SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1999: 3,397,875 shares.
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income (unaudited)
for the three months ended June 30, 1999 and 1998 4
and for the six months ended June 30, 1999 and 1998 5
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1999 (unaudited)
and the year ended December 31, 1998 6 - 7
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1999 and 1998 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 - 34
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 35
ITEM 2. Changes in Securities 35
ITEM 3. Defaults Upon Senior Securities 35
ITEM 4. Submission of Matters to a Vote of Security Holders 35
ITEM 5. Other Information 35
ITEM 6. Exhibits and Reports on Form 8-K 35
Signature Page 36
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
June 30, December 31,
1999 1998
(unaudited)
Assets:
Cash and due from banks $ 6,992 $ 7,038
Short-term investments (Note 3) 140,878 147,776
________________________________________________________________________________
Total cash and cash equivalents 147,870 154,814
Term federal funds sold -- 25,000
Interest-bearing deposits in banks 3,549 2,033
Securities held to maturity, at amortized cost
(market value of $230 in 1999 and $354 in 1998) 230 354
Securities available for sale, at market value (amortized
cost of $437,325 in 1999 and $398,343 in 1998) 446,372 418,126
Trading securities, at market value 5,980 30,793
Loans: (Note 4)
Mortgage loans 295,540 283,654
Other loans 36,256 21,335
Less: allowance for loan losses (2,558) (2,450)
________________________________________________________________________________
Net loans 329,238 302,539
Premises and equipment 4,309 4,320
Real estate acquired through foreclosure -- 86
Accrued interest receivable 5,031 5,058
Goodwill 1,338 1,387
Accrued income tax asset, net 221 --
Other assets 1,878 2,115
________________________________________________________________________________
Total assets $946,016 $946,625
Liabilities and Stockholders' Equity:
Deposits $829,290 $824,031
Escrow deposits of borrowers 1,350 1,438
Employee stock ownership plan liability 625 625
Accrued income taxes payable -- 723
Deferred income taxes payable 2,341 6,761
Other liabilities 8,058 2,558
________________________________________________________________________________
Total liabilities 841,664 836,136
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, 7,391,082 and
7,384,332 shares issued, respectively 7,391 7,384
Additional paid-in capital 60,240 60,003
Retained earnings 82,243 78,308
________________________________________________________________________________
149,874 145,695
Accumulated other comprehensive income: (Note 5)
Net unrealized gains on securities
available for sale, net of tax effect 5,280 11,691
Treasury stock at cost, 3,988,707 and
3,885,222 shares, respectively (50,177) (46,272)
Common stock acquired by ESOP ( 625) ( 625)
________________________________________________________________________________
Total stockholders' equity 104,352 110,489
________________________________________________________________________________
Total liabilities and stockholders' equity $946,016 $946,625
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
June 30,
(In thousands except share data) 1999 1998
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 5,138 $ 4,774
Other loans 486 511
Securities available for sale:
Mortgage-backed securities 4,360 5,293
Other securities 2,258 2,167
Trading securities 75 157
Federal funds sold 1,704 1,749
Other investments 324 374
______________________________________________________________________________
Total interest and dividend income 14,345 15,025
______________________________________________________________________________
Interest expense:
Deposits 8,215 8,562
______________________________________________________________________________
Total interest expense 8,215 8,562
______________________________________________________________________________
Net interest income 6,130 6,463
Provision for loan losses 60 45
______________________________________________________________________________
Net interest income after provision for loan losses 6,070 6,418
______________________________________________________________________________
Non-interest income:
Deposit account service fees 178 210
Gains on securities, net 1,131 616
Other 269 275
______________________________________________________________________________
Total non-interest income 1,578 1,101
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,893 1,874
Occupancy and equipment 512 472
Data processing 116 123
Professional services 106 119
Advertising and marketing 47 54
Amortization of intangibles 83 68
Other 365 409
______________________________________________________________________________
Total non-interest expense 3,122 3,119
______________________________________________________________________________
Income before income taxes 4,526 4,400
Income tax expense 1,660 1,694
______________________________________________________________________________
Net income $ 2,866 $ 2,706
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,379,796 3,546,194
Diluted 3,495,618 3,708,701
Earnings per share (in dollars):
Basic $ 0.85 $ 0.76
Diluted 0.82 0.73
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six months ended
June 30,
(In thousands except share data) 1999 1998
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $10,263 $ 9,424
Other loans 921 1,036
Securities available for sale:
Mortgage-backed securities 8,815 10,854
Other securities 4,365 4,355
Trading securities 345 453
Federal funds sold 3,367 3,252
Other investments 642 744
______________________________________________________________________________
Total interest and dividend income 28,718 30,118
______________________________________________________________________________
Interest expense:
Deposits 16,448 17,083
______________________________________________________________________________
Total interest expense 16,448 17,083
______________________________________________________________________________
Net interest income 12,270 13,035
Provision for loan losses 110 90
______________________________________________________________________________
Net interest income after provision for loan losses 12,160 12,945
______________________________________________________________________________
Non-interest income:
Deposit account service fees 356 421
Gains on securities, net 2,509 1,428
Other 454 498
______________________________________________________________________________
Total non-interest income 3,319 2,347
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 3,762 3,847
Occupancy and equipment 1,059 1,027
Data processing 241 253
Professional services 220 240
Advertising and marketing 95 97
Amortization of intangibles 163 137
Other 750 774
______________________________________________________________________________
Total non-interest expense 6,290 6,375
______________________________________________________________________________
Income before income taxes 9,189 8,917
Income tax expense 3,410 3,377
______________________________________________________________________________
Net income $ 5,779 $ 5,540
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,415,146 3,540,456
Diluted 3,531,267 3,702,676
Earnings per share (in dollars):
Basic $ 1.69 $ 1.56
Diluted 1.64 1.50
<FN>
See accompanying condensed notes to consolidated financial statements.
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 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 -- -- 5 ,779 -- -- -- 5,779
Other comprehensive income or (loss),
net of tax:
Unrealized losses on securities,
net of reclassification adjustment (Note 5) -- -- -- -- (6,411) -- (6,411)
_____
Comprehensive (loss) (632)
Cash dividends declared and paid
($0.54 per share) -- -- (1,850) -- -- -- (1,850)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 6 -- -- -- 6
Amortization of ESOP shares
committed to be released -- 88 -- -- -- -- 88
Purchase of treasury stock -- -- -- (3,905) -- -- (3,905)
Exercise of stock options
and related tax benefits 7 149 -- -- -- -- 156
___________________________________________________________________________________________________________________________
Balance at June 30, 1999 $7,391 $60,240 $82,243 $(50,177) $ 5,280 $(625) $104,352
<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)
Six Months Ended
June 30,
1999 1998
____ ____
(In thousands)
Cash flows from operating activities:
Net income $ 5,779 $ 5,540
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 469 453
Loan interest capitalized (21) (40)
Amortization of ESOP shares committed to be released 88 139
Decrease in accrued interest receivable 27 44
Increase in other liabilities 217 562
Increase (decrease) in current income taxes payable (944) (1,809)
Accretion of discounts on securities, net of amortization
of premiums (547) (596)
Net trading securities activity 25,180 17,424
Gains on securities available for sale (2,486) (1,389)
Gains on trading securities (23) (38)
Increase in deferred mortgage loan
origination fees, net of amortization 53 130
Deferred income tax (benefit) expense (94) 49
Increase in other assets (217) (11)
Loans originated for sale -- (129)
Loans sold -- 129
Provision for loan losses 110 90
Gains on sales of real estate acquired through foreclosure -- (3)
Decrease in escrow deposits of borrowers (88) (168)
Gains on sales of premises and equipment (2) --
__________________________________________________________________________________________
Net cash provided by operating activities 27,501 20,377
__________________________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds -- (10,000)
Proceeds from maturities of term federal funds 25,000 20,000
Increase in interest bearing bank deposits (2,825) (513)
Proceeds from maturities of interest bearing bank deposits 1,309 --
Proceeds from sales of investment securities available for sale 41,968 10,847
Proceeds from maturities of investment securities
available for sale 42,800 25,750
Purchases of investment securities
available for sale (109,866) (29,957)
Purchases of mortgage-backed securities (46,659) --
Principal repayments of mortgage-backed securities 41,159 32,963
Principal repayments of securities held to maturity 124 9
Principal repayments of securities available for sale 41 1
Loans originated (61,042) (49,545)
Loan principal payments received 34,514 33,514
Loans purchased (345) --
Purchases of premises & equipment (264) (154)
Proceeds from sales of real estate acquired through foreclosure 86 191
Proceeds from sales of premises and equipment 2 --
Net advances on real estate acquired through foreclosure -- (9)
__________________________________________________________________________________________
Net cash (used in) provided by investing activities (33,998) 33,097
__________________________________________________________________________________________
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Six Months Ended
June 30,
1999 1998
____ ____
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits 5,146 (1,231)
Payments to acquire treasury stock (3,905) --
Issuance of common stock under stock option plan 112 373
Tax benefit resulting from stock options exercised 44 136
Dividends paid on common stock (1,850) (1,771)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 6 7
__________________________________________________________________________________________
Net cash used in financing activities (447) (2,486)
__________________________________________________________________________________________
Net (decrease) increase in cash and cash equivalents (6,944) 50,988
Cash and cash equivalents at beginning of period 154,814 116,563
_________________________________________________________________________________________
Cash and cash equivalents at end of period $147,870 $167,551
_________________________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $16,454 $17,091
Cash paid during the period for taxes, net of refunds 4,402 4,669
Purchases of securities incomplete (not settled) at
beginning of period which settled during the period 129 32
Sales of securities incomplete (not settled) at
beginning of period which settled during the period 583 --
Non-cash transactions:
SFAS 115:
(Decrease) increase in accumulated other comprehensive income (6,411) 1,165
(Decrease) increase in deferred tax liabilities (4,326) 653
Securities reclassified from available for sale to
trading securities -- 1,111
Transfers from loans to real estate acquired through foreclosure -- 250
Transfers from premises and equipment to other assets -- 9
Purchases of securities incomplete (not settled) at end of period 6,038 --
Sales of securities incomplete (not settled) at end of period 755 --
_________________________________________________________________________________________
<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 June 30, 1999
and December 31, 1998, and its operating results for the three and six months
ended June 30, 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) June 30, 1999 December 31, 1998
________________________________________________________________________________
Federal funds sold (overnight) $116,235 $123,207
Money market funds 24,643 24,569
________________________________________________________________________________
Total short-term investments $140,878 $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 June 30, 1999, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$4,618,000 and commitments under existing home equity lines of credit and other
loans of approximately $31,730,000 which are not reflected on the consolidated
balance sheet. In addition, as of June 30, 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
six months ended June 30, 1999 and the year ended December 31, 1998 is as
follows:
For the Six Months Ended
June 30, 1999
____________________________________________________________________________________
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
______ __________ ______
Unrealized losses on securities:
Unrealized holding losses arising during period $ (8,251) $3,270 $(4,981)
Less: reclassification adjustment for
gains realized in net income (2,486) 1,056 (1,430)
______ ________ ______
Net unrealized losses (10,737) 4,326 (6,411)
______ ________ ______
Other comprehensive loss $(10,737) $4,326 $(6,411)
______ ________ _____
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
June 30, 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 June 30, 1999
GENERAL
For the quarter ended June 30, 1999, MASSBANK Corp. reported consolidated
net income of $2,866,000 or $0.85 in basic earnings per share compared to net
income of $2,706,000, or $0.76 in basic earnings per share in the second quarter
of 1998. Diluted earnings per share increased to $0.82 per share from $0.73 per
share in the second quarter of last year, representing an increase of 12.3%.
The Company's favorable earnings results for the recent quarter can be
attributed primarily to an increase of $515,000 in securities gains, reflecting
the favorable performance of the Bank's equity securities portfolio, and a
decrease in income tax expense due to a lower effective income tax rate. 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. The second quarter earnings results also
reflect modest reductions in deposit account service fees and other non-
interest income, and a modest increase in the Bank's provision for loan losses.
AVERAGE BALANCE SHEETS
Three Months Ended
June 30,
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 $146,374 $ 1,704 4.67% $128,599 $ 1,749 5.46%
Short-term investments (2) 27,183 318 4.70 27,177 369 5.44
Investment securities 170,281 2,291 5.38 150,873 2,203 5.84
Mortgage-backed securities 258,589 4,360 6.74 307,654 5,293 6.88
Trading securities 5,967 75 5.05 11,472 157 5.48
Mortgage loans (1) 294,180 5,138 6.99 260,478 4,774 7.33
Other loans (1) 23,984 486 8.12 22,303 511 9.19
__________________________________________________ ________________
Total earning assets 926,558 $14,372 6.20% 908,556 $15,056 6.62%
Allowance for loan losses (2,502) (2,367)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 924,056 906,189
Other assets 19,963 19,951
__________________________________________________________________________________________
Total assets $944,019 $926,140
__________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
June 30,
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 $ 76,086 $ 123 0.65% $ 69,516 $ 140 0.81%
Savings 352,506 2,991 3.40 351,040 3,000 3.43
Time certificates of deposit 400,042 5,101 5.11 387,536 5,422 5.61
__________________________________________________ ________________
Total deposits 828,634 8,215 3.98 808,092 8,562 4.25
Other liabilities 8,117 9,790
__________________________________________________________________________________________
Total liabilities 836,751 817,882
Stockholders' equity 107,268 108,258
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $944,019 $926,140
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,157 6,494
Less adjustment of tax-exempt
interest income 27 31
__________________________________________________________________________________________
Net interest income $ 6,130 $ 6,463
__________________________________________________________________________________________
Interest rate spread 2.22% 2.37%
__________________________________________________________________________________________
Net interest margin (3) 2.66% 2.86%
__________________________________________________________________________________________
(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 $6,130,000 for the second quarter
of 1999, a decrease of $333,000 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 second quarter of 1999 was 2.66% down from 2.86% for the
same quarter of the prior year. Average earning assets for the second quarter
of 1999 increased to $926.6 million, up $18.0 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 15 basis points more than did interest-bearing liability
rates, as shown on pages 13 and 14 of this Form 10-Q.
Interest and Dividend Income
Interest and dividend income on a fully taxable equivalent basis for the
three months ended June 30, 1999, decreased to $14,372,000 from $15,056,000
for the three months ended June 30, 1998. The average total earning assets
of the Company increased by $18.0 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 42 basis points. The weighted average
yield on earning assets for the second quarter of 1999 was 6.20% compared to
6.62% in the same quarter of the prior year.
Interest Expense
Total interest expense for the three months ended June 30, 1999 was
$8,215,000, down from $8,562,000 for the same quarter last year. The Company's
average deposits, as shown in the table on page 14, increased $20.5 million or
2.5% to $828.6 million in the second quarter of 1999, from $808.1 million in the
second 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 June 30, 1999 was 3.98%, down from 4.25% 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 second quarter of 1999 was $60,000
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 were $2,000, down from $17,000 for
same quarter last year.
The reserve coverage as a percentage of the Bank's non-performing assets
increased in the recent quarter. At June 30, 1999, MASSBANK's allowance for
loan losses totaled $2,558,000 representing 267% of non-accrual loans compared
to $2,405,000 representing 137% of non-accrual loans at the end of the second
quarter 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 $1,578,000 for the quarter ended June 30,
1999, from $1,101,000 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 $1,131,000 in the second quarter of this
year compared to $616,000 in the second quarter of the prior year. The Bank's
equity securities portfolio continues to provide the Bank with favorable
returns. Realized gains on the sale of equity securities totaled $1,343,000
for the three months ended June 30, 1999. These gains, however, were partially
offset by net losses realized on the sale of debt securities of $189,000. The
Bank also recorded a mark-to-market loss of $23,000 on its trading account
during this same period.
The Bank's deposit account service fees and other non-interest income
totaled $178,000 and $269,000, respectively, in the second quarter of 1999
compared to $210,000 and $275,000, respectively, in the second quarter of 1998.
Non-Interest Expense
Non-interest expense was $3,122,000 for the second quarter 1999,
essentially unchanged from the second quarter 1998 total of $3,119,000.
Salaries and employee benefits, the largest component of non-interest
expense, increased by a modest $19,000 or 1.0% in the second quarter of 1999 to
$1,893,000. The increase is due essentially to an increase in employee benefits
expenses (higher profit sharing and incentive compensation bonus plan and
executive supplemental retirement plan expenses, partially offset by a decrease
in the Bank's employee stock ownership Plan expense).
Occupancy and equipment expense increased by $40,000 to $512,000 in the
recent quarter from $472,000 in the second quarter of 1998. This increase is
due primarily to real estate tax abatements for 1998 and prior years that the
Bank received in 1998.
All other expenses combined, consisting of data processing, professional
services, advertising and marketing, amortization of intangibles and other
expenses, decreased by $56,000 from $773,000 for the three months ended
June 30, 1998 to $717,000 for the three months ended June 30, 1999. This was
due partly to lower expenses on foreclosed real estate in 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 decreased to $1,660,000
for the three months ended June 30, 1999 from $1,694,000 for the same period
in 1998. This decrease is due to a reduction in the Company's effective income
tax rate, partly offset by an increase in income taxes due to the higher income
before income taxes in the recent quarter. The Company's combined effective
income tax rate for the second quarter of 1999 is 36.7% compared to 38.5% for
the same quarter a year ago.
Results of Operations for the six months ended June 30, 1999
For the six months ended June 30, 1999, the Company reported consolidated
net income of $5,779,000 or $1.69 in basic earnings per share ($1.64 per share
on a diluted basis) compared to net income of $5,540,000 or $1.56 in basic
earnings per share ($1.50 per share on a diluted basis) earned in the first half
of 1998.
The Company's positive financial performance in the first six months of
1999 reflects an increase in securities gains of $1,081,000 due to the
favorable performance of the Bank's equity securities portfolio, partially
offset by a decrease in net interest income of $765,000. The lower net interest
income results from a decline in net interest margin, partially offset by modest
growth in the Company's average earning assets. Average earning assets for the
first half of 1999 increased to $925.9 million, up $18.1 million from the
corresponding period in 1998.
The Company's earnings results for the six months ended June 30, 1999 were
also impacted by a modest increase in the provision for loan losses and income
tax expense, and modest reductions in deposit account service fees, other non-
interest income, and total non-interest expense.
AVERAGE BALANCE SHEETS
Six Months Ended
June 30,
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 $144,699 $ 3,367 4.69% $119,575 $ 3,252 5.48%
Short-term investments (2) 26,720 632 4.77 27,092 734 5.46
Investment securities 164,552 4,436 5.39 150,390 4,427 5.88
Mortgage-backed securities 260,488 8,815 6.77 316,130 10,854 6.87
Trading securities 15,570 345 4.47 16,684 453 5.42
Mortgage loans (1) 291,214 10,263 7.05 255,181 9,424 7.39
Other loans (1) 22,662 921 8.18 22,777 1,036 9.17
__________________________________________________ ________________
Total earning assets 925,905 $28,779 6.22% 907,829 $30,180 6.65%
Allowance for loan losses (2,479) (2,353)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 923,426 905,476
Other assets 19,827 19,500
__________________________________________________________________________________________
Total assets $943,253 $924,976
__________________________________________________________________________________________
AVERAGE BALANCE SHEETS - (continued)
Six Months Ended
June 30,
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 $ 74,804 $ 261 0.70% $ 68,290 $ 273 0.81%
Savings 350,098 5,905 3.40 352,271 5,982 3.42
Time certificates of deposit 400,189 10,282 5.18 387,191 10,828 5.64
__________________________________________________ ________________
Total deposits 825,091 16,448 4.02 807,752 17,083 4.26
Other liabilities 9,251 10,126
__________________________________________________________________________________________
Total liabilities 834,342 817,878
Stockholders' equity 108,911 107,098
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $943,253 $924,976
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 12,331 13,097
Less adjustment of tax-exempt
interest income 61 62
__________________________________________________________________________________________
Net interest income $12,270 $13,035
__________________________________________________________________________________________
Interest rate spread 2.20% 2.39%
__________________________________________________________________________________________
Net interest margin (3) 2.66% 2.89%
__________________________________________________________________________________________
(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 $12,270,000 for the six months ended June 30,
1999, reflecting a decrease of $765,000 from the same period a year ago. This
decrease is the result of a lower net interest margin, partially offset by
modest growth in the Company's average earning assets. The Company's net
interest margin for the first half of 1999 was 2.66%, down from 2.89% for the
comparable period in 1998. Average earning assets for the six months ended
June 30, 1999 increased $18.1 million or 2.0% to $925.9 million from $907.8
million for the corresponding period in 1998.
The Company's interest rate spread decreased to 2.20% for the first six
months of 1999, from 2.39% in the first six months of last year. The yield on
the Company's average earning assets in the first half of 1999 decreased by 43
basis points to 6.22% from 6.65% in the corresponding period of 1998. This
decrease was partially offset by a decrease of 24 basis points in the Company's
average cost of funds, from 4.26% for the six months ended June 30, 1998 to
4.02% for the same period this year.
Provision for Loan Losses
The provision for loan losses for the first half of 1999 was $110,000
versus $90,000 for the comparable period in 1998. This increase is essentially
due to the growth in the Bank's loan portfolio during the last twelve months.
Loan charge-offs net of recoveries for the six months ended June 30, 1999
declined to $2,000 from $19,000 for the same period last year.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
on securities and other non-interest income.
Non-interest income for the first six months of 1999 totaled $3,319,000,
up $972,000 or approximately 41% from $2,347,000 reported in the corresponding
period last year. This increase is due to net gains on securities of $2,509,000
reported for the six months ended June 30, 1999 versus $1,428,000 reported for
the same period last year. The Company continues to benefit from the strong
performance of its stock portfolio. Deposit account service fees and other non-
interest income combined decreased $109,000 to $810,000 in the first half of
1999 from $919,000 in the first half of 1998.
Non-Interest Expense
Non-interest expense decreased by $85,000, or 1.3% to $6,290,000 in
the first six months of 1999 from $6,375,000 in the first six months of 1998.
This was due primarily to a decrease in salaries and employee benefits
expenses.
Salaries and employee benefits, the largest component of non-interest
expense, decreased by $85,000 or just over 2% from $3,847,000 in the first half
of 1998 to $3,762,000 in the first half of this year. This reduction is due
primarily to a decrease of $90,000 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 $46,000 in loan
origination related salary expenses (which are amortized over the life of the
loan) being deferred. These reductions were partially offset by an increase of
$50,000 in the Company's profit sharing and incentive compensation bonus plan
expense for the first six months of 1999.
Non-Interest Expense (continued)
All other expenses combined, consisting of occupancy and equipment,
data processing, professional services, advertising and marketing, amortization
of intangibles and other expenses totaled $2,528,000 for the first half of
1999, unchanged from the first half of 1998.
Income Tax Expense
The provision for federal and state income taxes increased to $3,410,000
for the six months ended June 30, 1999 from $3,377,000 for the same period in
1998. This increase is due primarily to an increase in income before taxes
in the first half of 1999, partly offset by a reduction in the Company's
effective income tax rate. The Company's combined effective income tax rate
for the first half of 1999 is 37.1% compared to 37.9% for the same period a
year ago.
The Company's income tax expense for the first six months of 1998 includes
a state income tax refund, net of federal tax, of approximately $44,000 which
the Company received in 1998, representing the financial settlement of a state
income tax issue for prior years.
Financial Condition
Total assets at June 30, 1999 were $946.0 million, a decrease of $0.6
million from $946.6 million at December 31, 1998.
While total assets as of June 30, 1999 are essentially unchanged from
year-end 1998 the Company's balance sheet does reflect some changes in asset
mix. The Company's investment portfolio decreased by $27.1 million during the
six months ended June 30, 1999. This decrease, however, is offset by an
increase of $26.7 million in net loans. Other assets decreased by $0.2 million
in the first half 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 $597.0 million
at June 30, 1999. The decrease is mainly attributable to the Bank's trading
securities portfolio, term federal funds sold and short-term investments which
declined $24.8 million, $25.0 million and $6.9 million respectively, during the
first half of 1999. These reductions were partially offset by an increase in
the Bank's investment in debt and equity securities available for sale which
grew by $28.2 million during this same period.
MASSBANK's net loan portfolio increased to $329.2 million at June 30, 1999
reflecting a net increase in loans of $26.7 million in the first six months of
1999. This improvement results from an increase in loan originations. Loan
originations totaled $61.0 million in the six months ended June 30, 1999, up
approximately 23%, or $11.3 million from $49.7 million in the first six
months of 1998.
Total deposits were $829.3 million at June 30, 1999 reflecting an increase
of $5.3 million from $824.0 million at year-end 1998.
Total stockholders' equity declined to $104.4 million at June 30, 1999
from $110.5 million at December 31, 1998. The decrease results primarily from
a reduction in net unrealized gains, net of tax effect, on the Company's
available for sale securities in the amount of $6.4 million, and the cost of
the 103,485 shares of (MASSBANK Corp.) treasury stock that the Company
repurchased during the first half of 1999 for a total amount of $3.9 million.
These decreases were partially offset by an increase of $3.9 million in the
Company's retained earnings in the six months ended June 30, 1999. As a result,
the Company's book value per share decreased to $30.67 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 $597.0 million at June 30, 1999, down $27.1 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 $21.7 million as of
June 30, 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
totaled $277.6 million at June 30, 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:
June 30, December 31,
(In thousands) 1999 1998
_____________ ____________
U.S. Treasury bills $ 4,842 $29,707
Investment in mutual funds 1,101 1,086
Equity securities 37 --
_______ _______
Total $ 5,980 $30,793
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at June 30, 1999 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At June 30, 1999 Cost Gains Losses Value
__________________________________________________________________________________________
Securities held to maturity:
Other bonds and obligations $ 230 $ -- $ -- $ 230
__________________________________________________________________________________________
Total securities held to maturity $ 230 $ -- $ -- $ 230
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $130,717 $ 701 $ (399) $131,019
U.S. Government agency obligations 16,135 1 (106) 16,030
__________________________________________________________________________________________
Total 146,852 702 (505) 147,049
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 42,491 656 (198) 42,949
Federal Home Loan Mortgage
Corporation 224,670 1,356 (1,784) 224,242
Federal National Mortgage
Association 4,905 129 (33) 5,001
Collateralized mortgage
obligations 5,256 36 (4) 5,288
Other 151 7 -- 158
__________________________________________________________________________________________
Total mortgage-backed securities 277,473 2,184 (2,019) 277,638
__________________________________________________________________________________________
Total debt securities 424,325 2,886 (2,524) 424,687
__________________________________________________________________________________________
Equity securities 13,000 8,870 (185) 21,685
__________________________________________________________________________________________
Total securities available for sale 437,325 $ 11,756 $ (2,709) $446,372
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 9,047
__________________________________________________________________________________________
Total securities available
for sale, net $446,372
__________________________________________________________________________________________
Total investment securities, net $446,602
__________________________________________________________________________________________
Trading securities $ 5,992 $ 5,980
__________________________________________________________________________________________
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
June 30, 1999 and December 31, 1998 are as follows:
June 30, 1999
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
Within 1 year $ 47,929 $ 48,135 $ -- $ --
After 1 year but within 5 years 95,806 95,812 230 230
After 5 years but within 10 years 2,963 2,954 -- --
After 15 years 154 148 -- --
________ _______ ______ ______
146,852 147,049 230 230
Mortgage-backed securities 277,473 277,638 -- --
________ _______ ______ ______
$424,325 $424,687 $ 230 $ 230
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) June 30, 1999 December 31, 1998
_______________________________________________________________________________________
Mortgage loans:
Residential $294,046 $281,862
Commercial 2,600 2,257
Construction 175 730
_______________________________________________________________________________________
296,821 284,849
Add: Premium on loans 225 259
Less: deferred mortgage loan origination fees (1,506) (1,454)
_______________________________________________________________________________________
Total mortgage loans 295,540 283,654
Other loans:
Consumer:
Installment 1,293 1,547
Guaranteed education 7,381 7,967
Other secured 1,305 1,366
Home equity lines of credit 11,038 10,159
Unsecured 220 235
_______________________________________________________________________________________
Total consumer loans 21,237 21,274
Commercial 15,019 61
_______________________________________________________________________________________
Total other loans 36,256 21,335
_______________________________________________________________________________________
Total loans $331,796 $304,989
_______________________________________________________________________________________
The Bank's loan portfolio increased $26.8 million during the first six
months of 1999, from $305.0 million at December 31, 1998 to $331.8 million at
June 30, 1999. The increase was primarily in the commercial loan and residential
1-4 family mortgage loan categories.
Loan originations increased to $61.0 million in the first six months of 1999
compared to $49.7 million in the first six months of last year, an increase of
$11.3 million or 23%.
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing
assets at June 30, 1999 and 1998, and December 31, 1998:
At At At
June 30, December 31, June 30,
(In thousands) 1999 1998 1998
____________________________________________________________________________________
Non-Performing Assets:
Non-accrual loans $ 959 $ 1,004 $ 1,752
Real estate acquired through foreclosure -- 86 71
____________________________________________________________________________________
Total non-performing assets $ 959 $ 1,090 $ 1,823
____________________________________________________________________________________
Allowance for loan losses $ 2,558 $ 2,450 $ 2,405
Allowance as percent of
non-performing assets 266.7 % 224.8 % 131.9 %
Non-accrual loans as percent
of total loans 0.29% 0.33% 0.61%
Non-performing assets as percent
of total assets 0.10% 0.12% 0.20%
____________________________________________________________________________________
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 June 30, 1999
as noted in the table above. The principal balance of non-accrual loans
was down to $959,000, or approximately one-quarter of 1% of total loans at
June 30, 1999.
The Bank did not have any real estate acquired through foreclosure or
impaired loans as of June 30, 1999.
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Six Months Ended
June 30,
1999 1998
_______________________________________________________________________________
(In thousands)
Balance at beginning of period $ 2,450 $ 2,334
Provision for loan losses 110 90
Recoveries of loans previously charged-off 3 7
Less: Charge-offs (5) (26)
________________________________________________________________________________
Balance at end of period $ 2,558 $ 2,405
________________________________________________________________________________
The allowance for loan losses is established through a provision for loan
losses charged to operations based on management's assessment of many factors
including the risk characteristics of the portfolio, underlying collateral,
current and anticipated economic conditions that may effect the borrowers
ability to pay, and trends in loan delinquencies and charge-offs. Realized
losses, net of recoveries, are charged directly to the allowance. While
management uses the information available in establishing the allowance for
losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
At June 30, 1999 the balance of the allowance for loan losses was
$2,558,000 representing 266.7% 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 $5.3 million to $829.3 million at
June 30, 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:
June 30, December 31,
1999 1998
______________________________________________________________________________
(In thousands)
Demand and NOW $ 73,599 $ 76,173
Savings and money market accounts 353,918 348,049
Time certificates of deposit 402,375 400,524
Deposit acquisition premium,
net of amortization (602) (715)
________________________________________________________________________________
Total deposits $829,290 $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. In June 1999, FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of Statement
No. 133" which defers the effective date of Statement No. 133. Statement No.
133 is now effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. This Statement is not expected to have a material effect on the
Company's consolidated financial statements.
Liquidity and Capital Resources
The Bank must maintain a sufficient amount of cash and assets which can
readily be converted into cash in order to meet cash outflows from normal
depositor requirements and loan demands. The Bank's primary sources of funds
are deposits, loan amortization and prepayments, sales or maturities of
investment securities and income on earning assets. In addition to loan
payments and maturing investment securities, which are relatively predictable
sources of funds, the Bank maintains a high percentage of its assets invested
in overnight federal funds sold, which can be immediately converted into cash
and United States Treasury and Government agency securities, which can be sold
or pledged to raise funds. At June 30, 1999 the Bank had $116.2 million or
12.3% of total assets and $151.9 million or 16.1% 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 June 30, 1999, the Bank had a leverage
Tier I capital to total assets ratio of 10.31%, a Tier I capital to risk-
weighted assets ratio of 30.14% and a total capital to risk-weighted assets
ratio of 32.15%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to total assets of 10.37%, Tier I capital to risk-weighted assets
of 30.30% and total capital to risk-weighted assets of 32.31% at June 30, 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 $236,000.
Expenditures for the first half of 1999 totaled $182,000. Approximately $27,000
of the current year's expenditures were expensed as incurred, while the cost of
new hardware and software of approximately $155,000 was capitalized and will be
amortized over the software and hardware's useful life in accordance with the
Company's standard accounting practices. The capitalized expenditures represent
the 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 $100,000.
The Company relies on a third party service bureau for its primary business
processes (e.g., loans and deposits applications). It has worked 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 and the Company has successfully
completed testing with the service bureau.
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.
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 has also been substantially completed. 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 has tested some
of 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 developed a business resumption contingency plan for its primary
lines of business. The Plan, which addresses various potential Year 2000
scenarios, was completed in the second quarter 1999 and continues to be
enhanced.
The expenditures of the project 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. Management believes that
the Company is now ready for the year 2000.
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 June 30, 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
At the Annual Meeting of Stockholders of MASSBANK Corp. held on
April 20, 1999, stockholders voted affirmatively on the following
proposal:
1.) To elect four Directors to serve until the 2002 Annual
Meeting of Stockholders.
Elected At Meeting Term:
Alexander S. Costello 3 Years
Stephen E. Marshall 3 Years
Nancy L. Pettinelli 3 Years
Dr. Donald B. Stackhouse 3 Years
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. 11.1: Statement regarding computation of per
share earnings.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSBANK Corp. & Subsidiaries
_____________________________
(Registrant)
Date: August 13, 1999 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: August 13, 1999 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO