarter from 10.52% in the first quarter of 1996.
Net Interest Income
Net interest income was $6.4 million for the first quarter of 1997 as
compared to $6.1 million for the same period in 1996. As detailed in the
average balance sheets on pages 10 and 11, this increase resulted from the
growth in the Company's interest-earning assets coupled with a modest increase
in net interest margin. The net interest margin for the three months ended
March 31, 1997 and 1996 was 2.95% and 2.93%, respectively.
The Company's interest rate spread was 2.49% for the first quarter of
1997, unchanged from the first quarter of 1996. The yield on the Company's
average earning assets in the first quarter of 1997 increased by 3 basis points
to 6.77% from 6.74% in the corresponding quarter of 1996. This improvement
was offset by a similar increase in the Company's average cost of funds which
increased from 4.25% in the first quarter of 1996 to 4.28% in the recent
quarter.
Average earning assets for the quarter ended March 31, 1997 increased
to $875.1 million from $840.1 million for the corresponding quarter in 1996.
Provision for Loan Losses
The allowance for loan losses is increased by provisions charged to
operations based on management's assessment of many factors including the
risk characteristics of the portfolio, underlying collateral, current and
anticipated economic conditions that may affect the borrower's ability to pay,
and trends in loan delinquencies and charge-offs. Realized losses, net of
recoveries, are charged directly to the allowance. While management uses the
information available in establishing the allowance for loan losses, future
adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on judgments
different from those of management.
The provision for loan losses for the first quarter of 1997 was $68,000
versus $30,000 for the comparable period in 1996. This increase was due to the
higher level of loan charge-offs which the Bank has experienced in recent
quarters. Loan charge-offs net of recoveries were $95,000 and $55,000 for the
respective quarters.
The reserve coverage as a percentage of the Bank's nonaccrual loans showed
improvement in the recent quarter. At March 31, 1997, MASSBANK's allowance for
loan losses totalled $2.2 million representing 173% of nonaccrual loans compared
to $2.5 million representing 97% of nonaccrual loans at the end of the first
quarter in 1996.
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 for the first quarter of 1997 totalled $894,000, up
$277,000 or 45% from the $617,000 reported in the corresponding quarter last
year. This increase is principally due to net gains on securities of $468,000
reported in the recent quarter versus $207,000 reported in the first quarter
of 1996. The Company continues to benefit from the stock market's strong
performance, particularly in 1996. The Company's equity portfolio has yielded
substantial realized and unrealized gains. Net unrealized gains in the equity
securities portfolio totalled $4.4 million at March 31, 1997.
Non-Interest Expense
Non-interest expenses increased by $139,000, or 4.5%, to $3,195,000 in the
first quarter of 1997 from $3,056,000 in the first quarter of 1996.
Salaries and employee benefits, the largest component of non-interest
expense, increased $97,000 or 5.5% from $1,772,000 in the first quarter of 1996
to $1,869,000 in the recent quarter. This increase is due principally to salary
increases and an increase in employee health insurance expense. In the first
quarter, last year, MASSBANK received a one-time reduction in employee health
insurance premium equal to one full month's expense. There was no such
reduction in 1997.
Occupancy and equipment expenses decreased from $517,000 in the first
quarter of 1996 to $503,000 in the first quarter of 1997, due largely to a
reduction in snow removal expense, the results of a milder winter.
Data Processing expenses decreased 5.2% from $153,000 for the quarter
ended March 31, 1996 to $145,000 for the quarter ended March 31, 1997 due,
in part, to a decrease in the number of loans and deposit accounts.
Professional fees increased 25.7% from $109,000 in the first quarter 1996
to $137,000 in the recent quarter due primarily to an increase in corporate
legal fees.
Merger and acquisition related expenses incurred in connection with the
acquisition of the Glendale Co-operative Bank totalled $40,000 in the first
quarter of 1997. On February 26, 1997, MASSBANK, (the "Bank") announced that
it had signed a definitive merger agreement under which it would acquire all
of the outstanding shares of Glendale Co-operative Bank ("Glendale") of
Everett, Massachusetts. The transaction remains subject to approval by
Glendale's shareholders, various regulatory agencies and satisfaction of
certain financial contingencies. It is anticipated that the transaction will
close in the third quarter of 1997. The transaction will be accounted for as a
purchase.
All other expenses combined totalled $501,000 in the recent quarter versus
$505,000 for the same quarter a year ago.
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 $1,569,000
for the three months ended March 31, 1997 from $1,423,000 for the same period
in 1996.
The increase is due principally to higher income before taxes. The
Company's combined effective income tax rate for the first three months of
1997 is 38.8% as compared to 39.0% 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.
Financial Condition
The Company's total assets this past quarter increased by $12.9 million
from $888.2 million at December 31, 1996 to $901.1 million at March 31, 1997.
This was due primarily to an increase in investment securities. At March 31,
1997, the Company's balance sheet included approximately $10.4 million in
investment securities purchases which did not settle until April, 1997. The
corresponding liability for these securities is included in other liabilities.
Total stockholders' equity was $89.9 million at March 31, 1997, down from
$92.2 million at December 31, 1996. The decrease in stockholders' equity
resulted primarily from unrealized depreciation in the market value of the
Bank's securities available for sale portfolio. This was due to the upward
movement in market interest rates experienced during the period. The net
unrealized gains of $4.0 million, net of tax effect, reported as part of
stockholders' equity at December 31, 1996 changed to net unrealized gains of
$0.1 million, net of tax effect, at March 31, 1997.
The Company's book value per share at March 31, 1997 was $33.49 compared
to $34.34 at December 31, 1996.
Investments
Total investments consisting of investment securities and other short-term
investments, including term federal funds sold and interest-bearing bank
deposits, increased from $622.6 million at year end 1996 to $631.3 million at
March 31, 1997. These investments are principally in federal funds sold,
short-term U.S. Treasury notes and government agency fifteen year mortgage-
backed securities. The Bank also maintains an equity securities portfolio,
valued at $15.2 million as of March 31, 1997, which has yielded substantial
realized and unrealized gains. The majority of the Bank's investment
securities, $509.1 million at March 31, 1997, are classified as either available
for sale or trading securities. Management evaluates its investment
alternatives in order to properly manage the mix of assets on its balance
sheet. Investment securities available for sale and trading securities
provide liquidity, facilitate interest rate sensitivity management and enhance,
the Bank's ability to respond to customers' needs should loan demand increase
and/or deposits decline.
During this first quarter of 1997, the Bank continued to shift the mix
of its securities portfolio towards a larger proportion in government agency
mortgage-backed securities. These represent an attractive investment with
minimal credit risk, no servicing responsibilities, and no delinquencies. The
Bank's investment in mortgage-backed securities totalled $322.3 million at
March 31, 1997 versus $306.6 million at year end 1996.
The Bank's portfolio of trading securities was also increased in the
recent quarter from $4.7 million at December 31, 1996 to $13.2 million at
March 31, 1997. This increase was due to the purchase of U.S. Treasury bills
during the period. Trading securities consisted of the following as of the
dates shown:
March 31, December 31,
(In thousands) 1997 1996
_________ ____________
U.S. Treasury bills $ 9,609 $ --
Investment in mutual funds 3,620 4,672
_______ _______
Total $13,229 $ 4,672
FINANCIAL CONDITION
Investment Securities
The following table presents the amortized cost and estimated market value
of investment securities at March 31, 1997 and December 31, 1996 with gross
unrealized gains and losses:
__________________________________________________________________________________________
Gross Gross
(In thousands) At March 31, 1997 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 155 $ -- $ -- $ 155
__________________________________________________________________________________________
Total securities held to maturity $ 155 $ -- $ -- $ 155
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $150,091 $ 567 $ (267) $150,391
U.S. Government agency obligations 7,899 11 (116) 7,794
__________________________________________________________________________________________
Total $157,990 $ 578 $ (383) $158,185
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 67,673 384 (1,065) 66,992
Federal Home Loan Mortgage
Corporation 249,858 572 (4,563) 245,867
Federal National Mortgage
Association 8,732 270 -- 9,002
Other 430 21 -- 451
__________________________________________________________________________________________
Total mortgage-backed securities 326,693 1,247 (5,628) 322,312
__________________________________________________________________________________________
Total debt securities 484,683 1,825 (6,011) 480,497
__________________________________________________________________________________________
Equity securities 10,844 4,499 (138) 15,205
__________________________________________________________________________________________
Total securities available for sale 495,527 $ 6,324 $ (6,149) $495,702
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 175
__________________________________________________________________________________________
Total securities available
for sale, net $495,702
__________________________________________________________________________________________
Trading securities $ 13,400 $ 13,229
__________________________________________________________________________________________
Investment Securities (continued)
__________________________________________________________________________________________
Gross Gross
(In thousands) At December 31, 1996 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 160 $ -- $ -- $ 160
__________________________________________________________________________________________
Total securities held to maturity $ 160 $ -- $ -- $ 160
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $139,197 $ 1,509 $ -- $140,706
U.S. Government agency obligations 7,899 31 (53) 7,877
Other bonds and obligations 1,000 -- -- 1,000
__________________________________________________________________________________________
Total 148,096 1,540 (53) 149,583
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 69,903 987 (480) 70,410
Federal Home Loan Mortgage
Corporation 226,130 1,878 (1,920) 226,088
Federal National Mortgage
Association 9,261 356 -- 9,617
Other 453 27 -- 480
__________________________________________________________________________________________
Total mortgage-backed securities 305,747 3,248 (2,400) 306,595
__________________________________________________________________________________________
Total debt securities 453,843 4,788 (2,453) 456,178
__________________________________________________________________________________________
Equity securities 11,014 4,624 (64) 15,574
__________________________________________________________________________________________
Total securities available for sale 464,857 $ 9,412 $ (2,517) $471,752
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 6,895
__________________________________________________________________________________________
Total securities available
for sale, net $471,752
__________________________________________________________________________________________
Trading securities $ 4,790 $ 4,672
__________________________________________________________________________________________
Investment Securities (continued)
The amortized cost and estimated market value of debt securities held to
maturity and debt securities available for sale by contractual maturity at
March 31, 1997 and December 31, 1996 are as follows:
March 31, 1997
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 55,829 $ 56,091 $ -- $ --
After 1 year through 5 years 98,173 98,194 -- --
After 5 years through 10 years 3,988 3,900 107 107
After 10 years through 15 years -- -- 48 48
________ _______ ________ _______
157,990 158,185 155 155
Mortgage-backed securities 326,693 322,312 -- --
________ _______ ________ _______
$484,683 $480,497 $ 155 $ 155
December 31, 1996
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 56,820 $ 57,120 $ -- $ --
After 1 year through 5 years 87,289 88,470 -- --
After 5 years through 10 years 3,987 3,993 111 111
After 10 years through 15 years -- -- 49 49
________ _______ ______ ______
148,096 149,583 160 160
Mortgage-backed securities 305,747 306,595 -- --
________ _______ ______ ______
$453,843 $456,178 $ 160 $ 160
Loans
The composition of the Bank's loan portfolio is summarized as follows:
_______________________________________________________________________________________
At At
(In thousands) March 31, 1997 December 31, 1996
_______________________________________________________________________________________
Mortgage loans:
Residential $223,647 $219,347
Commercial 3,293 4,121
Construction 760 1,388
_______________________________________________________________________________________
227,700 224,856
Add: Premium on loans 309 325
Less: deferred mortgage loan origination fees (1,088) (1,042)
_______________________________________________________________________________________
Total mortgage loans 226,921 224,139
Other loans:
Consumer:
Installment 1,861 1,967
Guaranteed education 9,628 9,729
Other secured 1,521 1,611
Home equity lines of credit 10,898 11,316
Unsecured 264 271
_______________________________________________________________________________________
Total consumer loans 24,172 24,894
Commercial 515 628
_______________________________________________________________________________________
Total other loans 24,687 25,522
_______________________________________________________________________________________
Total loans $251,608 $249,661
_______________________________________________________________________________________
The Bank's loan portfolio increased slightly during the recent quarter,
from $249.7 million at December 31, 1996 to $251.6 million at March 31, 1997.
All of the increase was in the residential 1-4 family category as loan
originations during this period exceeded loan amortization and payoffs.
Loan originations, which are sensitive to interest rates, remained flat
for the recent quarter as the recent rise in interest rates affected both the
mortgage refinance and home purchase markets and also reduced the demand for
consumer and other loans. Loan originations totalled $12.8 million for the
three months ended March 31, 1997 compared to $12.4 million for the same period
last year.
Non-Performing Assets
The following table shows the composition of the Bank's non-performing
assets at March 31, 1997 and 1996, and December 31, 1996:
At At At
March 31, December 31, March 31,
(In thousands) 1997 1996 1996
____________________________________________________________________________________
Non-Performing Assets:
Non-accrual loans $ 1,275 $ 1,601 $ 2,586
Real estate acquired through foreclosure 443 503 276
____________________________________________________________________________________
Total non-performing assets $ 1,718 $ 2,104 $ 2,862
____________________________________________________________________________________
Allowance for loan losses $ 2,210 $ 2,237 $ 2,504
Allowance as percent of
non-accrual loans 173.3 % 139.7 % 96.8 %
Non-accrual loans as percent
of total loans 0.51% 0.64% 1.03%
Non-performing assets as percent
of total assets 0.19% 0.24% 0.33%
____________________________________________________________________________________
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 from December 31, 1996 to March 31, 1997
as noted in the table above. The principal balance of non-accrual loans was
$1.3 million, or approximately 1/2 of 1% of total loans and real estate
acquired through foreclosure was $443 thousand at March 31, 1997. 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 March 31, 1997.
Allowance For Loan Losses
An analysis of the activity in the allowance for loan losses is as follows:
Three Months Ended
March 31,
1997 1996
_______________________________________________________________________________
(In thousands)
Balance at beginning of period $ 2,237 $ 2,529
Provision for loan losses 68 30
Recoveries of loans previously charged-off 35 4
Less: Charge-offs (130) (59)
_________________________________________________________________________________
Balance at end of period $ 2,210 $ 2,504
_________________________________________________________________________________
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 March 31, 1997 the balance of the allowance for loan losses was
$2,210,000 representing 173.3% of nonaccrual 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 $6.6 million to $795.0 million at
March 31, 1997 from $788.4 million at December 31, 1996.
Deposits (continued)
The composition of the Bank's total deposits at the dates shown are
summarized as follows:
March 31, December 31,
1997 1996
______________________________________________________________________________
(In thousands)
Demand and NOW $ 64,182 $ 62,734
Savings and money market accounts 358,253 357,658
Time certificates of deposit 373,661 369,139
Deposit acquisition premium,
net of amortization (1,123) (1,181)
________________________________________________________________________________
Total deposits $794,973 $788,350
________________________________________________________________________________
Recent Accounting Developments
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share". This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock, (that is, securities such as options, warrants
or convertible securities). This Statement simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share". It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15.
This Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. This Statement requires restatement of all prior-period EPS
data presented.
Liquidity and Capital Resources
The Bank must maintain a sufficient amount of cash and assets which can
readily be converted into cash in order to meet cash outflows from normal
depositor requirements and loan demands. The Bank's primary sources of funds
are deposits, loan amortization and prepayments, sales or maturities of
investment securities and income on earning assets. In addition to loan
payments and maturing investment securities, which are relatively predictable
sources of funds, the Bank maintains a high percentage of its assets invested
in overnight federal funds sold, which can be immediately converted into cash
and United States Treasury and Government agency securities, which can be sold
or pledged to raise funds. At March 31, 1997 the Bank had $85.7 million or
9.5% of total assets and $167.8 million or 18.6% of total assets invested,
respectively, in overnight federal funds sold and United States obligations.
The Bank is a Federal Deposit Insurance Corporation ("FDIC") insured
institution subject to the FDIC regulatory capital requirements. The FDIC
regulations require all FDIC insured institutions to maintain minimum levels
of Tier 1 capital. Highly rated banks (i.e., those with a composite rating of 1
under the CAMEL rating system) are required to maintain a minimum leverage
ratio of Tier 1 capital to total assets of at least 3.00%. An additional 100
to 200 basis points are required for all but these most highly rated
institutions. The Bank is also required to maintain a minimum level of
risk-based capital. Under the new risk-based capital standards, FDIC insured
institutions must maintain a Tier 1 capital to risk-weighted assets ratio of
4.00% and are generally expected to meet a minimum total qualifying capital to
risk-weighted assets ratio of 8.00%. The new risk-based capital guidelines
take into consideration risk factors, as defined by the regulators, associated
with various categories of assets, both on and off the balance sheet. Under
the guidelines, capital strength is measured in two tiers which are used in
conjunction with risk adjusted assets to determine the risk-based capital
ratios. Tier II components include supplemental capital components such as
qualifying allowance for loan losses and qualifying subordinated debt. Tier I
plus the Tier II capital components is referred to as total qualifying capital.
The capital ratios of the Bank and the Company currently exceed the
minimum regulatory requirements. At March 31, 1997, the Bank had a leverage
Tier I capital to total assets ratio of 9.61%, a Tier I capital to risk-
weighted assets ratio of 33.82% and a total capital to risk-weighted assets
ratio of 34.68%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to total assets of 9.85%, Tier I capital to risk-weighted assets
of 34.64% and total capital to risk-weighted assets of 35.51% at March 31,
1997.
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.
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 March 31, 1997, none of these actions individually
or in the aggregate is believed by management to be material to the
financial condition of MASSBANK Corp. or the Bank.
Item 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 May 14, 1997 /s/Gerard H. Brandi
____________ ______________________
(Signature)
Gerard H. Brandi
President and CEO
Date May 14, 1997 /s/Reginald E. Cormier
____________ ______________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO