1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K /x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) 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) (Zip Code) Registrant's telephone number, including area code: (617) 662-0100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share (Title of Class) 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.____ The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price for the registrant's common stock on March 11, 1996 as reported by NASDAQ, was $85,077,696. As of March 11, 1996, there were 2,738,562 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1995 Annual Report to Stockholders are incorporated by reference in Parts I, II, III and IV of this Form 10-K. Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. 2 PART I Item 1. Business Business of MASSBANK Corp. General MASSBANK Corp. (the "Company") is a general business corporation incorporated under the laws of the State of Delaware on August 11, 1986. MASSBANK Corp. was organized for the purpose of becoming the holding company for MASSBANK for Savings (the "Bank"). The Company is a one-bank holding company registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. As of and since December 2, 1986, the effective date of the reorganization whereby MASSBANK Corp. became the holding company for the Bank, the Bank has been a wholly-owned subsidiary of MASSBANK Corp. The only office of MASSBANK Corp., and its principal place of business, is located at the main office of the Bank at 123 Haven Street, Reading, Massachusetts 01867. MASSBANK Corp. currently has no material assets other than its investment in the Bank. The Company's primary business, therefore, is managing its investment in the stock of the Bank. MASSBANK Corp. is classified by the Commonwealth of Massachusetts as a securities corporation for tax purposes which restricts its business to buying, selling, dealing in, or holding securities on its own behalf. In the future, MASSBANK Corp. may become an operating company or acquire banks or companies engaged in bank-related activities. MASSBANK Corp.'s principal sources of revenues on an unconsolidated basis, which are used for the payment of dividends to stockholders and other purposes, are dividends from MASSBANK for Savings and, to a lesser extent, interest income received from its interest-bearing bank deposits. MASSBANK Corp.'s assets on an unconsolidated basis at December 31, 1995 were represented by its investment in the Bank of $91.0 million and other assets of $1.1 million. The Company's liabilities consisted of loan indebtedness of $1.1 million and other liabilities of $0.1 million. The proceeds of the loan were used to fund stock purchases through the Employee Stock Ownership Plan ("ESOP"). See Note 16 to the Consolidated Financial Statements for parent company only financial information. At December 31, 1995 MASSBANK Corp. on a consolidated basis had total assets of $854.5 million, deposits of $753.7 million, and stockholders' equity of $90.8 million which represents 10.63% of total assets. Book value per share at December 31, 1995 was $33.13. The Company does not own or lease any real or personal property. Instead it intends to utilize during the immediate future the premises, equipment and furniture of the Bank without the direct payment of rental fees to the Bank. Competition The primary business of MASSBANK Corp. currently is the ongoing business of the Bank. Therefore, the competitive conditions faced by MASSBANK Corp. currently are the same as those faced by the Bank. See "Business of MASSBANK for Savings - Competition." In addition, many banks and financial institutions have formed holding companies. It is likely that these holding companies will attempt to acquire commercial banks, thrift institutions or companies engaged in bank-related activities. MASSBANK Corp. would face competition in undertaking any such acquisitions and in operating any such entity subsequent to its acquisition. 3 Employees MASSBANK Corp. does not employ any persons; its management also serves as management of, and is paid by, the Bank. See "Item 10 - Directors and Executive Officers of the Registrant." MASSBANK Corp. utilizes the support staff of the Bank from time to time and does not pay any separate salaries or expenses in connection therewith. Dividends MASSBANK Corp. paid total cash dividends of $0.73 per share in 1995 compared to $0.60 per share in 1994 and $0.4533 per share in 1993. The Company's dividend payout ratios (cash dividends paid divided by net income) for 1995, 1994 and 1993 were 23%, 21% and 20%, respectively. Stock Repurchase Program In October 1995, MASSBANK Corp. announced that its Board of Directors had approved the repurchase of an additional 100,000 shares of its outstanding common stock. Repurchases are expected to be made in the open market or in private transactions over the next year. At December 31, 1995, the Company had repurchased 5,000 shares at a total cost of $153,750. Preferred Stock Purchase Rights In January 1990, the Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right for each outstanding share of MASSBANK Corp. common stock. These Rights, which expire in January 2000, entitle their holders to purchase from the Company one one-hundreth of a share (a "unit") of Series A Junior Participating Cumulative Preferred Stock, par value $1.00 per share ("preferred stock") at a cash exercise price of $70.00 per unit, subject to adjustment. The Rights will trade separately from the common stock and will become exercisable when a person or group has acquired 15% or more of the outstanding common stock, upon a tender offer that would result in a person or group acquiring 15% or more of the outstanding common stock, or upon the declaration by the Board of Directors that any person holding 10% or more of the outstanding shares of common stock is an "adverse person". In the event a person or group acquires 15% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person", each Right would entitle its holder (except if the holder is a person or group described above) to receive upon exercise sufficient units of preferred stock to equal a value of two times the exercise price of the Right. In the event the Company is acquired in a merger or other business combination transaction or if 50% or more of the Company's assets or earning power is sold, each holder may receive upon exercise common stock of the acquiring company having a market value equal to two times the exercise price of the Right. The Rights are redeemable in whole, but not in part, by the Board of Directors at a price of $.01 1/3 per Right any time before a person or group acquires 15% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person". 4 Business of MASSBANK for Savings General MASSBANK for Savings is a Massachusetts-chartered savings bank founded in 1872 as the Melrose Savings Bank. In 1983, the Reading Savings Bank was merged into the Melrose Savings Bank and the name of the resulting institution was changed to MASSBANK for Savings. In 1986, the Bank converted from mutual to stock form of ownership. The Bank is primarily engaged in the business of attracting deposits from the general public through its fourteen full service banking offices in Reading, Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford, Dracut and Lowell, and originating residential and commercial real estate mortgages, construction, and a variety of consumer loans. The Bank also invests a significant portion of its funds in U.S. Treasury and Government agency securities, mortgage-backed securities, federal funds sold, and other authorized investments. The Bank's earnings depend largely upon net interest income, which is the difference between the interest and dividend income derived by the Bank from its loans and investments and the interest paid by the Bank on its deposits and borrowed funds. The Bank's deposits are insured to applicable limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC") and excess deposit accounts are insured by the Depositors Insurance Fund ("DIF"), a private industry-sponsored deposit insurer. The Bank recognizes that loan and investment opportunities change over time and that yields derived from such opportunities can vary significantly even when the risks associated with those opportunities are comparable. By developing a relatively liquid loan and investment portfolio, the Bank has attempted to position itself so as to be able to take advantage of these changing opportunities. Consequently, the Bank expects that the relative mix of its loan and investment portfolios will change over time in response to changing market conditions. Acquisitions In February 1992, the Bank acquired approximately $336 million in federally insured deposits and other liabilities and certain assets of The Central Savings Bank of Lowell, Massachusetts from the FDIC for a bid price of $2.2 million. Net loans acquired totaled $147.9 million. The Bank also acquired Central Savings' trust department and safe deposit operations. In September 1991, the Bank acquired from the Resolution Trust Corporation the insured deposits and branch operations of the former branches of ComFed Savings Bank located in Tewksbury and Chelmsford, MA. In connection with the transaction, the Bank paid a premium of $59,800 and received approximately $45.6 million in insured deposits. 5 Market Area The Bank is headquartered in Reading, Massachusetts, which is located approximately 15 miles north of Boston. The Bank's market area includes a significant portion of eastern Massachusetts and is served by a network of 14 branch offices located on a broad arc stretching from Melrose and Medford in the south, Dracut in the north, and Westford in the west. The Bank's general market area consists of the municipalities in which it operates banking offices and all of the contiguous cities and towns. The Bank currently operates banking offices in the municipalities of Chelmsford, Dracut, Lowell, Medford, Melrose, Reading, Stoneham, Tewksbury, Westford and Wilmington. Lending Activities The Bank's net loan portfolio totaled $246.7 million at December 31, 1995. The following table sets forth information concerning the Bank's loan portfolio by type of loan at the dates shown: - ------------------------------------------------------------------------------------------- (In thousands) At December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------- Mortgage loans: Residential: Conventional $209,408 $207,772 $204,096 $201,331 $ 63,686 FHA and VA 3,244 4,158 5,166 6,985 4,670 Commercial 6,975 8,155 9,654 10,878 9,855 Construction 1,516 603 474 355 -- - ------------------------------------------------------------------------------------------- Total mortgage loans 221,143 220,688 219,390 219,549 78,211 Add: premium on loans 388 452 813 912 -- Less: deferred mortgage loan origination fees (928) (871) (856) (529) (147) - ------------------------------------------------------------------------------------------- Mortgage loans, net 220,603 220,269 219,347 219,932 78,064 - ------------------------------------------------------------------------------------------- Other loans: Consumer: Installment 1,988 1,972 2,474 4,259 1,923 Guaranteed education 10,420 10,152 9,131 8,237 6,140 Other secured 2,012 2,598 1,735 2,406 1,108 Home equity lines of credit 13,144 14,674 15,744 18,440 10,629 Unsecured 265 269 277 333 207 - ------------------------------------------------------------------------------------------- Total consumer loans 27,829 29,665 29,361 33,675 20,007 Commercial 753 882 338 149 53 - ------------------------------------------------------------------------------------------- Other loans, net 28,582 30,547 29,699 33,824 20,060 - ------------------------------------------------------------------------------------------- Total loans 249,185 250,816 249,046 253,756 98,124 Less: Allowance for possible loan losses (2,529) (2,566) (2,261) (2,056) (375) - ------------------------------------------------------------------------------------------- Net loans $246,656 $248,250 $246,785 $251,700 $ 97,749 - ------------------------------------------------------------------------------------------- The increase in total loans from December 31, 1991 to December 31, 1992 was primarily attributable to loans acquired as part of the acquisition of The Central Savings Bank in 1992. 6 The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 1995: Maturity/Scheduled Payments (1) Within One to Five to After (In thousands) one year five years ten years ten years Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $ 857 $ 5,183 $ 45,119 $160,965 $212,124 Commercial & construction 1,842 4,095 1,485 1,057 8,479 - ------------------------------------------------------------------------------------------- Total mortgage loans 2,699 9,278 46,604 162,022 220,603 Other loans 2,438 3,042 10,243 12,859 28,582 - ------------------------------------------------------------------------------------------- Total loans $ 5,137 $12,320 $56,847 $174,881 $249,185 - ------------------------------------------------------------------------------------------- (1) Loan amounts are accumulated as if the entire balance came due on the last contractual payment date. Accordingly, the amounts do not reflect proceeds from contractual loan amortization or anticipated prepayments. The following table shows the amounts, included in the table above, which are due after one year and which have fixed or adjustable interest rates: Total Due After One Year Fixed Adjustable (In thousands) Rate Rate Total - ------------------------------------------------------------------------------------------- Mortgage loans: Residential $165,645 $ 45,622 $211,267 Commercial & construction 1,216 5,421 6,637 - ------------------------------------------------------------------------------------------- Total mortgage loans 166,861 51,043 217,904 Other loans 2,698 23,446 26,144 - ------------------------------------------------------------------------------------------- Total loans $169,559 $ 74,489 $244,048 - ------------------------------------------------------------------------------------------- Mortgage Lending. The Bank believes that the repayment periods of long-term first mortgage loans, the general resistance of the public to variable rate mortgage instruments and the highly competitive nature of the mortgage industry require a prudent approach to mortgage lending. Consequently, as part of its policy of generally attempting to match the maturities of its assets and its liabilities, the Bank, over several years, has kept its mortgage loan portfolio to a level at which the Bank believed there was an acceptable risk- to-reward ratio in light of opportunities in the marketplace and the Bank's long-term objectives. The Bank's net loan portfolio represented approximately 28.9% and 29.4% of the Company's total assets at December 31, 1995, and 1994, respectively. The Bank realizes that this low level of loans with respect to assets in relation to the securities portfolio results in a reduction in yield; however, the Bank believes that this reduction would be more than offset in risk and loss associated with lending during periods of economic decline. In today's economic climate, the Bank would prefer a more even mix of loans and securities. However, there remains a tremendous amount of competition for mortgages in the Bank's area, and developing a quality loan portfolio takes time. We anticipate that our loan portfolio will stay even or grow slowly over the next few years. 7 Mortgage Lending (continued) Loan originations come from a number of sources, including referrals from real estate brokers, walk-in customers, purchasers of property owned by existing customers and refinancing for existing customers. In addition to actively soliciting loan referrals, the Bank conducts an advertising and promotion program, directed both toward the general public and real estate professionals who might refer potential borrowers. Substantially all of the real estate loans originated by the Bank during 1995 were secured by real estate located in the Bank's primary lending area, reflecting the Bank's commitment to serve the credit needs of the local communities in which it operates banking offices. The Bank makes both conventional fixed and adjustable-rate loans on one-to-four family residential properties for a term of ten to thirty years. The Bank retains the 10, 12 or 15 year fixed rate mortgages and adjustable rate mortgages it originates for its own portfolio. All long-term fixed rate residential mortgages are generally sold in the secondary market. Adjustable- rate mortgage loans ("ARMs") have rates that are re-set at either 1, 3 or 5 year intervals and provide a margin over various mortgage indices. In 1994, the Bank instituted new loan programs which have been well received by customers. The first program features a 5/1 and 7/1 year ARM product with an initial fixed rate for 5 or 7 years and a 1 year adjustable rate thereafter. A special First Time Home Buyers Program has also been instituted featuring a discounted 7/1 ARM. This program is designed for first-time home buyers meeting certain income and property location restrictions. At December 31, 1995, 1-4 family residential mortgage loans totaled $212.1 million, or 85.1% of the total loan portfolio, compared to $211.5 million, or 84.3% of the total loan portfolio, at December 31, 1994. Residential mortgage loan originations amounted to $30.4 million during 1995, a decrease of 13.4% from $35.1 million in 1994. This decrease was attributable, in part, to decreased customer demand combined with increased competition for residential mortgage loans in the Bank's market area. Origination volumes have been affected by the interest rate environment which saw interest rates rise during 1994 and decline throughout 1995. This recent decrease in rates helped to fuel higher levels of residential loan refinancings in the last quarter of 1995. The Bank also originates mortgage loans secured by commercial or investment property such as multifamily housing, strip shopping centers, office buildings and retail buildings. At December 31, 1995, commercial and multifamily real estate mortgages and construction loans totaled approximately $8.5 million, or 3.4% of the total loan portfolio, compared to $8.8 million, or 3.5% of the total loan portfolio, at December 31, 1994. There were no commercial and multifamily real estate mortgages originated in 1995 and 1994. The total amount of first mortgage loans held by the Bank at December 31, 1995 was $220.6 million as indicated in the maturity distribution table appearing on the previous page. Of this amount, $52.7 million was subject to interest rate adjustments. The remaining $167.9 million in fixed rate mortgage loans represents 19.6% of the Company's total assets. 8 Mortgage Lending (continued) Fees received for originating loans and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. The Bank also receives fees and charges relating to existing loans, primarily late charges and prepayment penalties. Other Loans. The Bank makes a variety of consumer loans and had a consumer loan portfolio of approximately $27.8 million at December 31, 1995 representing 11.2% of the Bank's total loan portfolio. Of this amount $10.4 million or 4.2% of the total loan portfolio are education loans made under the Massachusetts Higher Education Assistance Corporation. The Bank may sell education loans in the future. The balance of the Bank's consumer loan portfolio consists of home equity lines of credit and installment consumer credit contracts such as automobile loans, home improvement loans and other secured and unsecured financings. These loans totaled $17.4 million at December 31, 1995, representing 7.0% of the Bank's total loan portfolio. At December 31, 1995, the Bank had only $753 thousand in outstanding loans to commercial enterprises not secured by real estate. Loan Approval. The Bank's loan approval process for all loans generally includes a review of an applicant's financial statements, credit history, banking history and verification of employment. For mortgage loans, the Bank generally obtains an independent appraisal of the subject property. The Bank has a formal lending policy approved by the Board of Directors of the Bank which delegates levels of loan approval authority to Bank personnel. All loans in excess of established limits require approval of the Bank's Board of Directors. The Bank issues commitments to prospective borrowers to make loans subject to certain conditions for generally up to 60 days. The interest rate applicable to the committed loans is usually the rate in effect at the time the application fee is paid. At December 31, 1995, the Bank had issued commitments on residential first mortgage loans totaling $3,466,000, and had commitments to advance funds on construction loans and unused credit lines, including unused portions of home equity lines of credit, of $444,000 and $20,714,000, respectively. Loan Delinquencies. It is the Bank's policy to manage its loan portfolio so as to recognize problem loans at an early stage and thereby minimize loan losses. Loans are considered delinquent when any payment of principal or interest is 30 days or more past due. The Bank generally commences collection procedures, however, when accounts are 15 days past due. It is the Bank's practice to discontinue accrual of interest on all loans for which payments are more than 90 days past due. Loans delinquent for 90 or more days, as shown in the table on the following page, totaled $2,428,000 at December 31, 1995. 9 Real Estate Acquired through Foreclosure. Real estate acquired through foreclosure is comprised of foreclosed properties where the Bank has actually received title and real estate substantially repossessed. Real estate formally acquired in settlement of loans is recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received, less estimated costs to sell the property following foreclosure. Operating expenses and any subsequent provisions to reduce the carrying value to fair value are charged to current period earnings. Gains or losses upon disposition are reflected in earnings as realized. Real estate acquired through foreclosure totaled $255,000 as of year-end 1995. Non-Performing Assets The following table sets forth information with respect to loans delinquent for 90 or more days and real estate acquired through foreclosure: - ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------ Mortgages delinquent for 90 or more days: Conventional $2,016 $1,496 $1,048 $1,075 $ 618 FHA and VA 14 62 43 55 78 Commercial -- 152 -- 135 135 Other loans delinquent for 90 or more days: Consumer 398 388 178 241 212 - ------------------------------------------------------------------------------------------------ Total loans delinquent for 90 or more days 2,428 2,098 1,269 1,506 1,043 - ------------------------------------------------------------------------------------------------ Real estate acquired through foreclosure or substantively repossessed: Conventional 255 129 699 545 -- FHA and VA -- -- -- -- 21 Commercial -- -- -- -- 128 Land development -- -- -- 360 1,009 - ------------------------------------------------------------------------------------------------ Total real estate acquired through fore- closure or substantively repossessed 255 129 699 905 1,158 - ------------------------------------------------------------------------------------------------ Total non-performing assets 2,683 2,227 $1,968 $2,411 $2,201 - ------------------------------------------------------------------------------------------------ Non-performing loans as percent of total loans 0.97% 0.84% 0.51% 0.59% 1.06% Non-performing assets as percent of total assets 0.31% 0.26% 0.23% 0.29% 0.52% The reduction in interest income for the periods indicated associated with nonaccrual loans (loans delinquent for 90 or more days) held at the end of such years, is as follows: - ------------------------------------------------------------------------------------------------ (In thousands) Years Ended December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------ Income in accordance with original loan terms $204 $204 $105 $160 $109 - ------------------------------------------------------------------------------------------------ Income recognized 60 107 40 $ 80 58 - ------------------------------------------------------------------------------------------------ Foregone interest $144 $ 97 $ 65 $ 80 $ 51 10 Allowance for Possible Loan Losses. Possible losses on loans are provided for under the allowance method of accounting. The allowance is increased by provisions charged to operations based on management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may 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 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 possible loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. The following table sets forth the activity in the allowance for loan losses during the years indicated: - ------------------------------------------------------------------------------------------------ (In thousands) Years ended December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------ Balance at beginning of year $2,566 $2,261 $2,056 $ 375 $ 308 - ------------------------------------------------------------------------------------------------ Loans charged-off: Residential real estate (124) (339) (305) (262) -- Commercial real estate -- -- (135) -- -- Consumer loans (30) (24) (17) (20 ) (18) Other loans (95) (63) (31) (24) (9) Recoveries: Residential real estate 41 23 20 1 3 Consumer loans 1 3 2 2 8 - ------------------------------------------------------------------------------------------------ Net (charge-offs) recoveries (207) (400) (466) (303) (16) Central Savings acquisition -- -- -- 1,100 -- Provision for loan losses, charged to operations 170 705 671 884 83 - ------------------------------------------------------------------------------------------------ Allowance for loan losses, end of year $2,529 $2,566 $2,261 $2,056 $ 375 - ------------------------------------------------------------------------------------------------ Net loans charged off as a percent of average loans outstanding during the period 0.08% 0.16% 0.19% 0.13% 0.02% Allowance for possible loan losses as a percent of total loans outstanding at year-end 1.01% 1.02% 0.91% 0.81% 0.38% Allowance for possible loan losses as a percent of non-performing loans 104.2 % 122.3 % 178.2 % 136.5 % 36.0 % - ------------------------------------------------------------------------------------------------ 11 Investment Activities The Bank believes that investment opportunities in United States Government, corporate and other securities are at times more attractive than the opportunities present in the loan market. As compared to loans, these investments of the Bank are generally shorter-term and hence more liquid, are subject to lower risk of loss, and present an opportunity for appreciation. In addition, these investments often permit the Bank to better match the maturities of its assets and its liabilities. The Bank's investment portfolio is managed by its officers in accordance with an investment policy approved by the Bank's Board of Directors. The objectives of that policy are to provide a level of liquidity, earnings and diversification consistent with the exercise of prudent investment judgment. The policy authorizes the senior management of the Bank to make and execute investment decisions and requires that those persons report all investment transactions to the Bank's Board of Directors at each of its regular meetings. In addition, management is required to report all gains or losses on all securities transactions at each meeting of the Bank's Board of Directors. Purchases and sales of securities by the Bank are generally required to be made on a competitive basis and all investments must be permitted by applicable law. The Bank invests in a wide variety of securities and obligations, including: Federal funds sold (which are sold only to institutions included on the Bank's internally-prepared approved list of adequately capitalized institutions); commercial paper and bankers' acceptances; United States Treasury and Government agency obligations; United States agency guaranteed and other mortgage-backed securities; investment grade corporate debt securities (generally limited to those rated A or better by Standard & Poor's); mutual funds; and equity securities traded on a national securities exchange or quoted on the NASDAQ System. At December 31, 1993, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Under this method, the Company records investment securities available for sale at aggregate market value with the net unrealized holding gains or losses reported, net of tax effect, as a separate component of stockholders' equity until realized. As of December 31, 1995, stockholders' equity included approximately $7.2 million, representing the net unrealized gains on securities available for sale, less applicable income taxes. Prior to December 31, 1993, the Company recorded its investment securities available for sale at the lower of aggregate cost or market value with the net unrealized losses reported in non-interest income as a component of "gains (losses) on securities." In the fourth quarter of 1995, the Company adopted the Financial Accounting Standards Board guidelines, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued on November 15, 1995. Under these guidelines, the Company was allowed a one-time opportunity to reassess the appropriateness of its FASB 115 investment classifications and reclassify securities from the held to maturity category to the available for sale category, or vice versa. As a result of this reassessment and after thoughtful consideration, the Company reclassified all of its mortgage-backed securities from the held to maturity category to the available for sale category in accordance with the FASB guidelines. The total amortized cost of the securities reclassified was $202.8 million. These securities had total unrealized gains of $3.7 million on the date they were reclassified. 12 Investment Activities (continued) Under the investment policy management determines the appropriate classification of securities at the time of purchase. Those securities that the Company has the intent and the ability to hold to maturity are classified as securities held to maturity and are carried at amortized historical cost adjusted for any premiums or discounts. Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital and other similar factors. Income on debt securities available for sale is accrued and included in interest and dividend income. The specific identification method is used to determine realized gains and losses on sales of securities available for sale which are also reported in non-interest income under the caption "gains (losses) on securities." When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings. Investments classified as trading securities are stated at market with unrealized gains or losses included in earnings. Income on debt trading securities is accrued and included in interest and dividend income. All of the Company's mortgage-backed securities are currently classified as available for sale. Prior to the fourth quarter of 1995, mortgage-backed securities were classified as securities held to maturity and stated at cost, which was adjusted for amortization of premiums and accretion of discounts by crediting or charging interest and dividend income over the life of the related securities using a method which approximated the level yield method. At times of low loan demand, short-term mortgage-backed securities may be used as substitutes for loans as certain of their financial characteristics are very similar to short-term mortgage loans. At December 31, 1995, the Company's investments, which consists of securities held to maturity, securities available for sale (including mortgage-backed securities), trading securities, short-term investments, term federal funds sold and interest-bearing deposits in banks totaled $586.8 million, representing 68.7% of the Company's total assets. 13 The following table sets forth the composition of the Company's investment portfolio as of the dates indicated: Investment Portfolio - ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Federal funds sold: Overnight federal funds $100,245 $ 22,551 $ 21,498 Term federal funds 15,000 -- 5,000 - ------------------------------------------------------------------------------------------------ Total federal funds sold 115,245 22,551 26,498 Money market funds 7,260 -- 2,747 Interest-bearing deposits in banks 941 -- -- - ------------------------------------------------------------------------------------------------ Total federal funds sold and other short-term investments $123,446 $ 22,551 $ 29,245 - ------------------------------------------------------------------------------------------------ Percent of total assets 14.4% 2.7% 3.4% - ------------------------------------------------------------------------------------------------ (In thousands) At December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Securities held to maturity: (a) Other bonds and obligations $ 402 $ 567 $ 815 Mortgage-backed securities -- 172,263 115,353 Other securities -- -- 253 - ------------------------------------------------------------------------------------------------ Total securities held to maturity 402 172,830 116,421 Securities available for sale: (b) U.S. Treasury obligations 212,115 242,787 282,719 U.S. Government agency obligations 14,172 6,043 7,496 Other bonds and obligations 2,004 1,914 2,024 Marketable equity securities 11,290 6,900 8,592 Mortgage-backed securities 216,520 -- -- - ------------------------------------------------------------------------------------------------ Total securities available for sale 456,101 257,644 300,831 Trading securities: (b) U.S. Treasury obligations -- 112,166 132,819 Investments in mutual funds 6,819 3,444 10,350 - ------------------------------------------------------------------------------------------------ Total trading securities 6,819 115,610 143,169 - ------------------------------------------------------------------------------------------------ Total securities $463,322 $546,084 $560,421 - ------------------------------------------------------------------------------------------------ Percent of total assets 54.2% 64.7% 65.5% - ------------------------------------------------------------------------------------------------ Total investments $586,768 $568,635 $589,666 Total investments as a percent of total assets 68.7% 67.4% 68.9% - ------------------------------------------------------------------------------------------------ (a) At amortized cost. (b) At market value. 14 The following tables present the carrying value of debt securities held to maturity and available for sale at December 31, 1995 maturing within stated periods with the weighted average interest yield from securities falling within the range of maturities: Debt Securities Held to Maturity Other bonds and (Dollars in thousands) obligations (1) Total - ----------------------------------------------------------------------------------------- Maturing within 1 year Amount $ 225 $ 225 Yield 6.02% 6.02% Maturing after 5 years but within 10 years Amount 124 124 Yield 6.47% 6.47% Maturing after 10 years but within 15 years Amount 53 53 Yield 10.98% 10.98% - ----------------------------------------------------------------------------------------- Total Amount $ 402 $ 402 Yield 6.81% 6.81% Average life in years 4.75 4.75 Debt Securities Available for Sale U.S. Other Mortgage- U. S. Government bonds backed Treasury agency and securities (2) (Dollars in thousands) obligations obligations obligations Total - ------------------------------------------------------------------------------------------------ Maturing within 1 year Amount $ 75,948 $ 6,995 999 $ -- $ 83,942 Yield 5.82% 8.00% 4.97% 5.99% Maturing after 1 but within 5 years Amount 128,838 6,999 997 38 136,872 Yield 6.70% 6.46% 6.35% 5.30% 6.69% Maturing after 5 but within 10 years Amount 2,985 --- --- 21,967 24,952 Yield 6.47% 8.50% 8.26% Maturing after 10 but within 15 years Amount 189,518 189,518 Yield 6.92% 6.92% - ------------------------------------------------------------------------------------------------ Total Amount $207,771 $13,994 $ 1,996 $211,523 $435,284 Yield 6.37% 7.23% 5.66% 7.09% 6.74% - ------------------------------------------------------------------------------------------------ Average life in years 1.67 2.12 0.76 Average contractual maturity in years 12.63 15 (1) Yields on tax exempt obligations have been computed on a tax equivalent basis. (2) Mortgage-backed securities are shown at their contractual maturity, but are expected to have shorter lives due to scheduled payments and prepayments. At December 31, 1995, the Company did not have an investment in any issuer (other than securities of the U.S. government) in excess of 10% of stockholders equity. Asset/Liability Management Due to the volatility of interest rates, managing interest rate risk is important in determining the profitability of the Company. Interest rate risk arises from the difference in aggregate balances and repricing dates of interest-earning assets compared to interest-bearing liabilities. These differences, or repricing "gaps", provide an indication of the extent to which net interest income is vulnerable to interest rate fluctuations in future periods. The Company attempts to manage the net repricing gaps to maintain what it believes to be the most appropriate balance between earnings and exposure to interest rate fluctuations. It attempts to manage its interest rate gap primarily by lengthening or shortening the maturity structure of the Company's portfolio of securities and other investments. The Company closely monitors its one year "gap" position. One year "gap" is the difference between the amount of assets and liabilities repricing over the next twelve months. An institution with more assets maturing in one year than liabilities could experience a decline in net interest income if interest rates declined. Conversely, an institution with more liabilities repricing in one year than assets could experience a decline in net interest income if rates rose. At December 31, 1995, the one-year cumulative gap position was negative at $112.4 million, or approximately 13.2% of total assets. The table on the following page sets forth the Company's repricing "gaps" both in terms of dollar volume and as a percentage of total assets. 16 The following table details the projected amounts of the Company's interest-sensitive assets and liabilities at December 31, 1995 that are scheduled or assumed to mature or reprice during the time periods indicated. All assets and liabilities shown are at amortized cost or book value, exclusive of the effects of SFAS No. 115, with the exception of trading securities which are stated at market. Interest Rate Sensitivity Gap Analysis - At December 31, 1995 0 - 6 6 - 12 1 - 3 3 - 5 Over 5 Total (In thousands) Months Months Years Years Years Amount - --------------------------------------------------------------------------------------------- Interest sensitive assets: Mortgage loans (1) $ 6,912 $ 8,638 $ 32,243 $ 6,276 $166,534 $220,603 Other loans 24,523 1,360 914 513 1,272 28,582 - --------------------------------------------------------------------------------------------- Total loans 31,435 9,998 33,157 6,789 167,806 249,185 Securities held to maturity 402 --- --- --- --- 402 Securities available for sale: mortgage-backed securities (2) --- --- 38 --- 211,485 211,523 other 62,323 29,973 97,119 39,715 2,985 232,115 Trading securities 6,819 --- --- --- --- 6,819 Short term investments 117,505 --- --- --- --- 117,505 Federal funds sold 5,000 --- --- --- --- 5,000 Interest bearing deposits in banks --- --- 941 --- --- 941 - --------------------------------------------------------------------------------------------- Total interest sensitive assets 223,484 39,971 131,255 46,504 382,276 823,490 Non-interest earning assets --- --- --- --- 31,052 31,052 - --------------------------------------------------------------------------------------------- Total Assets $223,484 $ 39,971 $131,255 $ 46,504 $413,328 $854,542 - --------------------------------------------------------------------------------------------- Interest sensitive liabilities: NOW accounts $ 51,197 $ --- $ --- $ --- $ --- $ 51,197 Regular savings and special notice accounts (3) 32,892 30,220 80,000 45,000 142,118 330,230 Money market accounts 26,368 --- --- --- --- 26,368 Time certificates of deposit 127,848 106,385 90,615 6,558 651 332,057 Escrow deposits of borrowers 992 --- --- --- --- 992 - --------------------------------------------------------------------------------------------- Total rate sensitive liabilities 239,297 136,605 170,615 51,558 142,769 740,844 Non-interest bearing liabilities --- --- --- --- 22,881 22,881 Stockholders' equity --- --- --- --- 90,817 90,817 - --------------------------------------------------------------------------------------------- Total liabilities and Stockholder's equity $239,297 $136,297 $170,615 $ 51,558 $256,467 $854,542 - --------------------------------------------------------------------------------------------- Period Repricing Difference (Period Gap) (15,813) (96,634) (39,360) (5,054) 239,507 82,646 Cumulative Repricing Difference (Cumulative Gap) (15,813) (112,447) (151,807) (156,861) 82,646 Cumulative Gap as a Percentage of Total Assets -1.9% -13.2% -17.8% -18.4% 9.7% - --------------------------------------------------------------------------------------------- (1) Fixed rate mortgage loan amounts are accumulated as if the entire balance came due on the last contractual payment date and adjustable rate mortgage loan amounts are accumulated as if the entire balance came due on the repricing date. Accordingly, these amounts do not reflect proceeds from contractual loan amortization or anticipated prepayments. (2) Based upon contractual maturity, but lives are expected to be shorter. Assumes no principal amortization or prepayments. (3) Based on an historical analysis of runoff of regular savings and special notice accounts (SNAs) at various levels at which short term rates exceed savings rates. This analysis anticipates moderate increases in short-term rates during 1996. 17 Deposits and Other Sources of Funds General. Deposits have been the primary source of funds of the Bank for making investments and loans. In addition to deposits, the Bank's other major sources of funds are derived from amortization and prepayment of loans and mortgage-backed securities, from sales or maturities of securities, and from operations. Deposit flows can vary significantly and are influenced by prevailing interest rates, money market conditions, economic conditions and competition. The Bank can respond to changing market conditions and competition through the pricing of its deposit accounts. Management can control the level of its deposits to a significant degree through its pricing policies. Another important factor in attracting deposits is convenience. In addition to the Bank's fourteen conveniently located banking offices, customers can access accounts through the Bank's ATM network. The Bank is a member of the Transaxion ("TX"), New York Cash Exchange ("NYCE") and CIRRUS System, Inc. ("CIRRUS") networks which allow access to ATMs in over 100,000 locations worldwide. Deposits. A substantial amount of the Bank's deposits are derived from customers who live or work within the Bank's market area. The Bank does not solicit deposits through any outside agents. The Bank's deposits consist of regular, silver and smart savings accounts, special notice accounts, NOW and Super NOW accounts, business checking accounts, money market deposit accounts, IRA and Keogh accounts, and term deposit accounts. The Bank's deposits declined by $6.0 million in the past year, from $759.7 million at December 31, 1994 to $753.7 million at December 31, 1995, a modest decline considering the performance of the financial markets and mutual funds which were fierce competitors for the savers' dollars. The composition of the Bank's deposits continued to shift in 1995, as it did in 1994, from savings to higher yielding time certificates of deposit. The Bank has maintained flat regular savings account deposit rates in 1995 and 1994 while selectively increasing rates on certificates of deposit. This strategy has helped to minimize the effect of rising interest rates on the Company's net interest margin. However, the strategy has also helped to encourage a shift from savings to time certificates of deposit during this period. During 1995, the Bank's total savings deposits, including money market accounts, declined $101.8 million, from $458.4 million at December 31, 1994 to $356.6 million at December 31, 1995, while its certificates of deposit increased $96.6 million, from $235.4 million at year end 1994 to $332.0 million at year end 1995. Borrowed Funds. From time to time the Bank has obtained funds through repurchase agreements with its customers and federal funds purchased. The Bank also has the ability, although it has never exercised it, to borrow from the Federal Reserve Bank and The Depositors Insurance Fund, Inc. The Company did not have any borrowed funds in 1995. Borrowed funds averaged $159,000, and $167,000 during the years ended December 31, 1994, and 1993, respectively. The highest month end balance of the Company's total borrowings during the years ended December 31, 1994, and 1993 were $228,000 and $245,000, respectively. 18 DEPOSITS The following table shows the composition of the deposits as of the dates indicated: (In thousands) at December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Percent Percent Percent of of of Amount Deposits Amount Deposits Amount Deposits Demand and NOW NOW $ 51,197 6.79% $ 53,428 7.03% $ 52,385 6.84% Demand accounts (non interest-bearing) 15,216 2.02 14,068 1.85 12,215 1.59 ------- ----- ------ ----- ------- ----- Total demand and NOW 66,413 8.81 67,496 8.88 64,600 8.43 Savings: Regular savings and special notice accounts 330,230 43.82 430,143 56.62 500,158 65.26 Money market accounts 26,368 3.50 28,258 3.72 36,655 4.78 ------- ----- ------- ----- ------- ----- Total savings 356,598 47.32 458,401 60.34 536,813 70.04 Time Certificates of deposit: Fixed rate certificates 274,684 36.45 187,319 24.66 125,229 16.34 Variable rate certificates 57,373 7.61 48,102 6.33 41,593 5.43 ------- ----- ------- ----- ------- ----- Total time certificates of deposit 332,057 44.06 235,421 30.99 166,822 21.77 Deposit acquisition premium, net of amortization (1,411) (.19) (1,642) (.21) (1,872) (.24) ------- ----- ------- ----- ------- ---- Total deposits $753,657 100.00% $759,676 100.00% $766,363 100.00% In the following table the average amount of deposits and average rate is shown for each of the years as indicated. (In thousands) Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate NOW accounts $ 51,301 1.27% $ 52,884 1.29% $ 53,503 1.53% Demand (non interest-bearing) accounts 13,645 -- 13,166 -- 12,928 -- Money market accounts 28,052 3.29 31,795 2.70 40,850 2.64 Regular savings and special notice accounts 359,397 3.59 482,220 3.34 476,441 3.71 Time certificates of deposit 300,141 5.78 186,222 4.57 184,526 4.29 ------- ----- ------- ----- ------- ----- $752,536 4.11% $766,287 3.41% $768,248 3.58% 19 Investment Management and Trust Services In 1992, the Bank acquired a trust division as part of its Central Savings Bank acquisition. The Trust and Investment Services Division offers a variety of investment, trust and estate planning services and also serves as Trustee, Executor, and Executor's Agent for bank customers. As of December 31, 1995 the Trust Division had approximately $25.3 million (market value) of assets in custody and under management. Savings Bank Life Insurance In 1990 and prior periods, the Bank issued and sold life insurance through its Savings Bank Life Insurance ("SBLI") department. As required by Massachusetts law, the assets, reserves and earnings of the Bank's SBLI department were held solely for policyholders and were segregated from the Bank's assets. The Bank is not liable for any obligations of its SBLI department. As of December 31, 1990, the Bank discontinued offering savings bank life insurance to its customers. On December 31, 1991, SBLI was demutualized by legislation enacted in December, 1990. In connection with this reorganization the newly chartered SBLI Company distributed stock to the SBLI issuing banks in direct proportion to the outstanding assets and liabilities of their SBLI departments. During the first quarter of 1992, the Company recognized non-interest income of $253,000 resulting from this distribution of stock. Competition The Bank faces substantial competition both in originating loans and in attracting deposits. Competition in originating loans comes primarily from other thrift institutions, commercial banks, credit unions and mortgage banking companies. The Bank competes for loans principally on the basis of interest rates and loan fees, the types of loans originated and the quality of services provided to borrowers. In attracting deposits, the Bank's primary competitors are other thrift institutions, commercial banks, mutual funds and credit unions located in its market area. The Bank's attraction and retention of deposits depend on its ability to provide investment opportunities that satisfy the requirements of customers with respect to rate of return, liquidity, risk and other factors. The Bank attracts a significant amount of deposits through its branch offices primarily from the communities in which those branch offices are located. The Bank competes for these deposits by offering competitive rates, convenient branches and ATM locations and convenient business hours. 20 Supervision and Regulation The Bank is in a heavily regulated industry. As a Massachusetts- chartered savings bank whose deposits are insured by the FDIC and The Depositors Insurance Fund, the Bank is subject to regulation, supervision and examination by federal and state regulatory authorities, including, but not limited to the FDIC, the Massachusetts Commissioner of Banks and The Depositors Insurance Fund. This Federal and State regulation is for the benefit of borrowers, depositors and the respective deposit insurance funds and is not for the benefit of the Bank, the Company or its stockholders. The Bank is subject to extensive federal and state statutes, regulations, policies and standards regarding virtually all aspects of its operations, including capital adequacy, reserves, liquidity, payment of dividends, transactions with affiliates, loans to officers, directors, principal shareholders and their related interests, mergers, acquisitions and changes in controlling ownership, establishment, relocation and closure of branch banking offices, community reinvestment, fair lending, fair credit reporting, real estate settlement procedures, funds availability, disclosure to consumers and financial accounting, reporting and recordkeeping. In the event the Bank did not operate in accordance with FDIC statutes, regulations or policies, the FDIC has authority to terminate insurance of the Bank's deposit accounts and the FDIC and the Commissioner of Banks have authority to impose other sanctions for such non-compliance. For a discussion of the Bank's capital adequacy, see the heading "Liquidity and Capital Resources" appearing in the Company's 1995 Annual Report to Stockholders, which is incorporated herein by reference. In addition, as a bank holding company, the Company is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System and is subject to statutes, regulations and policies relating to, among other things, mergers, acquisitions and changes in controlling ownerships, non-bank activities and subsidiaries, capital adequacy, the payment of dividends, the tying of the sale or pricing of products or services of bank and nonbank subsidiaries, and the provision of financial and managerial support of its subsidiary bank. 21 Federal Deposit Insurance Corporation Improvement Act of 1991 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") made significant changes in federal laws governing depository institutions and the FDIC. Among other changes, FDICIA requires federal bank regulatory agencies to take "prompt corrective action" with respect to banks that do not meet applicable regulatory capital requirements. In addition, FDICIA prohibits state chartered banks from engaging, as principals, in activities such as equity investments and insurance underwriting, which are not permissible for national banks, unless the FDIC has determined that the activity would pose no significant risk to the Bank Insurance Fund and the state bank is in compliance with applicable capital standards. An insured state bank, such as MASSBANK, may to the extent permitted by the FDIC, acquire and retain ownership of common or preferred stock listed on a national securities exchange, provided that the insured state bank made or maintained an investment in such securities during the period beginning on September 30, 1990 and ending on November 26, 1991, which MASSBANK did, and provided further that the aggregate amount of the investment does not exceed 100 percent of the Bank's capital. At December 31, 1995, the Bank had marketable equity securities with a market value of approximately $11.3 million, representing 12.6% of the Bank's equity capital. In addition, FDICIA limits the aggregate amount a bank may lend to its directors, executive officers and principal shareholders and their related interests, prohibits depository institutions that are not well capitalized from accepting brokered deposits without an express waiver from the FDIC, requires uniform disclosures to consumers of the terms of bank deposit accounts, and requires banks to give regulators and bank customers advance notice of branch closings. FDICIA also establishes a system of risk-based deposit insurance assessments that takes a bank's capital level and supervisory risk characteristics into account in calculating the amount of its federal deposit insurance assessment. FDICIA imposes new annual audit and reporting requirements on banking organizations with more than $500 million in total assets. Finally, the FDICIA requires the FDIC and the other Federal bank regulatory agencies to issue regulatory standards to govern various aspects of bank operations including real estate lending, executive compensation, loan documentation, credit underwriting, interest rate risk exposure, and asset growth. From time to time the U.S. Congress and the Massachusetts Legislature adopt legislation and the Federal and State bank regulatory agencies issue regulations and policies that may significantly affect the operations of the Bank and the Company. No assurance can be given as to whether additional legislation will be enacted or whether additional regulations or policies will be issued or as to the effect any such legislation, regulations or policies may have on the Bank or the Company. 22 Employees MASSBANK Corp. utilizes the support staff of the Bank from time to time without the payment of any fees. No separate compensation is being paid to the executive officers of MASSBANK Corp., all of whom are executive officers of the Bank and receive compensation as such. As of December 31, 1995, the Bank had 150 full-time employees, including 27 officers, and 65 part-time employees. None of the Bank's employees is represented by a collective bargaining group, and management believes that its employee relations are good. The Bank provides its employees with formal training in product knowledge, sales techniques, fair lending, and motivation. In addition, each supervisor at the Bank receives management training before assuming his or her supervisory duties and periodically thereafter. The Bank maintains a comprehensive employee benefit program for qualified employees that includes a qualified pension plan, an Employee Stock Ownership Plan (ESOP), health and dental insurance, life and long-term disability insurance and tuition assistance. Subsidiaries The Bank has four wholly-owned subsidiaries: Readibank Investment Corporation, Melbank Investment Corporation, Readibank Equipment Corporation and Readibank Properties, Inc. Readibank Investment Corporation and Melbank Investment Corporation were established for the purpose of managing portions of the Bank's investment portfolio. Assets of Readibank Investment Corporation and Melbank Investment Corporation totaled $11.9 million and $58.9 million, at December 31, 1995, respectively. Readibank Equipment Corporation is an office equipment and furniture lessor whose sole lessee is the Bank. Assets of Readibank Equipment Corporation totaled $219 thousand at December 31, 1995. Readibank Properties, Inc. incorporated primarily for the purpose of real estate development, had total assets of $639 thousand at December 31, 1995. Executive Officers of the Registrant The executive officers of the Company and the Bank and the age of each officer as of February 29, 1996 are as follows: Name Age Office Gerard H. Brandi 47 Chairman of the Board of Directors, President and Chief Executive Officer of the Company and the Bank Raymond A. Brearey 59 Vice President of the Bank David F. Carroll 48 Vice President of the Bank Reginald E. Cormier 48 Vice President, Treasurer and Chief Financial Officer of the Company and the Bank Donald R. Washburn 52 Senior Vice President of the Bank Donna H. West 50 Senior Vice President of the Bank and Assistant Secretary of the Company 23 Gerard H. Brandi. Mr. Brandi has served in various capacities with MASSBANK since he joined the Bank in 1975 as Vice President of the Lending Division. He served as Senior Vice President from 1978 to 1981, Executive Vice President and Senior Lending Officer from 1981 to 1983, Executive Vice President and Treasurer from 1983 to 1986, and has served as the Bank's President since 1986. Mr. Brandi became Chief Executive Officer in April, 1992, and Chairman in January, 1993. Raymond A. Brearey. Mr. Brearey is Vice President and Senior Trust Officer of the Bank. Prior to joining the Bank in 1992, Mr. Brearey was a Senior Trust Officer of the Malden Trust Company in Malden, Massachusetts. David F. Carroll. Mr. Carroll has been employed by the Bank since 1983 and has been Vice President of Operations since 1984. He served as Vice President of the Lending Division for a year before becoming Vice President of Operations. Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in September, 1987 and has served in this capacity until his promotion to Vice President, Treasurer and Chief Financial Officer in January, 1995. Donald R. Washburn. Mr. Washburn joined the Bank in 1973 as a Loan Officer. He became an Assistant Vice President in January, 1977 and a Vice President in the Lending Division in June, 1980. Mr. Washburn served as Vice President of the Operations Division from February, 1983 to January, 1984, as Vice President of the Retail Banking Division from January, 1984 to January, 1986 and as Vice President of the Lending Division from January, 1986 until his promotion to Senior Vice President of the Lending Division in June, 1994. Donna H. West. Mrs. West has been employed by the Bank since 1979 and has served as Vice President of the Retail Banking Division since October, 1987. Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West became a Branch Manager in 1981, an Assistant Treasurer and Branch Manager in 1982, an Assistant Treasurer and Regional Branch Administrator in 1984 and an Assistant Vice President and Regional Branch Administrator in 1986. She served in this capacity until her October, 1987 promotion to Vice President of the Retail Banking Division. In June, 1994, Mrs. West was promoted to Senior Vice President of the Retail Banking Division. 24 Item 2. Properties The main office of MASSBANK Corp. and MASSBANK for Savings is located at 123 Haven Street, Reading, Massachusetts. Additionally, the Bank has thirteen branches and three operations facilities. The Bank owns its main office, two operations facilities and six of its branches. All of the remaining branches and other facilities are leased under various leases. At December 31, 1995, management believes that the Bank's existing facilities are adequate for the conduct of its business. The following table sets forth certain information relating to the Bank's existing facilities. Owned Lease Renewal or Expiration Option Location Leased Date Through MAIN OFFICE: 123 Haven Street, Reading, MA Owned ---- ---- BRANCH 476 Main Street, Melrose, MA Owned ---- ---- OFFICES: 27 Melrose Street, Towers Plaza, Melrose, MA Leased 2004 2014 370 Main Street, Wilmington, MA Owned ---- ---- 219 Lowell Street, Lucci's Plaza, Wilmington, MA Leased 1996 2006 240 Main Street, Stoneham, MA Leased 1998 2003 4110 Mystic Valley Pkwy, Medford, MA Leased 1996 2001 296 Chelmsford Street, Chelmsford, MA Leased 1998 ---- 17 North Road, Chelmsford, MA Leased 1999 (1) 45 Broadway Road, Dracut, MA Leased 2002 ---- 50 Central Street, Lowell, MA Owned ---- ---- 755 Lakeview Avenue, Lowell, MA Owned ---- ---- 1800 Main Street, Tewksbury, MA Owned ---- ---- 203 Littleton Road, Westford, MA Owned ---- ---- OPERATIONS FACILITIES: 159 Haven Street, Reading, MA Owned ---- ---- 169 Haven Street, Reading, MA Owned ---- ---- 11 North Road, Chelmsford, MA Leased 1999 (1) (1) Bank has option to purchase in year 2000. Item 3. 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 December 31, 1995, 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 4. Submission of Matters to a Vote of Security Holders None. 25 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information contained under the caption "MASSBANK Corp. and Subsidiaries Stockholder Data" in the Registrant's 1995 Annual Report to Stockholders is incorporated herein by reference. Item 6. Selected Financial Data The information contained under the caption "MASSBANK Corp. and Subsidiaries - Selected Consolidated Financial Data" in the Registrant's 1995 Annual Report to Stockholders is incorporated herein by reference. This selected consolidated financial data should be read in conjunction with the consolidated statements and related notes thereto appearing in the Registrant's 1995 Annual Report to Stockholders which are incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1995 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's consolidated financial statements and notes thereto, together with the report of KPMG Peat Marwick LLP, contained in the Registrant's 1995 Annual Report to Stockholders are incorporated herein by reference. The unaudited quarterly financial data set forth on page 45 of such Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The information appearing under the captions "Election of Directors" and "Compliance with Section 16(A) of the Exchange Act" in the Registrant's definitive proxy statement relating to its 1996 Annual Meeting of Stockholders is incorporated herein by reference. Information required by this item concerning the Executive Officers of the Registrant is contained in Part I of this Form 10-K. Item 11. Executive Compensation The information appearing under the caption "Executive Compensation" in the Registrant's definitive proxy statement relating to its 1996 Annual Meeting of Stockholders is incorporated herein by reference. 26 Item 12. Security Ownership of Certain Beneficial Owners and Management The information appearing under the captions "Election of Directors" and "Principal Stockholders" in the Registrant's definitive proxy statement relating to its 1996 Annual Meeting of Stockholders is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information contained in Note 5 of the Financial Statements under the caption "Loans" in the Registrant's 1995 Annual Report to Stockholders is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The following financial statements and financial statement schedules are contained herein or are incorporated herein by reference: (a)1. Financial Statements Reference to 1995 Annual Report to Stockholders (Pages) Independent Auditors' Report 21 Consolidated balance sheets at December 31, 1995 and 1994 22 Consolidated statements of income for the three years ended December 31, 1995 23 Consolidated statements of cash flows for the three years ended December 31, 1995 24-25 Consolidated statements of changes in stockholders' equity for the three years ended December 31, 1995 26 Notes to consolidated financial statements 27-45 2. Financial Statement Schedules All schedules are omitted as the required information is either not applicable or is included in the consolidated financial statements or related notes. 27 3. Exhibits Exhibit No. Description of Exhibit 3.1 Restated Certificate of Incorporation of the Registrant - incorporated by reference to Exhibit 3.1 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 3.2 By-Laws of the Registrant - incorporated by reference to Exhibit 3 of the Registrant's Form 10-Q for the quarter ended September 30, 1991. 4.1 Shareholder Rights Agreement dated as of January 16, 1990, between the Company and The First National Bank of Boston, as Rights Agent - incorporated herein by reference to the Exhibit to the Company's Current Report on Form 8-K dated as of January 16, 1990. 10.1 MASSBANK Corp. 1986 Stock Option Plan, as amended - incorporated by reference to Exhibit 28.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-11949). 10.1.2 Amendment to MASSBANK Corp. 1986 Stock Option Plan dated April 19, 1991 - incorporated by reference to Exhibit 10.1.2 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.1.3 MASSBANK Corp. 1994 Stock Incentive Plan - incorporated by reference to Exhibit 10.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-82110). 10.2 MASSBANK for Savings Employees' Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 10.2.1 Amendments to the MASSBANK for Savings Employee's Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2.1 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3 Form of Employment Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.3 of the Registrant's annual report on Form 10-K for the year ended December 31, 1986 and Exhibit 10.3.1 of the Registrant's annual report on Form 10-K for the year ended December 31, 1989. 10.3.2 Amendment to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.2 of the Registrant's annual report on Form 10-K for the year ended December 31, 1990. 10.3.3 Second amendment dated as of February 1, 1993 to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.3. to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 28 Exhibit No. Description of Exhibit 10.3.4 Form of Employment Agreement with Raymond A. Brearey dated June 22, 1992 - incorporated by reference to Exhibit 10.3.4 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.5 First amendment dated as of February 1, 1993 to the Employment Agreement with Raymond A. Brearey - incorporated by reference to Exhibit 10.3.5 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.6 Second amendment dated as of February 1, 1993 to the Employment Agreement with Raymond A. Brearey - incorporated by reference to Exhibit 10.3.6 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.7 Form of Employment Agreement with David F. Carroll dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.7 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.8 Form of Employment Agreement with Reginald E. Cormier dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.8 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.9 Form of Employment Agreement with Donald R. Washburn dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.9 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.10 Form of Employment Agreement with Donna H. West dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.10 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992. 10.3.11 Executive Severance Agreement with Gerard H. Brandi dated as of January 18, 1994 incorporated by reference to exhibit 10.3.11 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.12 Executive Severance Agreement with David F. Carroll dated as of December 23, 1993 incorporated by reference to exhibit 10.3.12 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.13 Executive Severance Agreement with Reginald E. Cormier dated as of December 23, 1993 incorporated by reference to exhibit 10.3.13 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.3.14 Executive Severance Agreement with Donald R. Washburn dated as of December 23, 1993 incorporated by reference to exhibit 10.3.14 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 29 Exhibit No. Description of Exhibit 10.3.15 Executive Severance Agreement with Donna H. West dated as of December 23, 1993 incorporated by reference to exhibit 10.3.15 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993. 10.4 Form of Executive Supplemental Retirement Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.4 of Registrant's annual report on Form 10-K for the year ended December 31, 1986. 11.1 Computation of Per Share Earnings - Computation of primary and fully diluted earnings per share is attached hereto as Exhibit 11.1 to this Annual Report on Form 10-K. 12 Statement re Computation of Ratios - Not applicable as MASSBANK Corp. does not have any debt securities registered under Section 12 of the Securities Exchange Act of 1934. 13 1995 Annual Report to Stockholders - except for those portions of the 1995 Annual Report to Stockholders which are expressly incorporated by reference in this report, such 1995 Annual Report to Stockholders is furnished for the information of the SEC and is not to be deemed "filed" with the SEC. 22 Subsidiaries of the Registrant - incorporated by reference to Exhibit 22 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916). 23 Consent of Independent Auditors. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this Form 10-K. (c) Exhibits to this Form 10-K are attached or incorporated by reference as stated in the Index to Exhibits. (d) Not applicable. 30 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MASSBANK CORP. /s/Gerard H. Brandi ------------------- Gerard H. Brandi Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/Gerard H. Brandi Chairman, President, - ---------------------------- Chief Executive Officer and Gerard H. Brandi Director March 27, 1996 /s/Reginald E. Cormier Vice President, Treasurer - ---------------------------- and Chief Financial Officer Reginald E. Cormier (Principal Financial and Accounting Officer) March 27, 1996 /s/Samuel Altschuler Director March 22, 1996 - ---------------------------- Samuel Altschuler /s/Mathias B. Bedell Director March 28, 1996 - ---------------------------- Mathias B. Bedell - ---------------------------- Director Allan S. Bufferd - ---------------------------- Director Peter W. Carr /s/Alexander S. Costello Director March 25, 1996 - ---------------------------- Alexander S. Costello 31 - ---------------------------- Director Robert S. Cummings /s/Robert E. Dyson Director March 25, 1996 - ---------------------------- Robert E. Dyson /s/Louise A. Hickey Director March 22, 1996 - ---------------------------- Louise A. Hickey - ---------------------------- Director Leonard Lapidus /s/Stephen E. Marshall Director March 26, 1996 - ---------------------------- Stephen E. Marshall /s/Arthur W. McPherson Director March 22, 1996 - ---------------------------- Arthur W. McPherson /s/Herbert G. Schurian Director March 22, 1996 - ---------------------------- Herbert G. Schurian /s/Donald B. Stackhouse Director March 25, 1996 - ---------------------------- Donald B. Stackhouse