SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 May 5, 1999: 3,414,325 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income (unaudited)
for the three months ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1999 (unaudited)
and the year ended December 31, 1998 5 - 6
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1999 and 1998 7 - 8
Condensed Notes to the Consolidated Financial Statements 9 - 10
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 28
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 29
ITEM 2. Changes in Securities 29
ITEM 3. Defaults Upon Senior Securities 29
ITEM 4. Submission of Matters to a Vote of Security Holders 29
ITEM 5. Other Information 29
ITEM 6. Exhibits and Reports on Form 8-K 29
Signature Page 30
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
March 31, December 31,
1999 1998
(unaudited)
Assets:
Cash and due from banks $ 7,689 $ 7,038
Short-term investments (Note 3) 169,048 147,776
________________________________________________________________________________
Total cash and cash equivalents 176,737 154,814
Term federal funds sold -- 25,000
Interest-bearing deposits in banks 1,511 2,033
Securities held to maturity, at amortized cost
(market value of $349 in 1999 and $354 in 1998) 349 354
Securities available for sale, at market value (amortized
cost of $409,774 in 1999 and $398,343 in 1998) 425,615 418,126
Trading securities, at market value 15,944 30,793
Loans: (Note 4)
Mortgage loans 291,152 283,654
Other loans 20,998 21,335
Less: allowance for loan losses (2,500) (2,450)
________________________________________________________________________________
Net loans 309,650 302,539
Premises and equipment 4,250 4,320
Real estate acquired through foreclosure -- 86
Accrued interest receivable 4,576 5,058
Goodwill 1,363 1,387
Other assets 1,864 2,115
________________________________________________________________________________
Total assets $941,859 $946,625
Liabilities and Stockholders' Equity:
Deposits $822,001 $824,031
Escrow deposits of borrowers 1,546 1,438
Employee stock ownership plan liability 625 625
Accrued and deferred income taxes payable 6,513 7,484
Other liabilities 2,907 2,558
________________________________________________________________________________
Total liabilities 833,592 836,136
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, 7,385,666 and
7,384,332 shares issued, respectively 7,386 7,384
Additional paid-in capital 60,064 60,003
Retained earnings 80,288 78,308
________________________________________________________________________________
147,738 145,695
Accumulated other comprehensive income:
Net unrealized gains on securities
available for sale, net of tax effect 9,493 11,691
Treasury stock at cost, 3,939,707 and
3,885,222 shares, respectively (48,339) (46,272)
Common stock acquired by ESOP ( 625) ( 625)
________________________________________________________________________________
Total stockholders' equity 108,267 110,489
________________________________________________________________________________
Total liabilities and stockholders' equity $941,859 $946,625
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
March 31,
(In thousands except share data) 1999 1998
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 5,125 $ 4,650
Other loans 435 525
Securities available for sale:
Mortgage-backed securities 4,455 5,561
Other securities 2,107 2,188
Trading securities 270 296
Federal funds sold 1,663 1,503
Other investments 318 370
______________________________________________________________________________
Total interest and dividend income 14,373 15,093
______________________________________________________________________________
Interest expense:
Deposits 8,233 8,521
______________________________________________________________________________
Total interest expense 8,233 8,521
______________________________________________________________________________
Net interest income 6,140 6,572
Provision for loan losses 50 45
______________________________________________________________________________
Net interest income after provision for loan losses 6,090 6,527
______________________________________________________________________________
Non-interest income:
Deposit account service fees 178 211
Gains on securities, net 1,378 812
Other 185 223
______________________________________________________________________________
Total non-interest income 1,741 1,246
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,869 1,973
Occupancy and equipment 547 555
Data processing 125 130
Professional services 114 121
Advertising and marketing 48 43
Amortization of intangibles 80 69
Other 385 365
______________________________________________________________________________
Total non-interest expense 3,168 3,256
______________________________________________________________________________
Income before income taxes 4,663 4,517
Income tax expense 1,750 1,683
______________________________________________________________________________
Net income $ 2,913 $ 2,834
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,450,888 3,534,654
Diluted 3,567,313 3,696,584
Earnings per share (in dollars):
Basic $ 0.84 $ 0.80
Diluted 0.82 0.77
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 1999 (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, 1998 $7,384 $60,003 $78,308 $(46,272) $11,691 $(625) $110,489
Net Income -- -- 2 ,913 -- -- -- 2,913
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 5) -- -- -- -- (2,198) -- (2,198)
_____
Comprehensive income 715
Cash dividends declared and paid
($0.27 per share) -- -- (936) -- -- -- (936)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 3 -- -- -- 3
Amortization of ESOP shares
committed to be released -- 44 -- -- -- -- 44
Purchase of treasury stock -- -- -- (2,067) -- -- (2,067)
Exercise of stock options
and related tax benefits 2 17 -- -- -- -- 19
___________________________________________________________________________________________________________________________
Balance at March 31, 1999 $7,386 $60,064 $80,288 $(48,339) $ 9,493 $(625) $108,267
<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, 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 -- -- 10,914 -- -- -- 10,914
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 5) -- -- -- -- 2,620 -- 2,620
______
Comprehensive income 13,534
Cash dividends declared and paid
($1.02 per share) -- -- (3,605) -- -- -- (3,605)
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 -- 243 -- -- -- -- 243
Purchase of treasury stock -- -- -- (4,703) -- -- (4,703)
Exercise of stock options
and related tax benefits 47 1,023 -- -- -- -- 1,070
__________________________________________________________________________________________________________________________
Balance at December 31, 1998 $7,384 $60,003 $78,308 $(46,272) $11,691 $(625) $110,489
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
1999 1998
____ ____
(In thousands)
Cash flows from operating activities:
Net income $ 2,913 $ 2,834
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 230 230
Loan interest capitalized (16) (11)
Amortization of ESOP shares committed to be released 45 66
Decrease in accrued interest receivable 482 31
Increase in other liabilities 349 497
Increase (decrease) in current income taxes payable 809 (182)
Accretion of discounts on securities, net of amortization
of premiums (333) (282)
Net trading securities activity 15,250 (1,325)
Gains on securities available for sale (1,320) (780)
Gains on trading securities (58) (32)
Increase in deferred mortgage loan
origination fees, net of amortization 24 46
Deferred income tax (benefit) expense (36) 63
Increase in other assets (203) (62)
Loans originated for sale -- (129)
Loans sold -- 129
Provision for loan losses 50 45
Gains on sales of real estate acquired through foreclosure -- (1)
Increase in escrow deposits of borrowers 108 46
__________________________________________________________________________________________
Net cash provided by operating activities 18,294 1,183
__________________________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds -- (10,000)
Proceeds from maturities of term federal funds 25,000 10,000
Increase in interest bearing bank deposits (25) (469)
Proceeds from maturities of interest bearing bank deposits 547 --
Proceeds from sales of investment securities available for sale 18,112 5,073
Proceeds from maturities of investment securities
available for sale 22,800 14,500
Purchases of investment securities
available for sale (61,391) (19,005)
Purchases of mortgage-backed securities (12,297) --
Principal repayments of mortgage-backed securities 23,069 14,351
Principal repayments of securities held to maturity 5 5
Principal repayments of securities available for sale 40 1
Loans originated (24,637) (19,632)
Loan principal payments received 17,797 14,834
Loans purchased (345) --
Purchases of premises & equipment (65) (109)
Proceeds from sales of real estate acquired through foreclosure 86 89
__________________________________________________________________________________________
Net cash provided by investing activities 8,696 9,638
__________________________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Three Months Ended
March 31,
1999 1998
____ ____
(In thousands)
Cash flows from financing activities:
Net decrease in deposits (2,085) (137)
Payments to acquire treasury stock (2,067) --
Issuance of common stock under stock option plan 18 269
Tax benefit resulting from stock options exercised -- 71
Dividends paid on common stock (936) (884)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 3 4
__________________________________________________________________________________________
Net cash used in financing activities (5,067) (677)
__________________________________________________________________________________________
Net increase in cash and cash equivalents 21,923 10,144
Cash and cash equivalents at beginning of period 154,814 116,563
_________________________________________________________________________________________
Cash and cash equivalents at end of period $176,737 $126,707
_________________________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $ 8,238 $ 8,522
Cash paid during the period for taxes, net of refunds 974 1,403
Purchases of securities incomplete (not settled) at
beginning of period which settled during the period 129 --
Sales of securities incomplete (not settled) at
beginning of period which settled during the period 583 32
Non-cash transactions:
SFAS 115:
Increase in accumulated other comprehensive income (2,198) 923
Increase in deferred tax liabilities (1,744) 466
Securities reclassified from available for sale to
trading securities -- 1,111
Transfers from loans to real estate acquired through foreclosure -- 88
Transfers from premises and equipment to other assets -- 9
_________________________________________________________________________________________
<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 March 31, 1999
and December 31, 1998, and its operating results for the three months ended
March 31, 1999 and 1998. The results of operations for any interim
period are not necessarily indicative of the results to be expected for the
entire year.
Certain amounts in the prior year's consolidated financial statements
have been reclassified to permit comparison with the current fiscal year.
The information in this report should be read in conjunction with the
financial statements and related notes included in the Annual Report on Form
10-K for the year ended December 31, 1998.
(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) March 31, 1999 December 31, 1998
________________________________________________________________________________
Federal funds sold (overnight) $144,191 $123,207
Money market funds 24,857 24,569
________________________________________________________________________________
Total short-term investments $169,048 $147,776
________________________________________________________________________________
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
(4) Commitments
At March 31, 1999, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$8,855,000 and commitments under existing home equity lines of credit and other
loans of approximately $32,070,000 which are not reflected on the consolidated
balance sheet. In addition, as of March 31, 1999, the Company had a performance
standby letter of credit conveyed to others in the amount of $625,000 which is
also not reflected on the consolidated balance sheet.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) Reporting Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." This Statement establishes standards
for the reporting and displaying of comprehensive income. Comprehensive income
is defined as "the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources."
It includes all changes in equity during a period except those resulting from
investments by and distributions to shareholders.
The term "comprehensive income", is used in the Statement to describe
the total of all components of comprehensive income including net income.
The Company's other comprehensive income and related tax effect for the
quarter ended March 31, 1999 and the year ended December 31, 1998 is as follows:
For the Three Months Ended
March 31, 1999
____________________________________________________________________________________
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
______ __________ ______
Unrealized gains on securities:
Unrealized holding gains arising during period $(2,577) $1,170 $(1,407)
Less: reclassification adjustment for
gains realized in net income (1,365) 574 (791)
______ ________ ______
Net unrealized gains (3,942) 1,744 (2,198)
______ ________ ______
Other comprehensive income $(3,942) $1,744 $(2,198)
______ ________ _____
For the Year Ended
December 31, 1998
____________________________________________________________________________________
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
______ __________ ______
Unrealized gains on securities:
Unrealized holding gains arising during period $ 7,106 $(2,864) $4,242
Less: reclassification adjustment for
gains realized in net income (2,798) 1,176 (1,622)
______ ________ ______
Net unrealized gains 4,308 (1,688) 2,620
______ ________ ______
Other comprehensive income $4,308 $(1,688) $2,620
______ ________ ______
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
Cautionary Statement.
Certain statements contained in this report or incorporated herein by
reference are "forward-looking statements." We may also make written or oral
forward-looking statements in other documents we file with the SEC, in our
annual reports to stockholders, in press releases and other written materials,
and in oral statements made by our officers, directors or employees. You can
identify forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume" and other similar expressions which
predict or indicate future events and trends and which do not relate to
historical matters. In addition, information concerning the costs, timing and
effectiveness of Year 2000 compliance, are forward-looking statements. You
should not rely on forward-looking statements, because they involve known and
unknown risks, uncertainties and other factors, some of which are beyond the
control of the Company. These risks, uncertainties and other factors may cause
the actual results, performance or achievements of the Company to be materially
different from the anticipated future results, performance or achievements
expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the
following: fluctuations in interest rates, price volatility in the stock and
bond markets, inflation, government regulations and economic conditions and
competition in the geographic and business areas in which the Company conducts
its operations; and the Company and its customers and suppliers may experience
unanticipated delays or expenses in achieving Year 2000 compliance. You should
carefully review all of these factors, and you should be aware that there may
be other factors that could cause these differences. These forward-looking
statements were based on information, plans and estimates at the date of this
report, and we do not promise to update any forward-looking statements to
reflect changes in underlying assumptions or factors, new information, future
events or other changes.
Results of Operations for the three months ended March 31, 1999
GENERAL
For the quarter ended March 31, 1999, MASSBANK Corp. reported
consolidated net income of $2,913,000 or $0.84 in basic earnings per share
compared to net income of $2,834,000, or $0.80 in basic earnings per share in
the first quarter of 1998. Diluted earnings per share increased to $0.82 per
share from $0.77 per share in the first quarter of last year, representing an
increase of 6.5%.
The Company's favorable earnings results for the recent quarter can be
attributed primarily to higher non-interest income, due to increased securities
gains, and a reduction in non-interest expense. These improvements were
partially offset by a decrease in net interest income resulting from a decline
in net interest margin, partially offset by an increase in average earning
assets.
AVERAGE BALANCE SHEETS
Three Months Ended
March 31,
1999 1998
______________ ______________
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 $143,004 $ 1,663 4.72% $110,451 $ 1,503 5.52%
Short-term investments (2) 26,252 313 4.84 27,007 365 5.49
Investment securities 158,759 2,145 5.40 149,901 2,224 5.93
Mortgage-backed securities 262,408 4,455 6.79 324,699 5,561 6.85
Trading securities 25,280 270 4.33 21,955 296 5.40
Mortgage loans (1) 288,215 5,125 7.11 249,825 4,650 7.45
Other loans (1) 21,327 435 8.26 23,256 525 9.14
__________________________________________________ ________________
Total earning assets 925,245 $14,406 6.23% 907,094 $15,124 6.68%
Allowance for loan losses (2,456) (2,339)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 922,789 904,755
Other assets 19,689 19,044
__________________________________________________________________________________________
Total assets $942,478 $923,799
__________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
March 31,
1999 1998
______________ ______________
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 $ 73,507 $ 137 0.76% $ 67,050 $ 133 0.80%
Savings 347,663 2,914 3.40 353,515 2,982 3.42
Time certificates of deposit 400,339 5,182 5.25 386,843 5,406 5.67
__________________________________________________ ________________
Total deposits 821,509 8,233 4.06 807,408 8,521 4.28
Other liabilities 10,397 10,467
__________________________________________________________________________________________
Total liabilities 831,906 817,875
Stockholders' equity 110,572 105,924
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $942,478 $923,799
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,173 6,603
Less adjustment of tax-exempt
interest income 33 31
__________________________________________________________________________________________
Net interest income $ 6,140 $ 6,572
__________________________________________________________________________________________
Interest rate spread 2.17% 2.40%
__________________________________________________________________________________________
Net interest margin (3) 2.67% 2.91%
__________________________________________________________________________________________
(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
The Company's net interest income was $6,140,000 for the first quarter
of 1999, a decrease of $432,000 from the same quarter a year ago. This decrease
is the result of a lower net interest margin, partially offset by the positive
effect of growth in the Company's average earning assets. The Company's net
interest margin for the first quarter of 1999 was 2.67% down from 2.91% for the
same quarter of the prior year. Average earning assets for the first quarter of
1999 increased to $925.2 million, up $18.1 million from the corresponding
quarter in 1998. MASSBANK's net interest margin over the last twelve months has
been negatively impacted by reductions in the Federal Funds rate, an overall
decline in market interest rates, and the slope of the yield curve. As market
interest rates declined and as the yield curve flattened in 1998, MASSBANK's
interest-earning asset yields decreased faster than did its interest-bearing
liability rates. The interest rate spread contracted because interest-earning
asset yields decreased 23 basis points more than did interest-bearing liability
rates, as shown on pages 12 and 13 of this Form 10-Q.
Interest and Dividend Income
Interest and dividend income on a fully taxable equivalent basis for the
three months ended March 31, 1999, decreased to $14,406,000 from $15,124,000
for the three months ended March 31, 1998. The average total earning assets
of the Company increased by $18.1 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 12, 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 45 basis points. The weighted average
yield on earning assets for the first quarter of 1999 was 6.23% compared to
6.68% 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 March 31, 1999 was
$8,233,000, down from $8,521,000 for the same quarter last year. The Company's
average deposits, as shown in the table on page 13, increased $14.1 million or
1.7% to $821.5 million in the first quarter of 1999, from $807.4 million in the
first quarter of 1998. The decrease in interest expense resulted from a
decrease in average cost of funds partially offset by the additional interest
expense resulting from the higher deposit volume. The Company's average cost of
funds for the three months ended March 31, 1999 was 4.06%, down from 4.28% for
the comparable period in 1998.
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.
Provision for Loan Losses (continued)
The provision for loan losses for the first quarter of 1999 was $50,000
versus $45,000 for the comparable period in 1998. This increase is essentially
due to the growth in the Bank's loan portfolio. In the recent quarter the
Bank's loan charge-offs net of recoveries netted to zero compared to net
charge-offs on loans of $2,000 for same quarter last year.
The reserve coverage as a percentage of the Bank's non-performing assets
increased in the recent quarter. At March 31, 1999, MASSBANK's allowance
for loan losses totalled $2,500,000 representing 341.5% of non-performing
assets compared to $2,377,000 representing 152.3% of non-performing assets
at the end of the first quarter in 1998.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
on securities and other non-interest income.
Non-interest income increased to $1,741,000 for the quarter ended March 31,
1999, from $1,246,000 for the comparable quarter of the prior year. This
improvement is due to an increase in securities gains in 1999.
Net gains on securities totaled $1,378,000 in the first quarter of this
year compared to $812,000 in the first quarter of the prior year. The Bank's
equity securities portfolio continues to provide the Bank with significant
returns. Realized gains on the sale of equity securities totaled $1,424,000
for the three months ended March 31, 1999. The Bank also recorded a mark-to-
market gain on its trading account of $13,000 during this same period. These
gains, however, were partially offset by net losses realized on the sale of
debt securities of $59,000.
The Bank's deposit account service fees and other non-interest income
totaled $178,000 and $185,000, respectively, in the first quarter of 1999
compared to $211,000 and $223,000, respectively, in the first quarter of 1998.
Non-Interest Expense
Non-interest expense decreased by $88,000, or 2.7% to $3,168,000 in the
first quarter of 1999 from $3,256,000 in the first quarter of 1998.
Salaries and employee benefits, the largest component of non-interest
expense, decreased by $104,000 or 5.3% from $1,973,000 in the first quarter of
1998 to $1,869,000 in the recent quarter. This reduction is due primarily to a
decrease of $65,000 in compensation and benefits expenses which are tied to the
Company's stock performance. Also contributing to the reduction in salaries
and employee benefits expenses was an increase of $29,000 in loan origination
related salary expenses (which are amortized over the life of the loan) being
deferred due to increased residential lending activity.
Occupancy and equipment expense was $547,000 in the first quarter of 1999,
essentially unchanged from $555,000 in the first quarter of last year.
All other expenses combined, consisting of data processing, professional
services, advertising and marketing, amortization of intangibles and other
expenses, increased by $24,000 from $728,000 for the three months ended
March 31, 1998 to $752,000 for the three months ended March 31, 1999.
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 $1,750,000
for the three months ended March 31, 1999 from $1,683,000 for the same period
in 1998. This increase is due to higher income before income taxes and a
modest increase in the Company's effective income tax rate. The Company's
combined effective income tax rate for the first quarter of 1999 is 37.5%
compared to 37.3% for the same quarter a year ago.
Financial Condition
Total assets at March 31, 1999 were $941.9 million, a decrease of $4.7
million from $946.6 million at December 31, 1998.
The decrease in total assets was driven by an $11.6 million decrease in the
investment portfolio, partially offset by $7.1 million growth in net loans.
Other assets decreased by $0.2 million in the first quarter of 1999.
Total investments consisting of investment securities and other short-term
investments, including term federal funds sold and interest-bearing bank
deposits, decreased from $624.1 million at December 31, 1998 to $612.5 million
at March 31, 1999. The decrease is mainly attributable to the Bank's trading
securities portfolio which declined approximately $14.9 during the recent
quarter. This reduction was partially offset by an increase in the Bank's
investment in debt and equity securities available for sale which grew by
$7.5 million this past quarter.
MASSBANK's net loan portfolio increased to $309.7 million at March 31, 1999
reflecting a net increase in loans of $7.1 million in the first three months of
1999. This improvement results from an increase in loan originations. Loan
originations totalled $24.6 million in the three months ended March 31, 1999,
up approximately 24%, or $4.8 million from $19.8 million in the first three
months of 1998.
Total deposits were $822.0 million at March 31, 1999 reflecting a modest
reduction from $824.0 million at year end 1998.
Total stockholders' equity declined to $108.3 million at March 31, 1999
from $110.5 million at December 31, 1998. The decrease results primarily from
the cost of the 54,485 shares of (MASSBANK Corp.) treasury stock that the
Company repurchased during the recent quarter for a total amount of $2.1 million
and a reduction in net unrealized gains, net of tax effect, on the Company's
available for sale securities in the amount of $2.2 million. These decreases
were partially offset by an increase of $2.0 million in the Company's retained
earnings in the recent quarter. As a result, the Company's book value per
share decreased to $31.42 per share, from $31.58 per share at year end 1998.
Investments
As previously noted, total investments consisting of investment securities,
short-term investments, term federal funds sold and interest-bearing bank
deposits equalled $612.5 million at March 31, 1999, down $11.6 million from
$624.1 million at year end 1998. These investments are principally in federal
funds sold, short-term U.S. Treasury and government agency obligations and
government agency fifteen year mortgage-backed securities. The Bank also
maintains an equity securities portfolio, valued at $23.3 million as of
March 31, 1999, 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 $261.0 million at March 31, 1999 versus $272.6 million at year end
1998.
The Bank also maintains a portfolio of trading securities which consisted
of the following as of the dates shown:
March 31, December 31,
(In thousands) 1999 1998
_____________ ____________
U.S. Treasury bills $14,788 $29,707
Investment in mutual funds 1,115 1,086
Equity securities 41 --
_______ _______
Total $15,944 $30,793
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at March 31, 1999 with gross unrealized gains and losses, follows:
_________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At March 31, 1999 Cost Gains Losses Value
_________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 349 $ -- $ -- $ 349
_________________________________________________________________________________________
Total securities held to maturity $ 349 $ -- $ -- $ 349
_________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $120,681 $ 1,502 $ (32) $122,151
U.S. Government agency obligations 19,131 9 (27) 19,113
_________________________________________________________________________________________
Total 139,812 1,511 (59) 141,264
_________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 45,255 1,320 -- 46,575
Federal Home Loan Mortgage
Corporation 199,251 4,351 (15) 203,587
Federal National Mortgage
Association 4,757 156 (5) 4,908
Collateralized mortgage
obligations 5,666 67 -- 5,733
Other 193 9 -- 202
_________________________________________________________________________________________
Total mortgage-backed securities 255,122 5,903 (20) 261,005
_________________________________________________________________________________________
Total debt securities 394,934 7,414 (79) 402,269
_________________________________________________________________________________________
Equity securities 14,840 8,663 (157) 23,346
_________________________________________________________________________________________
Total securities available for sale 409,774 $ 16,077 $ (236) $425,615
_________________________________________________________________________________________
Net unrealized gains on securities
available for sale 15,841
_________________________________________________________________________________________
Total securities available
for sale, net $425,615
_________________________________________________________________________________________
Total investment securities, net $425,964
_________________________________________________________________________________________
Trading securities $ 15,933 $ 15,944
_________________________________________________________________________________________
FINANCIAL CONDITION
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investment securities
at December 31, 1998 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At December 31, 1998 Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 354 $ -- $ -- $ 354
__________________________________________________________________________________________
Total securities held to maturity $ 354 $ -- $ -- $ 354
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $112,627 $ 2,354 $ -- $114,981
U.S. Government agency obligations 8,966 26 -- 8,992
__________________________________________________________________________________________
Total 121,593 2,380 -- 123,973
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 48,347 1,517 -- 49,864
Federal Home Loan Mortgage
Corporation 205,949 5,116 (6) 211,059
Federal National Mortgage
Association 4,984 181 -- 5,165
Collateralized mortgage
obligations 6,193 60 (3) 6,250
Other 223 12 -- 235
__________________________________________________________________________________________
Total mortgage-backed securities 265,696 6,886 (9) 272,573
__________________________________________________________________________________________
Total debt securities 387,289 9,266 (9) 396,546
__________________________________________________________________________________________
Equity securities 11,054 10,579 (53) 21,580
__________________________________________________________________________________________
Total securities available for sale 398,343 $ 19,845 $ (62) $418,126
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 19,783
__________________________________________________________________________________________
Total securities available
for sale, net $418,126
__________________________________________________________________________________________
Total investment securities, net $418,480
__________________________________________________________________________________________
Trading securities $ 30,802 $ 30,793
__________________________________________________________________________________________
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
March 31, 1999 and December 31, 1998 are as follows:
March 31, 1999
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 54,943 $ 55,279 $ -- $ --
After 1 year but within 5 years 81,752 82,788 230 230
After 5 years but within 10 years 2,962 3,042 78 78
After 10 years but within 15 years -- -- 41 41
After 15 years 155 155 -- --
________ _______ ______ ______
139,812 141,264 349 349
Mortgage-backed securities 255,122 261,005 -- --
________ _______ ______ ______
$394,934 $402,269 $ 349 $ 349
December 31, 1998
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 52,876 $ 53,266 $ -- $ --
After 1 year but within 5 years 65,561 67,345 230 230
After 5 years but within 10 years 2,961 3,164 82 82
After 15 years 195 198 42 42
________ _______ ______ ______
121,593 123,973 354 354
Mortgage-backed securities 265,696 272,573 -- --
________ _______ ______ ______
$387,289 $396,546 $ 354 $ 354
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
_______________________________________________________________________________________
At At
(In thousands) March 31, 1999 December 31, 1998
_______________________________________________________________________________________
Mortgage loans:
Residential $289,463 $281,862
Commercial 2,304 2,257
Construction 620 730
_______________________________________________________________________________________
292,387 284,849
Add: Premium on loans 242 259
Less: deferred mortgage loan origination fees (1,477) (1,454)
_______________________________________________________________________________________
Total mortgage loans 291,152 283,654
Other loans:
Consumer:
Installment 1,426 1,547
Guaranteed education 7,754 7,967
Other secured 1,178 1,366
Home equity lines of credit 10,372 10,159
Unsecured 221 235
_______________________________________________________________________________________
Total consumer loans 20,951 21,274
Commercial 47 61
_______________________________________________________________________________________
Total other loans 20,998 21,335
_______________________________________________________________________________________
Total loans $312,150 $304,989
_______________________________________________________________________________________
The Bank's loan portfolio increased $7.2 million during the first three
months of 1999, from $305.0 million at December 31, 1998 to $312.2 million at
March 31, 1999. Essentially all of the increase was in the residential 1-4
family category.
Loan originations increased to $24.6 million in the first quarter of 1999
compared to $19.8 million in the first quarter of last year, an increase of
$4.8 million or 24%.
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing
assets at March 31, 1999 and 1998, and December 31, 1998:
At At At
March 31, December 31, March 31,
(In thousands) 1999 1998 1998
____________________________________________________________________________________
Non-Performing Assets:
Non-accrual loans $ 732 $ 1,004 $ 1,561
Real estate acquired through foreclosure -- 86 --
____________________________________________________________________________________
Total non-performing assets $ 732 $ 1,090 $ 1,561
____________________________________________________________________________________
Allowance for possible loan losses $ 2,500 $ 2,450 $ 2,377
Allowance as percent of
non-performing assets 341.5 % 224.8 % 152.3 %
Non-accrual loans as percent
of total loans 0.23% 0.33% 0.56%
Non-performing assets as percent
of total assets 0.08% 0.12% 0.17%
____________________________________________________________________________________
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, 1998 to March 31, 1999
as noted in the table above. The principal balance of non-accrual loans
was down to $732,000, or approximately one-quarter of 1% of total loans at
March 31, 1999.
The Bank did not have any real estate acquired through foreclosure or
impaired loans as of March 31, 1999.
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Three Months Ended
March 31,
1999 1998
_______________________________________________________________________________
(In thousands)
Balance at beginning of period $ 2,450 $ 2,334
Provision for loan losses 50 45
Recoveries of loans previously charged-off 1 6
Less: Charge-offs (1) (8)
_________________________________________________________________________________
Balance at end of period $ 2,500 $ 2,377
_________________________________________________________________________________
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 March 31, 1999 the balance of the allowance for loan losses was
$2,500,000 representing 341.5% 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 decreased by $2.0 million to $822.0 million at
March 31, 1999 from $824.0 million at December 31, 1998.
The composition of the Bank's total deposits as of the dates shown are
summarized as follows:
March 31, December 31,
1999 1998
______________________________________________________________________________
(In thousands)
Demand and NOW $ 71,244 $ 76,173
Savings and money market accounts 351,096 348,049
Time certificates of deposit 400,321 400,524
Deposit acquisition premium,
net of amortization (660) (715)
________________________________________________________________________________
Total deposits $822,001 $824,031
________________________________________________________________________________
Recent Accounting Developments
"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 March 31, 1999 the Bank had $144.2 million or
15.3% of total assets and $156.1 million or 16.6% 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 CAMELS 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 and up
to 45 percent of the pre-tax net unrealized holding gains on certain available
for sale equity securities. Tier I plus the Tier II capital components is
referred to as total qualifying capital.
The capital ratios of the Bank and the Company currently exceed the
minimum regulatory requirements. At March 31, 1999, the Bank had a leverage
Tier I capital to total assets ratio of 10.33%, a Tier I capital to risk-
weighted assets ratio of 31.28% and a total capital to risk-weighted assets
ratio of 33.35%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to total assets of 10.46%, Tier I capital to risk-weighted assets
of 31.68% and total capital to risk-weighted assets of 33.75% at March 31, 1999.
Year 2000 Issue
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 the
Y2K critical issues in order to resolve its Year 2000 computer problems. The
project team provides direct oversight of the Year 2000 initiative. The
Company's Board of Directors receives project updates on a quarterly basis and
the Bank's Board of Directors receives a monthly project update.
The project team has completed its assessment of the Company's technology
and non-information technology systems, such as vault doors, elevators, and
security systems, to identify the systems that could be affected by the Year
2000 issue and has developed a plan to address this issue. The project plan,
which incorporates the Federal Financial Institutions Examination Council
("FFIEC") recommended guidelines, encompasses a service bureau for systems that
are outsourced, in-house systems, vendors, customers and suppliers (including
correspondent banks). In addition to addressing the Company's technology
issues, the project plan includes a customer awareness program designed to keep
the Bank's customers informed about the Year 2000 issue and the Company's state
of readiness.
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. Year 2000 project expenditures to-date approximate $126 thousand. First
quarter 1999 expenditures totalled $73,000. Approximately $21 thousand of the
first quarter 1999 expenditures were expensed as incurred, while the cost of
new hardware and software of approximately $52 thousand was capitalized and
will be amortized over the software and hardware's useful life. The capitalized
expenditures represent the partial payment on new check processing equipment and
the replacement of some personal computers and VCRs that were not Year 2000
ready. Expenses for the remainder of the Year 2000 project are not expected to
exceed $200 thousand. This includes the remaining cost of approximately $110
thousand 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 standard accounting practices.
The Company relies on a third party service bureau for its primary business
processes (e.g., loans and deposits applications). It continues to work closely
with the service bureau to monitor the progress of their Year 2000 efforts.
The service bureau's Y2K remediation efforts are also being monitored by the
federal banking regulators. The service bureau has substantially completed
the remediation and testing of all its applications. The Company's testing
with the service bureau that began April 1998 is expected to be substantially
completed by the end of the second quarter of 1999. However, the Company may
continue testing into the third quarter of 1999.
Year 2000 (continued)
The Company has made significant progress in testing, upgrading, and/or
replacing its information systems to assure Y2K compliance. The testing of all
of the Company's computer hardware and mission critical internal information
systems has been substantially completed, with the exception of its trust and
items processing department systems. These systems are being replaced with
hardware and software that is Year 2000 ready. The systems were delivered in
March 1999 and will be installed and operational in the second quarter of 1999.
The Company expects testing of these systems to be substantially completed by
the end of the second quarter of 1999.
Most of the Company's other date sensitive systems operate on software
supported by outside vendors. The Company continues to monitor the progress of
their Year 2000 efforts and is seeking to receive written verification from
these vendors as to their Year 2000 readiness.
Testing of the Company's non-mission critical internal information systems
and interfaces is expected to be substantially completed by June 30, 1999.
Examination of the Company's non-information technology systems indicated that
no significant replacements are required for Year 2000 readiness.
While the Company continues to receive written verification from its
service bureau and vendors as to their Year 2000 compliance, and continues to
test their systems, there is no guarantee that these systems will not fail in
the Year 2000. Also, there can be no assurance that the systems of other
companies, banks, government agencies, etc. that interface with the Company
will be timely remediated. If they are not successful, the Year 2000 problem
could have a material effect on the Company's operations. The Company,
therefore, has drafted contingency and business resumption plans for its primary
lines of business. These plans are being enhanced to address potential Year
2000 scenarios. This process will be completed by the end of the second
quarter of 1999.
The expenditures of the project and the dates on which the Bank plans to
complete Year 2000 testing and contingency and business resumption plans, 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.
Management presently does not believe that the Year 2000 issue will result
in 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, 1998. There have been no material changes in reported market
risks faced by the Corporation since the filing of the Corporation's 1998
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 March 31, 1999, none of these actions individually
or in the aggregate is believed by management to be material to the
financial condition of MASSBANK Corp. or the Bank.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. 11.1: Statement regarding computation of per
share earnings.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSBANK Corp. & Subsidiaries
_____________________________
(Registrant)
Date: May 11, 1999 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: May 11, 1999 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO