SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to____________
Commission File Number 0-15137
MASSBANK Corp.
(Exact name of registrant as specified in its charter)
Delaware 04-2930382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 HAVEN STREET
Reading, Massachusetts 01867
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (781) 662-0100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's classes of common stock,
as of the latest practicable date is:
Class: Common stock $1.00 per share.
Outstanding at July 31, 1998: 3,600,310 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income (unaudited)
for the three months ended June 30, 1998 and 1997 4
and for the six months ended June 30, 1998 and 1997 5
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1998 (unaudited)
and the year ended December 31, 1997 6 - 7
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1998 and 1997 8 - 9
Condensed Notes to the Consolidated Financial Statements 10 - 11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 32
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 33
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 34
ITEM 2. Changes in Securities 34
ITEM 3. Defaults Upon Senior Securities 34
ITEM 4. Submission of Matters to a Vote of Security Holders 34
ITEM 5. Other Information 34
ITEM 6. Exhibits and Reports on Form 8-K 34
Signature Page 35
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
June 30, December 31,
1998 1997
____ ____
(unaudited)
Assets:
Cash and due from banks $ 7,065 $ 6,808
Short-term investments (Note 3) 160,486 109,755
________________________________________________________________________________
Total cash and cash equivalents 167,551 116,563
Term federal funds sold 10,000 20,000
Interest-bearing deposits in banks 2,596 2,083
Securities held to maturity, at amortized cost
(market value of $363 in 1998 and $372 in 1997) 363 372
Securities available for sale, at market value (amortized
cost of $427,988 in 1998 and $466,749 in 1997) 445,280 482,224
Trading securities, at market value 4,985 21,260
Loans: (Note 4)
Mortgage loans 265,899 248,798
Other loans 22,022 23,505
Less: allowance for loan losses (2,405) (2,334)
________________________________________________________________________________
Net loans 285,516 269,969
Premises and equipment 4,233 4,369
Real estate acquired through foreclosure 71 --
Accrued interest receivable 5,351 5,395
Goodwill 1,437 1,487
Accrued income tax asset, net 569 --
Other assets 1,720 1,681
________________________________________________________________________________
Total assets $929,672 $925,403
Liabilities and Stockholders' Equity:
Deposits $808,706 $809,850
Escrow deposits of borrowers 1,334 1,502
Employee stock ownership plan liability 781 781
Accrued income taxes payable -- 1,240
Deferred income taxes payable 5,629 4,927
Other liabilities 3,854 3,324
________________________________________________________________________________
Total liabilities 820,304 821,624
Stockholders' Equity:
Preferred stock, par value $1.00 per share;
2,000,000 shares authorized, none issued -- --
Common stock, par value $1.00 per share;
10,000,000 shares authorized, 7,358,616 and
7,336,800 shares issued, respectively 7,359 7,337
Additional paid-in capital 59,363 58,737
Retained earnings 74,760 70,984
________________________________________________________________________________
141,482 137,058
Accumulated other comprehensive income:
Net unrealized gains on securities
available for sale, net of tax effect 10,236 9,071
Treasury stock at cost, 3,766,022 shares (41,569) (41,569)
Common stock acquired by ESOP ( 781) ( 781)
________________________________________________________________________________
Total stockholders' equity 109,368 103,779
________________________________________________________________________________
Total liabilities and stockholders' equity $929,672 $925,403
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
June 30,
(In thousands except share data) 1998 1997
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 4,774 $ 4,320
Other loans 511 560
Securities available for sale:
Mortgage-backed securities 5,293 5,647
Other securities 2,167 2,664
Trading securities 157 241
Federal funds sold 1,749 1,223
Other investments 374 362
______________________________________________________________________________
Total interest and dividend income 15,025 15,017
______________________________________________________________________________
Interest expense:
Deposits 8,562 8,555
______________________________________________________________________________
Total interest expense 8,562 8,555
______________________________________________________________________________
Net interest income 6,463 6,462
Provision for loan losses 45 52
______________________________________________________________________________
Net interest income after provision for loan losses 6,418 6,410
______________________________________________________________________________
Non-interest income:
Deposit account service fees 210 226
Gains on securities, net 616 610
Other 275 300
______________________________________________________________________________
Total non-interest income 1,101 1,136
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,874 1,955
Occupancy and equipment 472 516
Data processing 123 156
Professional services 119 90
Merger and acquisition related expense -- 100
Advertising and marketing 54 36
Amortization of intangibles 68 57
Contributions 6 644
Other 403 370
______________________________________________________________________________
Total non-interest expense 3,119 3,924
______________________________________________________________________________
Income before income taxes 4,400 3,622
Income tax expense 1,694 1,173
______________________________________________________________________________
Net income $ 2,706 $ 2,449
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,546,194 3,528,733
Diluted 3,708,701 3,652,569
Earnings per share (in dollars):
Basic $ 0.76 $ 0.69
Diluted 0.73 0.67
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six months ended
June 30,
(In thousands except share data) 1998 1997
_______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 9,424 $ 8,557
Other loans 1,036 1,120
Securities available for sale:
Mortgage-backed securities 10,854 11,012
Other securities 4,355 5,346
Trading securities 453 336
Federal funds sold 3,252 2,705
Other investments 744 701
_______________________________________________________________________________
Total interest and dividend income 30,118 29,777
_______________________________________________________________________________
Interest expense:
Deposits 17,083 16,904
_______________________________________________________________________________
Total interest expense 17,083 16,904
_______________________________________________________________________________
Net interest income 13,035 12,873
Provision for loan losses 90 120
_______________________________________________________________________________
Net interest income after provision for loan losses 12,945 12,753
_______________________________________________________________________________
Non-interest income:
Deposit account service fees 421 448
Gains on securities, net 1,428 1,078
Other 498 504
_______________________________________________________________________________
Total non-interest income 2,347 2,030
_______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 3,847 3,824
Occupancy and equipment 1,027 1,019
Data processing 253 301
Professional services 240 227
Merger and acquisition related expense -- 140
Advertising and marketing 97 92
Amortization of intangibles 137 115
Contributions 7 656
Other 767 745
_______________________________________________________________________________
Total non-interest expense 6,375 7,119
_______________________________________________________________________________
Income before income taxes 8,917 7,664
Income tax expense 3,377 2,742
_______________________________________________________________________________
Net income 5,540 $ 4,922
_______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,540,456 3,529,254
Diluted 3,702,676 3,649,732
Earnings per share (in dollars):
Basic $ 1.56 $ 1.39
Diluted 1.50 1.35
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 1998 (unaudited)
(In thousands except share data)
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL
________ __________ _________ __________ __________ _________ ________
Balance at December 31, 1997 $7,337 $58,737 $70,984 $(41,569) $9,071 $(781) $103,779
Net Income -- -- 5 ,540 -- -- -- 5,540
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 5) -- -- -- -- 1,165 -- 1,165
_____
Comprehensive income 6,705
Cash dividends declared and paid
($0.50 per share) -- -- (1,771) -- -- -- (1,771)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 7 -- -- -- 7
Amortization of ESOP shares
committed to be released -- 139 -- -- -- -- 139
Exercise of stock options
and related tax benefits 22 487 -- -- -- -- 509
___________________________________________________________________________________________________________________________
Balance at June 30, 1998 $7,359 $59,363 $74,760 $(41,569) $10,236 $(781) $109,368
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Year Ended December 31, 1997 (unaudited)
(In thousands except share data)
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL
________ __________ _________ __________ __________ _________ ________
Balance at December 31, 1996 $5,476 $57,858 $65,756 $(39,904) $ 4,001 $(937) $ 92,250
Net income -- -- 10,167 -- -- -- 10,167
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 5) -- -- -- -- 5,070 -- 5,070
______
Comprehensive income 15,237
Cash dividends declared and paid
($0.885 per share) -- -- (3,124) -- -- -- (3,124)
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 -- 184 -- -- -- -- 184
Purchase of treasury stock -- -- -- (1,665) -- -- (1,665)
Exercise of stock options
and related tax benefits 31 695 -- -- -- -- 726
Transfer resulting from four-for-three
stock split 1,830 -- (1,830) -- -- -- --
__________________________________________________________________________________________________________________________
Balance at December 31, 1997 $7,337 $58,737 $70,984 $(41,569) $9,071 $(781) $103,779
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
1998 1997
____ ____
(In thousands)
Cash flows from operating activities:
Net income $ 5,540 $ 4,922
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 453 397
Loan interest capitalized (40) --
Amortization of ESOP shares committed to be released 139 --
Charitable contribution of appreciated securities -- 622
Decrease (increase) in accrued interest receivable 44 (117)
Increase in other liabilities 562 648
Decrease in current income taxes payable (1,809) (400)
Accretion of discounts on securities, net of amortization
of premiums (596) (554)
Net trading securities activity 17,424 (8,549)
Gains on securities available for sale (1,389) (1,016)
Gains on trading securities (38) (62)
Increase in deferred mortgage loan
origination fees, net of amortization 130 80
Deferred income tax expense (benefit) 49 (67)
Increase in other assets (11) (148)
Loans originated for sale (129) (200)
Loans sold 129 200
Provision for loan losses 90 120
Gains on sales of real estate acquired through foreclosure (3) (15)
Increase in escrow deposits of borrowers (168) 106
__________________________________________________________________________________________
Net cash provided by (used in) operating activities 20,377 (4,033)
__________________________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds (10,000) (5,000)
Proceeds from maturities of term federal funds 20,000 5,000
Increase in interest bearing bank deposits (513) (260)
Proceeds from sales of investment securities available for sale 10,847 30,157
Proceeds from maturities of investment securities
available for sale 25,750 31,000
Purchases of investment securities
available for sale (29,957) (46,728)
Purchases of investment securities held to maturity -- (230)
Purchases of mortgage-backed securities -- (38,638)
Principal repayments of mortgage-backed securities 32,963 18,835
Principal repayments of securities held to maturity 9 9
Principal repayments of securities available for sale 1 --
Loans originated (49,545) (28,257)
Loan principal payments received 33,514 21,557
Purchases of premises & equipment (154) (398)
Proceeds from sales of real estate acquired through foreclosure 191 520
Net advances on real estate acquired through foreclosure (9) (4)
__________________________________________________________________________________________
Net cash provided by (used in) investing activities 33,097 (12,437)
__________________________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Six Months Ended
June 30,
1998 1997
____ ____
(In thousands)
Cash flows from financing activities:
Net (decrease) increase in deposits (1,231) 10,039
Payments to acquire treasury stock -- (656)
Issuance of common stock under stock option plan 373 199
Tax benefit resulting from stock options exercised 136 72
Dividends paid on common stock (1,771) (1,431)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 7 7
__________________________________________________________________________________________
Net cash (used in) provided by financing activities (2,486) 8,230
__________________________________________________________________________________________
Net increase (decrease) in cash and
cash equivalents 50,988 (8,240)
Cash and cash equivalents at beginning of period 116,563 140,922
_________________________________________________________________________________________
Cash and cash equivalents at end of period $167,551 $132,682
_________________________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $17,091 $16,887
Cash paid during the period for taxes, net of refunds 4,669 3,130
Purchases of securities incomplete (not settled) at
beginning of period which settled during the period 32 --
Sales of securities incomplete (not settled) at
beginning of period which settled during the period -- 30
Non-cash transactions:
SFAS 115:
Increase (decrease) in accumulated other comprehensive income 1,165 (949)
Increase in deferred tax liabilities 653 684
Transfers from loans to real estate acquired through foreclosure 250 322
Purchases of securities incomplete (not settled) at end of period -- 1,994
Transfers from securities available for sale to trading securities 1,111 --
Transfers from premises and equipment to other assets 9 --
Cost of donated securities 2 --
_________________________________________________________________________________________
<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 June 30, 1998
and December 31, 1997, and its operating results for the three and six months
ended June 30, 1998 and 1997. 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
Company's per share information reported for the prior year has been restated
to reflect the four-for-three stock split of the Company's common stock which
was effected in the form of a stock dividend on September 15, 1997.
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, 1997.
(2) Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents consist of
cash and due from banks, and short-term investments with original maturities of
less than 90 days.
(3) Short-Term Investments
Short-term investments consist of the following:
________________________________________________________________________________
At At
(In thousands) June 30, 1998 December 31, 1997
________________________________________________________________________________
Federal funds sold (overnight) $136,315 $ 85,241
Money market funds 24,171 24,514
________________________________________________________________________________
Total short-term investments $160,486 $109,755
________________________________________________________________________________
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
(4) Commitments
At June 30, 1998, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$7,607,000 and commitments under existing home equity lines of credit and other
loans of approximately $23,963,000 which are not reflected on the consolidated
balance sheet. In addition, as of June 30, 1998, the Company had a performance
standby letter of credit conveyed to others in the amount of $781,000 which is
also not reflected on the consolidated balance sheet.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
SFAS 130 establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by, and
distributions to, shareholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income.
The Company's other comprehensive income and related tax effect for the
six months ended June 30, 1998 and the year ended December 31, 1997 is as
follows:
For the Six Months Ended
June 30, 1998
____________________________________________________________________________________
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
______ __________ ______
Unrealized gains on securities:
Unrealized holding gains arising during period $3,207 $(1,238) $1,969
Less: reclassification adjustment for
gains realized in net income (1,389) 585 (804)
______ ________ ______
Net unrealized gains 1,818 (653) 1,165
______ ________ ______
Other comprehensive income $1,818 $ (653) $1,165
______ ________ _____
For the Year Ended
December 31, 1997
____________________________________________________________________________________
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
______ __________ ______
Unrealized gains on securities:
Unrealized holding gains arising during period $10,411 $(4,290) $6,121
Less: reclassification adjustment for
gains realized in net income (1,831) 780 (1,051)
______ ________ ______
Net unrealized gains 8,580 (3,510) 5,070
______ ________ ______
Other comprehensive income $8,580 $(3,510) $5,070
______ ________ ______
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1998
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 for the three months ended June 30, 1998
GENERAL
For the quarter ended June 30, 1998, MASSBANK Corp. reported consolidated
net income of $2,706,000 or $0.76 in basic earnings per share compared to net
income of $2,449,000, or $0.69 in basic earnings per share in the second
quarter of 1997. This represents an increase of 10.5% in net income and a
10.1% increase in basic earnings per share. Diluted earnings per share
increased to $0.73 per share from $0.67 per share in last year's comparable
period, representing an increase of 9.0%. The current and prior year per
share amounts reflect the four-for-three stock split of the Company's common
stock which was effected in the form of a stock dividend on September 15,
1997.
The Company's improved earnings for the three months ended June 30, 1998
resulted primarily from a decrease in non-interest expense. Non-interest
expense for the recent quarter decreased by $805,000 or 20.5% to $3,119,000
from $3,924,000 for the same quarter last year. This reduction was essentially
due to non-recurring expenses that the Bank incurred in the second quarter 1997
in conjunction with the establishment and endowment of a tax exempt private
foundation; its acquisition of the Glendale Co-operative Bank; and a computer
conversion. The expense reduction is partially offset by an increase in income
tax expense. This is essentially due to a non-recurring tax benefit of $260,000
that the Bank received in the 1997 second quarter as a result of having donated
appreciated securities to establish and endow the MASSBANK Charitable
Foundation.
AVERAGE BALANCE SHEETS
Three Months Ended
June 30,
1998 1997
______________ ______________
Interest Average Interest Average
Average Income Yield/ Average Income Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
Assets:
Earning assets:
Federal funds sold $128,599 $ 1,749 5.46% $ 89,153 $ 1,223 5.50%
Short-term investments (2) 27,177 369 5.44 26,051 358 5.51
Investment securities 150,873 2,203 5.84 171,062 2,706 6.33
Mortgage-backed securities 307,654 5,293 6.88 321,987 5,647 7.02
Trading securities 11,472 157 5.48 16,622 241 5.80
Mortgage loans (1) 260,478 4,774 7.33 229,663 4,320 7.52
Other loans (1) 22,303 511 9.19 24,600 560 9.11
__________________________________________________ ________________
Total earning assets 908,556 $15,056 6.62% 879,138 $15,055 6.85%
Allowance for loan losses (2,367) (2,222)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 906,189 876,916
Other assets 19,951 18,948
__________________________________________________________________________________________
Total assets $926,140 $895,864
__________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
June 30,
1998 1997
______________ ______________
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 $ 69,516 $ 140 0.81% $ 64,630 $ 132 0.82%
Savings 351,040 3,000 3.43 351,946 3,044 3.47
Time certificates of deposit 387,536 5,422 5.61 380,134 5,379 5.68
__________________________________________________ ________________
Total deposits 808,092 8,562 4.25 796,710 8,555 4.31
Other liabilities 9,790 6,193
__________________________________________________________________________________________
Total liabilities 817,882 802,903
Stockholders' equity 108,258 92,961
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $926,140 $895,864
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,494 6,500
Less adjustment of tax-exempt
interest income 31 38
__________________________________________________________________________________________
Net interest income $ 6,463 $ 6,462
__________________________________________________________________________________________
Interest rate spread 2.37% 2.54%
__________________________________________________________________________________________
Net interest margin (3) 2.86% 2.96%
__________________________________________________________________________________________
(1) Loans on non-accrual status are included in the average balance.
(2) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
(3) Net interest income (tax equivalent basis) before provision for loan
losses divided by average interest-earning assets.
(4) Includes the effects of SFAS No. 115.
Net Interest Income
Net interest income was $6.463 million for the second quarter of 1998
compared to $6.462 million for the same period in 1997. The net interest
income for the recent quarter reflects the positive effect of earning asset
growth offset by the negative effect of a lower net interest margin. The
Company's average earning assets increased by $29.4 million or 3.3% to $908.5
million in the second quarter of 1998, up from $879.1 million in the second
quarter of the prior year. The Company's net interest margin was 2.86% in the
recent quarter, down from 2.96% for the same quarter last year.
Interest and Dividend Income
Interest and dividend income on a fully taxable equivalent basis for the
three months ended June 30, 1998, remained unchanged at $15.1 million when
compared to the three months ended June 30, 1997. The average total earning
assets of the Company increased by $29.4 million, as noted above. The increase
in interest income resulting from the growth in earning assets in the recent
quarter, however, was offset by a decline in yield on earning assets. As
reflected in the table on page 13, the combination of yield declines in mortgage
loans, investment securities, federal funds sold and short-term investments,
partially offset by a modest increase in yield on other (consumer) loans,
resulted in an overall decline in yield on the Company's total average earning
assets of 23 basis points. The weighted average yield on earning assets for
the second quarter of 1998 was 6.62% compared to 6.85% in the same quarter of
the prior year. This decline in yield reflects a decrease in market interest
rates combined with a significant flattening of the yield curve.
Interest Expense
Total interest expense for the three months ended June 30, 1998 was $8.5
million, remaining essentially unchanged from the same quarter last year. The
Company's average deposits, as shown in the table on page 14, increased $11.4
million or 1.4% to $808.1 million in the second quarter of 1998, up from $796.7
million in the second quarter of 1997. The increase in interest expense
resulting from the growth in deposits in the recent quarter was offset by a
decrease in average cost of funds. The Company's average cost of funds for
the three months ended June 30, 1998 was 4.25%, down from 4.31% for the
comparable period in 1997.
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 second quarter of 1998 was $45,000
versus $52,000 for the comparable period in 1997. This decrease was
essentially due to lower net loan charge-offs. Loan charge-offs net of
recoveries equalled $17,000 in the recent quarter, down from $27,000 for the
same quarter last year.
Provision for Loan Losses (continued)
The reserve coverage as a percentage of the Bank's non-performing assets
declined slightly in the recent quarter. At June 30, 1998, MASSBANK's
allowance for loan losses totalled $2.405 million representing 131.9% of
non-performing assets compared to $2.235 million representing 149.8% of
non-performing assets at the end of the second quarter in 1997.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
on securities and other non-interest income.
Non-interest income for the second quarter of 1998 was $1,101,000, down
slightly from $1,136,000, for the comparable period in 1997. The Company
continues to benefit from the stock market's favorable performance. The
Company's equity portfolio has yielded substantial realized and unrealized
gains. Net unrealized gains in the equity securities portfolio totalled $9.8
million at June 30, 1998. The Company reported net securities gains of $616,000
for the recent quarter compared to $610,000 for the same quarter last year.
Most of these gains were from the sale of equity securities.
Non-Interest Expense
Non-interest expenses decreased by $805,000, or 20.5% to $3,119,000 in the
second quarter of 1998 from $3,924,000 in the second quarter of 1997.
Salaries and employee benefits, the largest component of non-interest
expense, decreased by $81,000 or 4.1% from $1,955,000 in the second quarter of
1997 to $1,874,000 in the recent quarter. This reduction is due largely to a
$70,000 decrease in the Company's directors deferred compensation plan expense.
The expense related to this plan is tied closely to the market value of the
Company's common stock. The increase in the market value of the Company's
common stock during the second quarter 1997, from $41.00 per share at March 31,
1997 to $47.75 per share at June 30, 1997, significantly increased the expense
for the plan. Conversely, the price of the Company's common stock in the recent
quarter declined from $50.125 per share at March 31, 1998 to $49.00 per share at
June 30, 1998, decreasing the expense for the plan.
Occupancy and equipment expenses decreased from $516,000 in the second
quarter of 1997 to $472,000 in the second quarter of 1998. This decrease is
due essentially to real estate tax abatements that the Bank received in the
recent quarter. These abatements were for both current and prior years and
totalled approximately $54,000.
There were no merger and acquisition related expenses incurred in the
second quarter of 1998. In the second quarter of last year, the Bank incurred
merger and acquisition related expenses of $100,000 in connection with its
acquisition of the Glendale Co-operative Bank.
Bank charitable contributions for the recent quarter were $6,000 compared
to $644,000 for the same quarter last year. During the 1997 second quarter,
the Company established and endowed a tax exempt private foundation -- the
"MASSBANK Charitable Foundation" -- for the purpose of making grants in future
years to benefit the Bank's local communities. MASSBANK contributed appreciated
securities to the Foundation valued at $622,000 which is included in
contributions expense for the second quarter of 1997.
Non-Interest Expense (continued)
All other expenses combined, consisting of data processing, professional
services, advertising and marketing, amortization of intangibles, and other
expenses, increased by $58,000 or 8.2%, from $709,000 for the three months
ended June 30, 1997 to $767,000 for the three months ended June 30, 1998.
Income Tax Expense
The Company, the Bank and its subsidiaries file a consolidated federal
income tax return. The Parent Company is subject to a State of Delaware
Franchise Tax and a State of Massachusetts Bank Excise Tax and the Bank's
subsidiaries are subject to a State of Massachusetts Corporate Excise Tax.
The provision for federal and state income taxes increased to $1,694,000
for the three months ended June 30, 1998 from $1,173,000 for the same period
in 1997. The Company's combined effective income tax rate for the second
quarter of 1998 is 38.5% compared to 32.4% for the same quarter a year ago.
The increase in effective income tax rate is essentially due to a non-
recurring tax benefit of approximately $260,000 that the Bank received last
year as a result of having contributed appreciated securities to the MASSBANK
Charitable Foundation, as previously noted.
Results of Operations for the six months ended June 30, 1998
General
For the six months ended June 30, 1998, the Company reported consolidated
net income of $5,540,000 or $1.56 in basic earnings per share ($1.50 per share
on a diluted basis) compared to net income of $4,922,000 or $1.39 in basic
earnings per share ($1.35 per share on a diluted basis) earned in the first half
of 1997.
The Company's positive financial performance in the first six months of
1998 reflects a decrease in non-interest expense of $744,000 or 10.5%. Non-
interest expense for the six months ended June 30, 1998 were $6,375,000 down
from $7,119,000 for the comparable period in 1997. Additionally, the favorable
earnings results for the first half of 1998 reflect an improvement in net
interest income due to growth in the Company's average earning assets. Average
earning assets for the first half of 1998 increased to $907.8 million, up $30.7
million from the corresponding period in 1997. Net interest income for the six
months ended June 30, 1998 was $13,035,000, up $162,000 when compared to the
same period a year ago.
The Company's earning results for the six months ended June 30, 1998 were
also impacted by the following factors:
a) Non-interest income increased by $317,000 to $2,347,000 in the first
six months of 1998 due to increased securities gains.
b) The Bank's provision for loan losses for the six months ended June 30,
1998 decreased by 25% to $90,000 from $120,000 for the comparable period
in 1997.
c) Income tax expense increased in the first half of 1998 compared to the
same period in 1997. This was partly due to a non-recurring tax benefit
of approximately $260,000 that the Bank received in 1997 as a result of
having contributed appreciated securities to establish and endow the
MASSBANK Charitable Foundation, as previously noted.
AVERAGE BALANCE SHEETS
Six Months Ended
June 30,
1998 1997
______________ ______________
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 $119,575 $ 3,252 5.48% $100,999 $ 2,705 5.40%
Short-term investments (2) 27,092 734 5.46 25,860 694 5.41
Investment securities 150,390 4,427 5.88 170,840 5,430 6.36
Mortgage-backed securities 316,130 10,854 6.87 315,277 11,012 6.99
Trading securities 16,684 453 5.42 11,577 336 5.85
Mortgage loans (1) 255,181 9,424 7.39 227,667 8,557 7.52
Other loans (1) 22,777 1,036 9.17 24,915 1,120 8.99
__________________________________________________ ________________
Total earning assets 907,829 $30,180 6.65% 877,135 $29,854 6.81%
Allowance for loan losses (2,353) (2,211)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 905,476 874,924
Other assets 19,500 18,380
__________________________________________________________________________________________
Total assets $924,976 $893,304
__________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued)
Six Months Ended
June 30,
1998 1997
______________ ______________
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 $ 68,290 $ 273 0.81% $ 63,998 $ 260 0.82%
Savings 352,271 5,982 3.42 354,507 6,097 3.47
Time certificates of deposit 387,191 10,828 5.64 375,677 10,547 5.66
__________________________________________________ ________________
Total deposits 807,752 17,083 4.26 794,182 16,904 4.29
Other liabilities 10,126 5,988
__________________________________________________________________________________________
Total liabilities 817,878 800,170
Stockholders' equity 107,098 93,134
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $924,976 $893,304
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 13,097 12,950
Less adjustment of tax-exempt
interest income 62 77
__________________________________________________________________________________________
Net interest income $13,035 $12,873
__________________________________________________________________________________________
Interest rate spread 2.39% 2.52%
__________________________________________________________________________________________
Net interest margin (3) 2.89% 2.95%
__________________________________________________________________________________________
(1) Loans on non-accrual status are included in the average balance.
(2) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
(3) Net interest income (tax equivalent basis) before provision for loan
losses divided by average interest-earning assets.
(4) Includes the effects of SFAS No. 115.
Net Interest Income
Net interest income was $13.035 million for the six months ended June 30,
1998, up $162,000 from $12.873 million for the same period in 1997. This
increase resulted from the growth in the Company's interest-earning assets
partially offset by a decrease in net interest margin. The Company's net
interest margin for the six months ended June 30, 1998 and 1997 was 2.89%
and 2.95%, respectively.
The Company's interest rate spread decreased to 2.39% for the first six
months of 1998, from 2.52% in the first six months of last year. The yield on
the Company's average earning assets in the first half of 1998 decreased by 16
basis points to 6.65% from 6.81% in the corresponding period of 1997. This
decrease was partially offset by a decrease of 3 basis points in the Company's
average cost of funds, from 4.29% for the six months ended June 30, 1997 to
4.26% for the same period this year.
Provision for Loan Losses
The provision for loan losses for the first half of 1998 was $90,000
versus $120,000 for the comparable period in 1997. This decrease was due to
the lower level of net loan charge-offs which the Bank has experienced in recent
quarters. For the six months ended June 30, 1998, loan charge-offs net of
recoveries declined to $19,000 from $122,000 for the same period last year.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
on securities and other non-interest income.
Non-interest income for the first six months of 1998 totalled $2,347,000,
up $317,000 or approximately 16% from $2,030,000 reported in the corresponding
period last year. This increase is due to net gains on securities of $1,428,000
reported for the six months ended June 30, 1998 versus $1,078,000 reported for
the same period last year. The Company continues to benefit from the stock
market's strong performance.
Non-Interest Expense
Non-interest expenses decreased by $744,000, or 10.5% to $6,375,000 in
the first six months of 1998 from $7,119,000 in the first six months of 1997.
Salaries and employee benefits, the largest component of non-interest
expense, increased $23,000 or less than 1% from $3,824,000 in the first half
of 1997 to $3,847,000 in the first half of this year. This increase is due
principally to salary increases and an increase in the Company's employee stock
ownership plan (ESOP) expense. These were partially offset by a $66,000
reduction in the Company's directors deferred compensation plan expense.
Occupancy and equipment expenses were $1,027,000 in the first half of 1998
compared to $1,019,000 for the same period in 1997. As previously noted,
occupancy and equipment expenses for the first six months of 1998 reflect
the real estate abatements of approximately $54,000 that the Bank received in
the recent quarter, otherwise the expense increase in 1998 would have been
higher.
There were no merger and acquisition related expenses incurred in the first
six months of 1998. In the first six months of last year, the Bank incurred
merger and acquisition related expenses of $140,000 in connection with its
acquisition of the Glendale Co-operative Bank.
Non-Interest Expense (continued)
Bank charitable contributions for the first half of 1998 were $7,000
compared to $656,000 for the same period last year. During the first half of
1997, the Company established and endowed a tax exempt private foundation --
the "MASSBANK Charitable Foundation" -- for the purpose of making grants in
future years to benefit the Bank's local communities. MASSBANK contributed
appreciated securities to the Foundation valued at $622,000 which is included
in contributions expense for 1997.
All other expenses combined, consisting of data processing, professional
services, advertising and marketing, amortization of intangibles, and other
expenses, increased by $14,000 or less than 1.0%, from $1,480,000 for the six
months ended June 30, 1997 to $1,494,000 for the six months ended June 30, 1998.
Income Tax Expense
The provision for federal and state income taxes increased to $3,377,000
for the six months ended June 30, 1998 from $2,742,000 for the same period in
1997. The Company's combined effective income tax rate for the first half of
1998 is 37.9% compared to 35.8% for the same period a year ago.
The increase in effective income tax rate is essentially due to a non-
recurring tax benefit of approximately $260,000 that the Bank received last
year as a result of having contributed appreciated securities to the MASSBANK
Charitable Foundation, as previously noted. Partially offsetting this increase
is a state income tax refund, net of federal tax, of approximately $44,000 that
the Bank received in the first quarter of 1998, representing the final
settlement of a state income tax issue for prior years.
Financial Condition
Total assets at June 30, 1998 were $929.7 million, an increase of $4.3
million from $925.4 million at December 31, 1997.
The Company's securities available for sale and trading securities
portfolios in the first half of 1998 decreased by $36.9 million and $16.3
million, respectively. Term federal funds sold also decreased from $20.0
million to $10.0 million. These decreases were offset by increases in short-
term investments of $50.7 million and an increase in the Bank's loan portfolio
of $15.6 million. Since short-term interest rates have been almost as high as
longer term rates in recent quarters, the Bank has opted to reinvest funds from
payments, sales or maturities of investment securities in (overnight) federal
funds sold.
MASSBANK's loan portfolio increased to $287.9 million at June 30, 1998
reflecting a net increase in loans of $15.6 million in the six months ended
June 30, 1998. This improvement was due to an increase in loan originations.
Loan originations totalled $49.7 million in the six months ended June 30, 1998,
up approximately 75%, or $21.2 million compared to $28.5 million in the six
months ended June 30, 1997.
Total deposits were $808.7 million at June 30, 1998 essentially unchanged
from $809.9 million at year end 1997.
Total stockholders' equity rose to $109.4 million at June 30, 1998 from
$103.8 million at December 31, 1997. Book value increased to $30.44 per share,
from $29.06 per share at year end 1997. The Company's book value per share has
increased $3.50 or 13.0% since June 30, 1997.
Investments
Total investments consisting of investment securities, short-term
investments, term federal funds sold and interest-bearing bank deposits
equalled $623.7 million at June 30, 1998, down $12.0 million from $635.7
million at year end 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 $20.7 million as of June 30, 1998, that has yielded
substantial realized and unrealized gains. Nearly all of the Bank's investment
securities are classified as available for sale or trading securities.
Management evaluates its investment alternatives in order to properly manage
the mix of assets on its balance sheet. Investment securities available for
sale and trading securities provide liquidity, facilitate interest rate
sensitivity management and enhance the Bank's ability to respond to customers'
needs should loan demand increase and/or deposits decline.
The Bank continues to maintain a large proportion of its securities
portfolio in government agency mortgage-backed securities. These represent an
attractive investment with minimal credit risk, no servicing responsibilities,
and no delinquencies. The Bank's investment in mortgage-backed securities
totalled $298.5 million at June 30, 1998 versus $330.7 million at year end
1997.
The Bank also maintains a portfolio of trading securities which consisted
of the following as of the dates shown:
June 30, December 31,
(In thousands) 1998 1997
_____________ ____________
U.S. Treasury bills $ 2,952 $18,542
Investment in mutual funds 2,033 2,718
_______ _______
Total $ 4,985 $21,260
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at June 30, 1998 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At June 30, 1998 Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 363 $ -- $ -- $ 363
__________________________________________________________________________________________
Total securities held to maturity $ 363 $ -- $ -- $ 363
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $119,487 $ 1,548 $ (1) $121,034
U.S. Government agency obligations 5,059 15 (6) 5,068
__________________________________________________________________________________________
Total 124,546 1,563 (7) 126,102
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 54,934 1,361 -- 56,295
Federal Home Loan Mortgage
Corporation 224,290 4,344 (30) 228,604
Federal National Mortgage
Association 6,353 209 -- 6,562
Collateralized mortgage
obligations 6,689 71 -- 6,760
Other 252 11 -- 263
__________________________________________________________________________________________
Total mortgage-backed securities 292,518 5,996 (30) 298,484
__________________________________________________________________________________________
Total debt securities 417,064 7,559 (37) 424,586
__________________________________________________________________________________________
Equity securities 10,924 9,841 (71) 20,694
__________________________________________________________________________________________
Total securities available for sale 427,988 $ 17,400 $ (108) $445,280
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 17,292
__________________________________________________________________________________________
Total securities available
for sale, net $445,280
__________________________________________________________________________________________
Trading securities $ 4,985 $ 4,985
__________________________________________________________________________________________
FINANCIAL CONDITION
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investment securities
at December 31, 1997 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At December 31, 1997 Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 372 $ -- $ -- $ 372
__________________________________________________________________________________________
Total securities held to maturity $ 372 $ -- $ -- $ 372
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $121,399 $ 1,622 $ -- $123,021
U.S. Government agency obligations 9,800 24 (11) 9,813
__________________________________________________________________________________________
Total 131,199 1,646 (11) 132,834
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 60,493 1,247 (31) 61,709
Federal Home Loan Mortgage
Corporation 248,744 4,257 (180) 252,821
Federal National Mortgage
Association 7,733 258 -- 7,991
Collateralized mortgage
obligations 7,836 62 -- 7,898
Other 298 14 -- 312
__________________________________________________________________________________________
Total mortgage-backed securities 325,104 5,838 (211) 330,731
__________________________________________________________________________________________
Total debt securities 456,303 7,484 (222) 463,565
__________________________________________________________________________________________
Investments in mutual funds 1,110 4 -- 1,114
Equity securities 9,336 8,227 (18) 17,545
__________________________________________________________________________________________
Total securities available for sale 466,749 $ 15,715 $ (240) $482,224
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 15,475
__________________________________________________________________________________________
Total securities available
for sale, net $482,224
__________________________________________________________________________________________
Trading securities $ 21,305 $ 21,260
__________________________________________________________________________________________
Investments (continued)
The amortized cost and estimated market value of debt securities held to
maturity and debt securities available for sale by contractual maturity at
June 30, 1998 and December 31, 1997 are as follows:
June 30, 1998
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 38,829 $ 39,039 $ -- $ --
After 1 year but within 5 years 82,561 83,856 230 230
After 5 years but within 10 years 2,958 3,012 90 90
After 10 years but within 15 years -- -- 43 43
After 15 years 198 195 -- --
________ _______ ______ ______
124,546 126,102 363 363
Mortgage-backed securities 292,518 298,484 -- --
________ _______ ______ ______
$417,064 $424,586 $ 363 $ 363
December 31, 1997
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 37,869 $ 38,007 $ -- $ --
After 1 year but within 5 years 92,130 93,634 230 230
After 5 years but within 10 years 1,000 994 97 97
After 15 years 200 199 45 45
________ _______ ______ ______
131,199 132,834 372 372
Mortgage-backed securities 325,104 330,731 -- --
________ _______ ______ ______
$456,303 $463,565 $ 372 $ 372
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
_______________________________________________________________________________________
At At
(In thousands) June 30, 1998 December 31, 1997
_______________________________________________________________________________________
Mortgage loans:
Residential $263,345 $245,325
Commercial 2,528 3,861
Construction 1,076 492
_______________________________________________________________________________________
266,949 249,678
Add: Premium on loans 303 343
Less: deferred mortgage loan origination fees (1,353) (1,223)
_______________________________________________________________________________________
Total mortgage loans 265,899 248,798
Other loans:
Consumer:
Installment 1,949 2,199
Guaranteed education 8,468 8,934
Other secured 1,376 1,600
Home equity lines of credit 9,885 10,470
Unsecured 247 266
_______________________________________________________________________________________
Total consumer loans 21,925 23,469
Commercial 97 36
_______________________________________________________________________________________
Total other loans 22,022 23,505
_______________________________________________________________________________________
Total loans $287,921 $272,303
_______________________________________________________________________________________
The Bank's loan portfolio increased $15.6 million during the first six
months of 1998, from $272.3 million at December 31, 1997 to $287.9 million at
June 30, 1998. Essentially all of the increase was in the residential 1-4 family
category.
Loan originations increased to $49.7 million in the first six months of
1998 compared to $28.5 million in the first six months of last year, an
increase of $21.2 million or 75%.
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing assets
at June 30, 1998 and 1997, and December 31, 1997:
At At At
June 30, December 31, June 30,
(In thousands) 1998 1997 1997
____________________________________________________________________________________
Non-Performing Assets:
Non-accrual loans $ 1,752 $ 1,771 $ 1,168
Real estate acquired through foreclosure 71 -- 324
____________________________________________________________________________________
Total non-performing assets $ 1,823 $ 1,771 $ 1,492
____________________________________________________________________________________
Allowance for possible loan losses $ 2,405 $ 2,334 $ 2,235
Allowance as percent of
non-performing assets 131.9 % 131.8 % 149.8 %
Non-accrual loans as percent
of total loans 0.61% 0.65% 0.46%
Non-performing assets as percent
of total assets 0.20% 0.19% 0.16%
____________________________________________________________________________________
The Bank generally does not accrue interest on loans which are 90 days or
more past due. It is the Bank's policy to place such loans on non-accrual
status and to reverse from income all interest previously accrued but not
collected and to discontinue all amortization of deferred loan fees.
Non-performing assets increased slightly from December 31, 1997 to
June 30, 1998 as noted in the table above. The principal balance of non-
accrual loans was $1.752 million, or approximately 6/10 of 1% of total loans
and real estate acquired through foreclosure was $71 thousand at June 30, 1998.
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 June 30, 1998.
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Six Months Ended
June 30,
1998 1997
_______________________________________________________________________________
(In thousands)
Balance at beginning of period $ 2,334 $ 2,237
Provision for loan losses 90 120
Recoveries of loans previously charged-off 7 35
Less: Charge-offs (26) (157)
_________________________________________________________________________________
Balance at end of period $ 2,405 $ 2,235
_________________________________________________________________________________
The allowance for loan losses is established through a provision for loan
losses charged to operations based on management's assessment of many factors
including the risk characteristics of the portfolio, underlying collateral,
current and anticipated economic conditions that may effect the borrowers
ability to pay, and trends in loan delinquencies and charge-offs. Realized
losses, net of recoveries, are charged directly to the allowance. While
management uses the information available in establishing the allowance for
losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
At June 30, 1998 the balance of the allowance for loan losses was
$2,405,000 representing 137.3% of non-accrual loans. Management believes that
the allowance for loan losses is adequate to cover the risks inherent in the
portfolio under current conditions.
DEPOSITS
Deposit accounts of all types have traditionally been the primary source
of funds for the Bank's lending and investment activities. The Bank's deposit
flows are influenced by prevailing interest rates, competition and other market
conditions. The Bank's management attempts to manage its deposits through
selective pricing and marketing.
The Bank's total deposits decreased by approximately $1.2 million to
$808.7 million at June 30, 1998 from $809.9 million at December 31, 1997.
The composition of the Bank's total deposits as of the dates shown are
summarized as follows:
June 30, December 31,
1998 1997
______________________________________________________________________________
(In thousands)
Demand and NOW $ 68,704 $ 66,859
Savings and money market accounts 350,092 352,875
Time certificates of deposit 390,741 391,034
Deposit acquisition premium,
net of amortization (831) (918)
________________________________________________________________________________
Total deposits $808,706 $809,850
________________________________________________________________________________
Recent Accounting Developments
"Disclosures about Segments of an Enterprise and Related Information"
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
This Statement establishes standards for reporting information about operating
segments. An operating segment is defined as a component of an enterprise for
which separate financial information is available and reviewed regularly by
the enterprise's chief operating decision maker in order to make decisions
about resources to be allocated to the segment and also to evaluate the
segment's performance. SFAS No. 131 requires a company to disclose certain
balance sheet and income statement information by operating segment, as well
as provide a reconciliation of operating segment information to the company's
consolidated balances. This Statement is effective for 1998 annual financial
statements. Segment information need not be reported in financial statements
for interim periods in the initial year of application.
Recent Accounting Developments (continued)
In June 1998, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in its balance sheet and measure those instruments
at fair market value. Under this Statement, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This Statement is not expected to have a
material effect on the Company's consolidated financial statements.
Liquidity and Capital Resources
The Bank must maintain a sufficient amount of cash and assets which can
readily be converted into cash in order to meet cash outflows from normal
depositor requirements and loan demands. The Bank's primary sources of funds
are deposits, loan amortization and prepayments, sales or maturities of
investment securities and income on earning assets. In addition to loan
payments and maturing investment securities, which are relatively predictable
sources of funds, the Bank maintains a high percentage of its assets invested
in overnight federal funds sold, which can be immediately converted into cash
and United States Treasury and Government agency securities, which can be sold
or pledged to raise funds. At June 30, 1998 the Bank had $136.3 million or
14.7% of total assets and $126.1 million or 13.6% 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 June 30, 1998, the Bank had a leverage
Tier I capital to total assets ratio of 10.05%, a Tier I capital to risk-
weighted assets ratio of 32.07% and a total capital to risk-weighted assets
ratio of 32.92%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to total assets of 10.63%, Tier I capital to risk-weighted assets
of 33.91% and total capital to risk-weighted assets of 34.75% at June 30, 1998.
Year 2000 Issues
As we near the 21st century, MASSBANK is taking important steps to tackle
the computer glitch dubbed the Year 2000 Problem, Y2K, or Millennium Bug. The
problem originated from software designers' attempt to save memory by recording
years in a two-digit format - "98" instead of "1998" for example - but didn't
take into account that the year 2000, or "00" could also be interpreted, by any
system that has time sensitive software, as the year 1900 rather than the year
2000. This could result in a system failure or in miscalculations.
In May 1997, the Company organized a Year 2000 project team to address Y2K
critical issues in order to resolve its Year 2000 computer problems. The team
has completed an assessment of the Company's computer systems to identify the
systems that could be affected by the year 2000 issue and has developed an
implementation plan to address this issue. It has also begun testing all of
the Company's computer hardware and software applications and plans to complete
testing of the Company's critical information systems by December 31, 1998.
Testing of the Company's non-critical applications is expected to be completed
by June 30, 1999.
The Company has incurred and will continue to incur expenses in connection
with the testing and upgrading of its computer systems to prepare for the Year
2000. Expenditures to date have not been material. Expenditures for the
remainder of the Year 2000 project are estimated at $50,000 to $250,000,
depending on the Company's need to upgrade its check processing equipment which
could cost as much as $200,000. The Company expects to expend approximately
$40,000 in the last half of 1998 and the remainder in the first half of 1999.
Since the majority of these expenditures will be to replace or upgrade existing
hardware and software, these expenditures will be capitalized and amortized in
accordance with the Company's existing accounting policy.
The Company uses a third party data center for the majority of its data
processing. The Year 2000 project team closely monitors the Year 2000
remediation efforts at the data center to assure that they are meeting their
Year 2000 project objectives. The data center's remediation progress to date
meets or nearly meets expectations laid out in its Year 2000 project plan.
Most of the Company's other date sensitive systems operate on software supported
by outside vendors. The progress made by these vendors to become Y2K compliant
is also being closely monitored. Letters requesting Year 2000 certification
statements have been sent to all "mission critical" vendors. Since there is no
guarantee that the Company's data center or outside vendors will become Y2K
compliant, the Company is developing contingency plans. There is, however, no
guarantee that the systems of other companies, banks, vendors, governmental
agencies, etc. that interface with the Company will be timely remediated. If
they are not successful, the Year 2000 problem could have a material affect on
the Company's operations. Management presently does not believe the Year 2000
issues will pose significant operational problems for the Company.
Impact Of Inflation And Changing Prices
MASSBANK Corp.'s financial statements presented herein have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time, due to the fact that substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity and Liquidity
See discussion and analysis of interest rate sensitivity and liquidity
provided in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997. There have been no material changes in reported market
risks faced by the Corporation since the filing of the Corporation's 1997
Annual Report on Form 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their
business. As of June 30, 1998, none of these actions individually
or in the aggregate is believed by management to be material to the
financial condition of MASSBANK Corp. or the Bank.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of MASSBANK Corp. held on
April 21, 1998, stockholders voted affirmatively on the following
proposals:
1.) To elect four Directors to serve until the 2001 Annual
Meeting of Stockholders.
Elected At Meeting Term:
Samuel Altschuler 3 Years
Gerard H. Brandi 3 Years
Allan S. Bufferd 3 Years
Peter W. Carr 3 Years
2.) To approve an amendment to the Corporation's Amended and
Restated 1994 Stock Incentive Plan to increase the number of
shares of the Corporation's common stock subject to issuance
thereunder by 170,000 shares, or approximately 4.8% of the
total number of outstanding shares.
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: August 14, 1998 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: August 14, 1998 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO