SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1998: 3,534,610 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income (unaudited)
for the three months ended September 30, 1998 and 1997 4
and for the nine months ended September 30, 1998 and 1997 5
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1998 (unaudited)
and the year ended December 31, 1997 6 - 7
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 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 - 33
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 33
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 34
ITEM 2. Changes in Securities 34
ITEM 3. Defaults Upon Senior Securities 34
ITEM 4. Submission of Matters to a Vote of Security Holders 34
ITEM 5. Other Information 34
ITEM 6. Exhibits and Reports on Form 8-K 34
Signature Page 35
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
September 30, December 31,
1998 1997
(unaudited)
Assets:
Cash and due from banks $ 7,473 $ 6,808
Short-term investments (Note 3) 169,963 109,755
________________________________________________________________________________
Total cash and cash equivalents 177,436 116,563
Term federal funds sold 20,000 20,000
Interest-bearing deposits in banks 1,848 2,083
Securities held to maturity, at amortized cost
(market value of $358 in 1998 and $372 in 1997) 358 372
Securities available for sale, at market value (amortized
cost of $407,790 in 1998 and $466,749 in 1997) 426,539 482,224
Trading securities, at market value 1,129 21,260
Loans: (Note 4)
Mortgage loans 274,747 248,798
Other loans 22,202 23,505
Less: allowance for loan losses (2,425) (2,334)
________________________________________________________________________________
Net loans 294,524 269,969
Premises and equipment 4,241 4,369
Real estate acquired through foreclosure 53 --
Accrued interest receivable 4,788 5,395
Goodwill 1,412 1,487
Accrued income tax asset, net 541 --
Other assets 1,589 1,681
________________________________________________________________________________
Total assets $934,458 $925,403
Liabilities and Stockholders' Equity:
Deposits $811,666 $809,850
Escrow deposits of borrowers 1,522 1,502
Employee stock ownership plan liability 781 781
Accrued income taxes payable -- 1,240
Deferred income taxes payable 6,472 4,927
Other liabilities 3,649 3,324
________________________________________________________________________________
Total liabilities 824,090 821,624
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, 7,370,532 and
7,336,800 shares issued, respectively 7,371 7,337
Additional paid-in capital 59,722 58,737
Retained earnings 76,570 70,984
________________________________________________________________________________
143,663 137,058
Accumulated other comprehensive income:
Net unrealized gains on securities
available for sale, net of tax effect 11,151 9,071
Treasury stock at cost, 3,816,922 and
3,766,022 shares, respectively (43,665) (41,569)
Common stock acquired by ESOP ( 781) ( 781)
________________________________________________________________________________
Total stockholders' equity 110,368 103,779
________________________________________________________________________________
Total liabilities and stockholders' equity $934,458 $925,403
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
September 30,
(In thousands except share data) 1998 1997
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 4,927 $ 4,535
Other loans 493 557
Securities available for sale:
Mortgage-backed securities 4,958 5,625
Other securities 2,045 2,536
Trading securities 54 182
Federal funds sold 2,152 1,625
Other investments 366 400
______________________________________________________________________________
Total interest and dividend income 14,995 15,460
______________________________________________________________________________
Interest expense:
Deposits 8,703 8,937
______________________________________________________________________________
Total interest expense 8,703 8,937
______________________________________________________________________________
Net interest income 6,292 6,523
Provision for loan losses 15 45
______________________________________________________________________________
Net interest income after provision for loan losses 6,277 6,478
______________________________________________________________________________
Non-interest income:
Deposit account service fees 194 242
Gains on securities, net 430 423
Other 172 221
______________________________________________________________________________
Total non-interest income 796 886
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,598 1,983
Occupancy and equipment 522 527
Data processing 132 71
Professional services 101 81
Merger and acquisition related expense -- 16
Advertising and marketing 44 39
Amortization of intangibles 82 68
Contributions 4 6
Other 388 400
______________________________________________________________________________
Total non-interest expense 2,871 3,191
______________________________________________________________________________
Income before income taxes 4,202 4,173
Income tax expense 1,507 1,584
______________________________________________________________________________
Net income $ 2,695 $ 2,589
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,548,156 3,519,618
Diluted 3,692,269 3,670,570
Earnings per share (in dollars):
Basic $ 0.76 $ 0.74
Diluted 0.73 0.70
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine months ended
September 30,
(In thousands except share data) 1998 1997
_______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $14,351 $13,092
Other loans 1,529 1,677
Securities available for sale:
Mortgage-backed securities 15,812 16,637
Other securities 6,400 7,882
Trading securities 507 518
Federal funds sold 5,404 4,330
Other investments 1,110 1,101
_______________________________________________________________________________
Total interest and dividend income 45,113 45,237
_______________________________________________________________________________
Interest expense:
Deposits 25,786 25,841
_______________________________________________________________________________
Total interest expense 25,786 25,841
_______________________________________________________________________________
Net interest income 19,327 19,396
Provision for loan losses 105 165
_______________________________________________________________________________
Net interest income after provision for loan losses 19,222 19,231
_______________________________________________________________________________
Non-interest income:
Deposit account service fees 615 690
Gains on securities, net 1,858 1,501
Other 670 725
_______________________________________________________________________________
Total non-interest income 3,143 2,916
_______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 5,445 5,807
Occupancy and equipment 1,549 1,546
Data processing 385 372
Professional services 341 308
Merger and acquisition related expense -- 156
Advertising and marketing 141 131
Amortization of intangibles 219 183
Contributions 11 662
Other 1,155 1,145
_______________________________________________________________________________
Total non-interest expense 9,246 10,310
_______________________________________________________________________________
Income before income taxes 13,119 11,837
Income tax expense 4,884 4,326
_______________________________________________________________________________
Net income $ 8,235 $ 7,511
_______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,543,051 3,526,007
Diluted 3,699,169 3,656,754
Earnings per share (in dollars):
Basic $ 2.32 $ 2.13
Diluted 2.23 2.05
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 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 -- -- 8 ,235 -- -- -- 8,235
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 5) -- -- -- -- 2,080 -- 2,080
_____
Comprehensive income 10,315
Cash dividends declared and paid
($0.75 per share) -- -- (2,660) -- -- -- (2,660)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 11 -- -- -- 11
Amortization of ESOP shares
committed to be released -- 199 -- -- -- -- 199
Purchase of treasury stock -- -- -- (2,096) -- -- (2,096)
Exercise of stock options
and related tax benefits 34 786 -- -- -- -- 820
___________________________________________________________________________________________________________________________
Balance at September 30, 1998 $7,371 $59,722 $76,570 $(43,665) $11,151 $(781) $110,368
<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)
Nine Months Ended
September 30,
1998 1997
____ ____
(In thousands)
Cash flows from operating activities:
Net income $ 8,235 $ 7,511
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 687 621
Loan interest capitalized (65) --
Amortization of ESOP shares committed to be released 199 131
Charitable contribution of appreciated securities -- 622
Decrease in accrued interest receivable 607 380
Increase in other liabilities 357 731
Decrease in current income taxes payable (1,780) (318)
Accretion of discounts on securities, net of amortization
of premiums (866) (859)
Net trading securities activity 21,296 (7,734)
Gains on securities available for sale (1,804) (1,398)
Gains on trading securities (54) (104)
Increase in deferred mortgage loan
origination fees, net of amortization 187 113
Deferred income tax expense (benefit) 349 (364)
Decrease in other assets 120 638
Loans originated for sale (129) (335)
Loans sold 129 335
Provision for loan losses 105 165
Gains on sales of real estate acquired through foreclosure (4) (16)
Gains on sales of premises and equipment -- (1)
Increase in escrow deposits of borrowers 20 337
__________________________________________________________________________________________
Net cash provided by operating activities 27,589 455
__________________________________________________________________________________________
Cash flows from investing activities:
Cash and cash equivalents for acquisitions -- (2,874)
Purchases of term federal funds (30,000) (5,000)
Proceeds from maturities of term federal funds 30,000 15,000
Increase in interest bearing bank deposits (581) (880)
Proceeds from maturities of interest bearing bank deposits 816 --
Proceeds from sales of investment securities available for sale 17,639 33,086
Proceeds from maturities of investment securities
available for sale 35,650 41,250
Purchases of investment securities
available for sale (42,467) (54,684)
Purchases of investment securities held to maturity -- (230)
Purchases of mortgage-backed securities -- (43,601)
Principal repayments of mortgage-backed securities 49,664 29,191
Principal repayments of securities held to maturity 14 13
Principal repayments of securities available for sale 1 1
Loans originated (75,281) (39,952)
Loan principal payments received 50,130 34,375
Purchases of premises & equipment (297) (447)
Proceeds from sales of premises and equipment -- 9
Proceeds from sales of real estate acquired through foreclosure 262 633
Net advances on real estate acquired through foreclosure (12) (28)
__________________________________________________________________________________________
Net cash provided by investing activities 35,538 5,862
__________________________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Nine Months Ended
September 30,
1998 1997
____ ____
(In thousands)
Cash flows from financing activities:
Net increase in deposits 1,671 2,604
Payments to acquire treasury stock (2,096) (1,447)
Issuance of common stock under stock option plan 558 284
Tax benefit resulting from stock options exercised 262 103
Dividends paid on common stock (2,660) (2,278)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 11 16
__________________________________________________________________________________________
Net cash used in financing activities (2,254) (718)
__________________________________________________________________________________________
Net increase in cash and cash equivalents 60,873 5,599
Cash and cash equivalents at beginning of period 116,563 140,922
_________________________________________________________________________________________
Cash and cash equivalents at end of period $177,436 $146,521
_________________________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $25,791 $25,828
Cash paid during the period for taxes, net of refunds 5,717 4,466
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 in accumulated other comprehensive income 2,080 4,000
Increase in deferred tax liabilities 1,195 2,829
Securities reclassified from available for sale to
trading securities 1,111 --
Transfers from loans to real estate acquired through foreclosure 299 376
Transfers from loans to other assets 19 --
Sales of securities incomplete (not settled) at end of period -- 192
Transfers from premises and equipment to other assets 9 --
Cost of donated securities -- 2
_________________________________________________________________________________________
In connection with the acquisition of Glendale Co-operative Bank in July, 1997, assets
acquired and liabilities assumed were as follows:
Assets acquired -- $31,561
Goodwill -- 1,530
Liabilities assumed -- 30,217
_________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial condition and results of operations of MASSBANK Corp. (the
"Company") essentially reflect the operations of its subsidiary, MASSBANK (the
"Bank"). All significant intercompany balances and transactions have been
eliminated in consolidation.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, and in the opinion of management,
include all adjustments of a normal recurring nature necessary for the fair
presentation of the financial condition of the Company as of September 30, 1998
and December 31, 1997, and its operating results for the three and nine months
ended September 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) September 30, 1998 December 31, 1997
________________________________________________________________________________
Federal funds sold (overnight) $144,958 $ 85,241
Money market funds 25,005 24,514
________________________________________________________________________________
Total short-term investments $169,963 $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 September 30, 1998, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$6,691,000 and commitments under existing home equity lines of credit and other
loans of approximately $25,859,000 which are not reflected on the consolidated
balance sheet. In addition, as of September 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.
CONDENSED 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
nine months ended September 30, 1998 and the year ended December 31, 1997 is as
follows:
For the Nine Months Ended
September 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 $5,079 $(1,953) $3,126
Less: reclassification adjustment for
gains realized in net income (1,804) 758 (1,046)
______ ________ ______
Net unrealized gains 3,275 (1,195) 2,080
______ ________ ______
Other comprehensive income $3,275 $(1,195) $2,080
______ ________ _____
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
September 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 September 30, 1998
GENERAL
For the quarter ended September 30, 1998, MASSBANK Corp. reported
consolidated net income of $2,695,000 or $0.76 in basic earnings per share
compared to net income of $2,589,000, or $0.74 in basic earnings per share in
the third quarter of 1997. Diluted earnings per share increased to $0.73 per
share from $0.70 per share in the third quarter of last year. 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 favorable earnings results for the recent quarter can be
attributed to a decrease in non-interest expense, income tax expense, and
provision for loan losses. These improvements were partially offset by a
reduction in non-interest income and a decrease in net interest income resulting
from a decline in net interest margin. The Company's net interest margin for
the third quarter of 1998 was 2.77% compared to 2.88% for the same quarter a
year earlier. Non-interest expense for the third quarter of 1998, when compared
to the same quarter of 1997, shows a decrease of $320,000.
AVERAGE BALANCE SHEETS
Three Months Ended
September 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 $156,588 $ 2,152 5.45% $116,775 $ 1,625 5.52%
Short-term investments (2) 26,213 361 5.47 27,219 395 5.75
Investment securities 144,386 2,094 5.80 165,324 2,580 6.24
Mortgage-backed securities 290,679 4,958 6.82 323,672 5,625 6.95
Trading securities 3,840 54 5.59 12,461 182 5.84
Mortgage loans (1) 270,208 4,927 7.29 240,639 4,535 7.54
Other loans (1) 21,980 493 8.91 24,643 557 8.99
__________________________________________________ ________________
Total earning assets 913,894 $15,039 6.56% 910,733 $15,499 6.79%
Allowance for loan losses (2,413) (2,281)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 911,481 908,452
Other assets 19,474 19,654
__________________________________________________________________________________________
Total assets $930,955 $928,106
__________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
September 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 $ 70,522 $ 138 0.77% $ 66,951 $ 137 0.81%
Savings 348,558 3,016 3.43 356,728 3,068 3.41
Time certificates of deposit 392,973 5,549 5.60 398,118 5,732 5.71
__________________________________________________ ________________
Total deposits 812,053 8,703 4.25 821,797 8,937 4.31
Other liabilities 8,949 8,007
__________________________________________________________________________________________
Total liabilities 821,002 829,804
Stockholders' equity 109,953 98,302
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $930,955 $928,106
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,336 6,562
Less adjustment of tax-exempt
interest income 44 39
__________________________________________________________________________________________
Net interest income $ 6,292 $ 6,523
__________________________________________________________________________________________
Interest rate spread 2.31% 2.48%
__________________________________________________________________________________________
Net interest margin (3) 2.77% 2.88%
__________________________________________________________________________________________
(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 $6,292,000 for the third quarter of 1998
compared to $6,523,000 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 $3.2 million to $913.9 million
in the third quarter of 1998, up from $910.7 million in the third quarter of
the prior year. The Company's net interest margin was 2.77% in the recent
quarter, down from 2.88% 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 September 30, 1998, decreased to $14,995,000 from $15,460,000
for the three months ended September 30, 1997. The average total earning assets
of the Company increased by $3.2 million, as noted above. The increase in
interest income resulting from the growth in earning assets in the recent
quarter, however, was more than offset by a decline in yield on earning
assets. As reflected in the table on page 13, yield declines in each of the
Bank's categories of earning assets 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 third quarter of 1998 was 6.56% compared
to 6.79% 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 September 30, 1998 was
$8,703,000, down from $8,937,000 for the same quarter last year. The
Company's average deposits, as shown in the table on page 14, decreased $9.7
million or 1.2% to $812.1 million in the third quarter of 1998, from $821.8
million in the third quarter of 1997. The decrease in interest expense resulted
from a decrease in average cost of funds and a decrease in total deposits. The
Company's average cost of funds for the three months ended September 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
best 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 third quarter of 1998 was $15,000
versus $45,000 for the comparable period in 1997. This decrease was
essentially due to lower net loan charge-offs. In the recent quarter the
Bank recorded net recoveries on loans of $5,000 compared to net charge-offs
on loans of $131,000 for same quarter last year.
Provision for Loan Losses (continued)
The reserve coverage as a percentage of the Bank's non-performing assets
increased in the recent quarter. At September 30, 1998, MASSBANK's allowance
for loan losses totalled $2,425,000 representing 166.2% of non-performing
assets compared to $2,254,000 representing 155.1% of non-performing assets
at the end of the third 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 third quarter of 1998 was $796,000, down from
$886,000 for the comparable period in 1997. This decrease is due to lower
deposit account service fees and a decrease in other income, partially offset
by slightly higher securities gains. The Bank's other non-interest income
reflects a decrease in income earned on the Bank's deferred compensation plan
assets, the result of the stock market performance in the recent quarter. The
Plan incurred a loss of $30,000 in the recent quarter, compared to income of
$16,000 for the same quarter last year. Since the Bank reflects a corresponding
deferred compensation plan liability on its balance sheet, it has recorded an
offsetting reduction in deferred compensation expense for the third quarter 1998
that is included in salaries and employee benefits.
Non-Interest Expense
Non-interest expenses decreased by $320,000, or 10.0% to $2,871,000 in the
third quarter of 1998 from $3,191,000 in the third quarter of 1997.
Salaries and employee benefits, the largest component of non-interest
expense, decreased by $385,000 or 19.4% from $1,983,000 in the third quarter of
1997 to $1,598,000 in the recent quarter. This reduction is due largely to a
decrease of $247,000 in the Company's directors deferred compensation plan
expense and a decrease of $98,000 in the expense amount provided for payments
to employees under the Bank's profit sharing and incentive compensation bonus
plans. The expense related to the directors deferred compensation 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 third quarter 1997,
from $35.8125 per share at June 30, 1997 to $47.50 per share at September 30,
1997, significantly increased the expense for the plan. Conversely, the price
of the Company's common stock in the recent quarter having declined from $49.00
per share at June 30, 1998 to $38.75 per share at September 30, 1998, decreased
the expense for the plan.
Occupancy and equipment expense was $522,000 in the third quarter of 1998,
essentially unchanged from $527,000 in the third quarter of last year.
There were no merger and acquisition related expenses incurred in the
third quarter of 1998. In the third quarter of last year, the Bank incurred
merger and acquisition related expenses of $16,000 in connection with its
acquisition of the Glendale Co-operative Bank.
Data processing expenses increased from $71,000 for the quarter ended
September 30, 1997 to $132,000 for the quarter ended September 30, 1998. In
the third quarter of last year, the Bank transferred its data processing to a
different service bureau. As part of the initial contract that the Bank
negotiated with the new service bureau it received $150,000 in total credits
that were to be applied against data processing expenses in 1997. One half or
$75,000 was applied in the third quarter of 1997 and the remaining balance was
applied in the fourth quarter of last year, significantly reducing data
processing expenses for the second half of 1997.
Non-Interest Expense (continued)
All other expenses combined, consisting of professional services,
advertising and marketing, amortization of intangibles, contributions and
other expenses, increased by $25,000 from $594,000 for the three months ended
September 30, 1997 to $619,000 for the three months ended September 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 decreased to $1,507,000
for the three months ended September 30, 1998 from $1,584,000 for the same
period in 1997. This decrease is due to a reduction in the Company's
effective income tax rate. The Company's combined effective income tax rate
for the third quarter of 1998 is 35.9% compared to 38.0% for the same quarter
a year ago.
Results of Operations for the nine months ended September 30, 1998
General
For the nine months ended September 30, 1998, the Company reported
consolidated net income of $8,235,000 or $2.32 in basic earnings per share
($2.23 per share on a diluted basis) compared to net income of $7,511,000 or
$2.13 in basic earnings per share ($2.05 per share on a diluted basis) earned
in the first nine months of 1997. This represents an increase in net income of
9.6%.
The Company's positive financial performance in the first nine months of
1998 reflects a decrease in non-interest expense of $1,064,000 or 10.3%. Non-
interest expenses for the nine months ended September 30, 1998 were $9,246,000,
down from $10,310,000 for the comparable period in 1997. In addition, non-
interest income for the nine months ended September 30, 1998 increased by
$227,000 due to increased securities gains.
The Company's earnings results for the nine months ended September 30, 1998
were also impacted by the following factors:
a) Net interest income decreased by $69,000 to $19,327,000 for the
first nine months of 1998, from $19,396,000 for the same period
in 1997.
b) The Bank's provision for loan losses for the nine months ended
September 30, 1998 decreased by 36% to $105,000 from $165,000 for the
comparable period in 1997.
c) Income tax expense increased in the first nine months 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.
AVERAGE BALANCE SHEETS
Nine Months Ended
September 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 $132,048 $ 5,404 5.47% $106,315 $ 4,330 5.45%
Short-term investments (2) 26,796 1,096 5.47 26,318 1,088 5.53
Investment securities 148,366 6,521 5.86 168,981 8,010 6.32
Mortgage-backed securities 307,553 15,812 6.85 318,106 16,637 6.97
Trading securities 12,356 506 5.44 11,875 518 5.85
Mortgage loans (1) 260,245 14,351 7.35 232,039 13,092 7.52
Other loans (1) 22,509 1,529 9.08 24,823 1,677 9.02
__________________________________________________ ________________
Total earning assets 909,873 $45,219 6.62% 888,457 $45,352 6.80%
Allowance for loan losses (2,373) (2,235)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 907,500 886,222
Other assets 19,491 18,810
__________________________________________________________________________________________
Total assets $926,991 $905,032
__________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued)
Nine Months Ended
September 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 $ 69,042 $ 411 0.80% $ 64,994 $ 398 0.82%
Savings 351,020 8,998 3.43 355,256 9,165 3.45
Time certificates of deposit 389,139 16,377 5.63 383,239 16,278 5.68
__________________________________________________ ________________
Total deposits 809,201 25,786 4.26 803,489 25,841 4.30
Other liabilities 9,730 6,667
__________________________________________________________________________________________
Total liabilities 818,931 810,156
Stockholders' equity 108,060 94,876
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $926,991 $905,032
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 19,433 19,511
Less adjustment of tax-exempt
interest income 106 115
__________________________________________________________________________________________
Net interest income $19,327 $19,396
__________________________________________________________________________________________
Interest rate spread 2.36% 2.50%
__________________________________________________________________________________________
Net interest margin (3) 2.85% 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.
Net Interest Income
Net interest income totalled $19,327,000 for the first nine months of
1998 compared to $19,396,000 for the same period in 1997. The decrease of
$69,000 was due principally to a decrease in net interest margin. The impact
of the lower net interest margin in 1998 was partially offset by an increase
in the Company's average earning assets from $888.5 million in the first nine
months of 1997 to $909.9 million in the first nine months of 1998. The
Company's net interest margin for the nine months ended September 30, 1998
was 2.85%, 8 basis points lower than the 2.93% for the comparable period of the
prior year.
The Company's interest rate spread decreased to 2.36% for the first nine
months of 1998, from 2.50% in the first nine months of last year. The yield on
the Company's average earning assets in the first half of 1998 decreased by 18
basis points to 6.62% from 6.80% in the corresponding period of 1997. This
decrease was partially offset by a decrease of 4 basis points in the Company's
average cost of funds, from 4.30% for the nine months ended September 30, 1997
to 4.26% for the same period this year.
Provision for Loan Losses
The provision for loan losses for the first nine months of 1998 was
$105,000 versus $165,000 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 nine months ended September 30, 1998,
loan charge-offs net of recoveries declined to $14,000 from $253,000 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 nine months of 1998 totalled $3,143,000,
up $227,000 or approximately 8% from $2,916,000 reported in the corresponding
period last year. This increase is due to net gains on securities of $1,858,000
reported for the nine months ended September 30, 1998 versus $1,501,000 reported
for the same period last year. The Company has benefited significantly from the
stock market's strong performance during the first half of 1998. The Company's
equity portfolio has yielded substantial realized and unrealized gains. Net
unrealized gains in the equity securities portfolio still totalled $6.7 million
at September 30, 1998 despite the downturn in the stock market during the recent
quarter. The improvement in net interest income due to the increase in
securities gains was partially offset by a decrease of $75,000 in deposit
account service fees and a decrease of $55,000 in other non-interest income.
Non-Interest Expense
Non-interest expenses decreased by $1,064,000, or 10.3% to $9,246,000 in
the first nine months of 1998 from $10,310,000 in the first nine months of 1997.
Salaries and employee benefits, the largest component of non-interest
expense, decreased $362,000 or 6.2%, from $5,807,000 in the first nine months
of 1997 to $5,445,000 in the first nine months of this year. This reduction
is due principally to a decrease of $313,000 in the Company's directors deferred
compensation plan expense and a decrease of $133,000 in the expense amount
provided for payments to employees under the Bank's profit sharing and incentive
compensation bonus plans. The expense related to the directors deferred
compensation plan is tied closely to the market value of the Company's common
stock as previously indicated.
Non-Interest Expense (continued)
Occupancy and equipment expenses were $1,549,000 for the nine months ended
September 30, 1998, essentially unchanged from $1,546,000 for the same period
last year.
There were no merger and acquisition related expenses incurred in the first
nine months of 1998. In the first nine months of last year, the Bank incurred
merger and acquisition related expenses of $156,000 in connection with its
acquisition of the Glendale Co-operative Bank.
Bank charitable contributions for the first nine months of 1998 were
$11,000 compared to $662,000 for the same period last year. During the first
nine months 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 $102,000 or 4.8%, from $2,139,000 for the nine
months ended September 30, 1997 to $2,241,000 for the nine months ended
September 30, 1998.
Income Tax Expense
The provision for federal and state income taxes increased to $4,884,000
for the nine months ended September 30, 1998 from $4,326,000 for the same period
in 1997. The Company's combined effective income tax rate for the first nine
months of 1998 is 37.2% compared to 36.5% 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 relating to prior years.
In addition, the Company in 1998 changed its tax year from an October 31
fiscal year to a calendar year. This change resulted in a lower state income
tax rate for the Bank. Since the tax rate for years beginning during 1997 and
1998 was 11.32% and 10.91%, respectively, the Bank lowered its state income tax
rate.
Financial Condition
Total assets at September 30, 1998 were $934.5 million, an increase of $9.1
million from $925.4 million at December 31, 1997.
The Company's available for sale securities and trading securities
portfolios in the first nine months of 1998 decreased by $55.7 million and $20.1
million, respectively. These decreases were offset by increases in short-
term investments of $60.2 million and an increase in the Bank's loan portfolio
of $24.6 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 $296.9 million at September 30, 1998
reflecting a net increase in loans of $24.6 million in the nine months ended
September 30, 1998. This improvement results from an increase in loan
originations. Loan originations totalled $75.4 million in the nine months
ended September 30, 1998, up approximately 87%, or $35.1 million from $40.3
million in the first nine months of 1997.
Total deposits were $811.7 million at September 30, 1998 essentially
unchanged from $809.9 million at year end 1997.
Total stockholders' equity rose to $110.4 million at September 30, 1998
from $103.8 million at December 31, 1997. Book value increased to $31.06 per
share, from $29.06 per share at year end 1997. The Company's book value per
share has increased $2.81 or 9.9% since September 30, 1997.
Investments
Total investments consisting of investment securities, short-term
investments, term federal funds sold and interest-bearing bank deposits
equalled $619.8 million at September 30, 1998, down $15.9 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 $21.9 million as of September 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 $284.7 million at September 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:
September 30, December 31,
(In thousands) 1998 1997
_____________ ____________
U.S. Treasury bills $ -- $18,542
Investment in mutual funds 1,129 2,718
_______ _______
Total $ 1,129 $21,260
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at September 30, 1998 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At September 30, 1998 Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 358 $ -- $ -- $ 358
__________________________________________________________________________________________
Total securities held to maturity $ 358 $ -- $ -- $ 358
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $107,590 $ 3,264 $ -- $110,854
U.S. Government agency obligations 8,963 62 -- 9,025
__________________________________________________________________________________________
Total 116,553 3,326 -- 119,879
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 51,712 1,857 -- 53,569
Federal Home Loan Mortgage
Corporation 211,939 6,533 (7) 218,465
Federal National Mortgage
Association 5,654 222 -- 5,876
Collateralized mortgage
obligations 6,457 114 -- 6,571
Other 233 13 -- 246
__________________________________________________________________________________________
Total mortgage-backed securities 275,995 8,739 (7) 284,727
__________________________________________________________________________________________
Total debt securities 392,548 12,065 (7) 404,606
__________________________________________________________________________________________
Equity securities 15,242 7,493 (802) 21,933
__________________________________________________________________________________________
Total securities available for sale 407,790 $ 19,558 $ (809) $426,539
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 18,749
__________________________________________________________________________________________
Total securities available
for sale, net $426,539
__________________________________________________________________________________________
Trading securities $ 1,112 $ 1,129
__________________________________________________________________________________________
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
September 30, 1998 and December 31, 1997 are as follows:
September 30, 1998
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 45,940 $ 46,465 $ -- $ --
After 1 year but within 5 years 67,457 69,974 230 230
After 5 years but within 10 years 2,959 3,237 86 86
After 10 years but within 15 years -- -- 42 42
After 15 years 197 203 -- --
________ _______ ______ ______
116,553 119,879 358 358
Mortgage-backed securities 275,995 284,727 -- --
________ _______ ______ ______
$392,548 $404,606 $ 358 $ 358
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) September 30, 1998 December 31, 1997
_______________________________________________________________________________________
Mortgage loans:
Residential $272,315 $245,325
Commercial 2,439 3,861
Construction 1,116 492
_______________________________________________________________________________________
275,870 249,678
Add: Premium on loans 286 343
Less: deferred mortgage loan origination fees (1,409) (1,223)
_______________________________________________________________________________________
Total mortgage loans 274,747 248,798
Other loans:
Consumer:
Installment 1,686 2,199
Guaranteed education 8,270 8,934
Other secured 1,574 1,600
Home equity lines of credit 10,379 10,470
Unsecured 252 266
_______________________________________________________________________________________
Total consumer loans 22,161 23,469
Commercial 41 36
_______________________________________________________________________________________
Total other loans 22,202 23,505
_______________________________________________________________________________________
Total loans $296,949 $272,303
_______________________________________________________________________________________
The Bank's loan portfolio increased $24.6 million during the first nine
months of 1998, from $272.3 million at December 31, 1997 to $296.9 million at
September 30, 1998. Essentially all of the increase was in the residential 1-4
family category.
Loan originations increased to $75.4 million in the first nine months of
1998 compared to $40.3 million in the first nine months of last year, an
increase of $35.1 million or 87%.
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing
assets at September 30, 1998 and 1997, and December 31, 1997:
At At At
September 30, December 31, September 30,
(In thousands) 1998 1997 1997
____________________________________________________________________________________
Non-Performing Assets:
Non-accrual loans $ 1,406 $ 1,771 $ 1,163
Real estate acquired through foreclosure 53 -- 290
____________________________________________________________________________________
Total non-performing assets $ 1,459 $ 1,771 $ 1,453
____________________________________________________________________________________
Allowance for possible loan losses $ 2,425 $ 2,334 $ 2,254
Allowance as percent of
non-performing assets 166.2 % 131.8 % 155.1 %
Non-accrual loans as percent
of total loans 0.47% 0.65% 0.43%
Non-performing assets as percent
of total assets 0.16% 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 decreased from December 31, 1997 to September 30,
1998 as noted in the table above. The principal balance of non-accrual loans
was $1,406,000, or approximately one-half of 1% of total loans and real estate
acquired through foreclosure was $53 thousand at September 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 September 30, 1998.
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Nine Months Ended
September 30,
1998 1997
_______________________________________________________________________________
(In thousands)
Balance at beginning of period $ 2,334 $ 2,237
Glendale Co-operative Bank acquisition -- 105
Provision for loan losses 105 165
Recoveries of loans previously charged-off 18 35
Less: Charge-offs (32) (288)
_________________________________________________________________________________
Balance at end of period $ 2,425 $ 2,254
_________________________________________________________________________________
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 September 30, 1998 the balance of the allowance for loan losses was
$2,425,000 representing 172.5% of non-accrual loans. Management believes that
the allowance for loan losses is adequate to cover the risks inherent in the
portfolio under current conditions.
DEPOSITS
Deposit accounts of all types have traditionally been the primary source
of funds for the Bank's lending and investment activities. The Bank's deposit
flows are influenced by prevailing interest rates, competition and other market
conditions. The Bank's management attempts to manage its deposits through
selective pricing and marketing.
The Bank's total deposits increased by $1.8 million to $811.7 million at
September 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:
September 30, December 31,
1998 1997
______________________________________________________________________________
(In thousands)
Demand and NOW $ 68,075 $ 66,859
Savings and money market accounts 345,574 352,875
Time certificates of deposit 398,790 391,034
Deposit acquisition premium,
net of amortization (773) (918)
________________________________________________________________________________
Total deposits $811,666 $809,850
________________________________________________________________________________
Recent Accounting Developments
"Disclosures about Segments of an Enterprise and Related Information"
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("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.
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
SFAS Nos. 87, 88 and 106". SFAS No. 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures required by SFAS Nos. 87, 88
and 106. The adoption of this pronouncement also requires restatement of
disclosures for earlier periods.
Recent Accounting Developments (continued)
"Accounting for Derivative Instruments and Hedging Activities"
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 September 30, 1998 the Bank had $145.0 million
or 15.5% of total assets and $119.9 million or 12.8% 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 September 30, 1998, the Bank had a leverage
Tier I capital to total assets ratio of 10.16%, a Tier I capital to risk-
weighted assets ratio of 30.91% and a total capital to risk-weighted assets
ratio of 32.72%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to total assets of 10.60%, Tier I capital to risk-weighted assets
of 32.27% and total capital to risk-weighted assets of 34.08% at September 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 and environmental
systems (e.g., security systems, vaults, etc.) 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 completed testing of the Company's
existing computer hardware and has begun testing all of the Company's
software applications and plans to substantially complete testing of the
Company's mission critical internal information systems by December 31, 1998,
with the exception of its trust and items processing department systems. The
hardware components for these systems is being replaced with Year 2000 compliant
equipment. Delivery is expected in January 1999, and testing of these systems
is expected to be substantially completed by March 31, 1999. Testing of the
Company's mission critical external information systems and non-mission
critical systems are expected to be substantially completed by March 31, 1999,
and June 30, 1999, respectively.
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. Expenses to date total approximately $20,000. Expenses for the remainder
of the Year 2000 project are estimated at $306,000. This includes an estimated
$200,000 to upgrade the Bank's check processing equipment. Since the majority
of these expenditures will be to replace or upgrade existing hardware and
software, the majority of these expenditures will be capitalized and amortized
in accordance with the Company's existing accounting policy.
The expenditures of the project and the date on which the Bank plans to
complete Year 2000 testing are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors.
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. The data center's Y2K remediation
efforts are also being monitored by the federal banking regulators. The data
center's remediation progress to date is 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.
Year 2000 (continued)
Since there is no guarantee that the Company's data center or outside
vendors will become Y2K compliant, the Company is developing a contingency plan.
The Company has drafted a contingency and business resumption plan that outlines
procedures to be followed in the event of the Year 2000 failure of mission
critical systems, including the possibility of obtaining alternative vendors
or replacement systems. This plan will be finalized in 1999. 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. In addition, the Company's efforts to address the Year 2000
issue are being monitored by its federal banking regulators. Failure to be
Year 2000 compliant on a timely basis could subject the Company to formal
supervisory or enforcement actions.
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 September 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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. 11.1: Statement regarding computation of per
share earnings.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSBANK Corp. & Subsidiaries
_____________________________
(Registrant)
Date: November 13, 1998 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: November 13, 1998 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO