1
FINANCIAL HIGHLIGHTS
MASSBANK CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
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(IN THOUSANDS) AT DECEMBER 31, 1997 1996 1995 1994 1993
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BALANCE SHEET DATA:
Total assets $925,403 $888,237 $854,542 $ 843,647 $ 855,881
Mortgage loans 248,798 224,139 220,603 220,269 219,347
Other loans 23,505 25,522 28,582 30,547 29,699
Allowance for loan losses 2,334 2,237 2,529 2,566 2,261
Investments(1) 635,694 622,645 586,768 568,635 589,666
Real estate acquired through foreclosure -- 503 255 129 699
Deposits 809,850 788,350 753,657 759,676 766,363
Stockholders' equity 103,779 92,250 90,817 74,504 80,075
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(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
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OPERATING DATA:
Interest and dividend income $ 60,733 $ 58,109 $ 56,611 $ 51,451 $ 51,541
Interest expense 34,681 33,062 30,896 26,152 27,485
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Net interest income 26,052 25,047 25,715 25,299 24,056
Provision for loan losses 260 160 170 705 671
Gains (losses) on securities, net 1,939 868 92 (533) 198
Other non-interest income 1,859 1,797 1,856 3,070 2,307
Non-interest expense 13,425 12,124 13,178 14,213 14,243
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Income before income taxes 16,165 15,428 14,315 12,918 11,647
Income tax expense 5,998 6,001 5,556 4,733 4,711
Change in accounting principle -- -- -- -- (241)
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Net income $ 10,167 $ 9,427 $ 8,759 $ 8,185 $ 6,695
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YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
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OTHER DATA:
Yield on average interest-earning assets 6.81% 6.84% 6.90% 6.22% 6.25%
Cost of average interest-bearing liabilities 4.30 4.27 4.11 3.41 3.57
Interest rate spread 2.51 2.57 2.79 2.81 2.68
Net interest margin 2.93 2.96 3.15 3.07 2.93
Non-interest expense to average assets(5) 1.39 1.40 1.57 1.67 1.68
Efficiency ratio(2)(5)(6) 43.0 43.5 47.4 50.8 53.3
Return on assets (net income/average assets) 1.12 1.08 1.04 0.96 0.79
Return on equity (net income/average
stockholders' equity) 10.51 10.65 10.65 10.62 8.98
Return on average realized equity(3) 11.11 11.01 10.81 10.62 8.98
Percent non-performing loans to total loans 0.65 0.64 0.97 0.84 0.51
Percent non-performing assets to total assets 0.19 0.24 0.31 0.26 0.23
Stockholders' equity to assets, at year-end 11.21 10.39 10.63 8.83 9.36
Book value per share, at year-end(4) $ 29.06 $ 25.75 $ 24.84 $ 20.09 $ 20.46
Earnings per share:(4)
Basic 2.88 2.65 2.43 2.19 1.71
Diluted 2.77 2.58 2.34 2.13 1.67
Cash dividends declared per share(4) 0.885 0.69 0.5475 0.45 0.34
Dividend payout ratio 31% 26% 23% 21% 20%
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(1) Consists of securities held to maturity and available for sale, trading
securities, short-term investments, term federal funds sold and
interest-bearing deposits in banks.
(2) Determined by dividing non-interest expense by fully taxable equivalent
net interest income plus non-interest income.
(3) Excludes average net unrealized gains or losses on securities available
for sale.
(4) All share information presented has been adjusted to reflect the 4-for-3
and 3-for-2 split of the Company's common stock effective September 15,
1997 and September 9, 1994, respectively.
(5) Excludes non-recurring non-interest expense of $778 thousand in 1997.
(6) Excludes $620 thousand in market appreciation on securities contributed to
the MASSBANK Charitable Foundation in 1997.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included in this report. Certain amounts
reported for prior years have been reclassified to conform to the 1997
presentation. The discussion contains certain forward-looking statements
regarding the future performance of the Company. All forward-looking information
is inherently uncertain and actual results may differ substantially from the
assumptions, estimates, or expectations reflected or contained in the
forward-looking information.
The financial condition and results of operations of MASSBANK Corp. (the
"Company") essentially reflect the operations of its subsidiary, MASSBANK (the
"Bank").
The Company's consolidated net income depends largely upon net interest
income, which is the difference between interest income from loans and
investments ("interest-earning assets") and interest expense on deposits and
borrowed funds ("interest-bearing liabilities"). Net interest income is
significantly affected by general economic conditions, policies established by
regulatory authorities and competition.
RECENT DEVELOPMENTS
ACQUISITION OF GLENDALE CO-OPERATIVE BANK
On February 26, 1997 the Company's wholly-owned subsidiary, MASSBANK, executed
an agreement with the Glendale Cooperative Bank ("Glendale") pursuant to which
MASSBANK would acquire all of the outstanding shares of Glendale at a price of
$28.00 per share. The transaction was valued at $7.38 million. Glendale operated
a single banking office in the city of Everett with total assets of $35.6
million. On July 21, 1997 MASSBANK consummated the acquisition. The transaction
was accounted for as a purchase.
FINANCIAL CONDITION
Total assets at December 31, 1997 were $925.4 million, an increase of 4.2%, or
$37.2 million from $888.2 million a year ago. The increase is largely
attributable to the securities, loans and other assets acquired in the Glendale
purchase. Glendale on the closing date had total assets of $35.6 million.
Short-term investments in 1997 decreased $24.6 million. This was fully offset by
increases in term federal funds sold and trading securities. Goodwill at
year-end 1997 totaled $1.5 million reflecting the premium paid in connection
with the Glendale purchase.
The Bank's total loan portfolio increased $22.6 million to $272.3
million at December 31, 1997 reflecting approximately $14.0 million in loans
acquired in connection with the Glendale purchase and modest internal growth.
Internal net loan growth in 1997 was approximately 3.4%, or $8.6 million,
compared with a slight net increase in loans of $0.5 million, in 1996. Loan
originations totaled $58.6 million in 1997, up 14.0%, or $7.2 million compared
to $51.4 million in 1996. The level of principal amortization and payoffs in the
Bank's portfolio continues to be high, making it difficult to grow the
portfolio. This is due in part to the shorter term mortgages that the Bank
originates and the prevailing low interest rates which encourage borrowers to
prepay higher rate mortgages.
Total investments consisting of investment securities and other short
term investments, including term federal funds sold and interest-bearing bank
deposits, increased from $622.6 million at December 31, 1996 to $635.7 million
at December 31, 1997. These investments are principally in federal funds sold,
short-term U.S. Treasury notes and government agency fifteen year
mortgage-backed securities. Essentially all of the Bank's investment securities
are classified as either available for sale or trading securities. Investment
securities available for sale and trading securities provide liquidity,
facilitate interest rate risk management and enhance the Bank's ability to
respond to customers' needs should loan demand increase and/or deposits decline.
Adding to the increase in total investments was a change in net
unrealized gains on securities available for sale from $6.9 million at December
31, 1996 to $15.5 million at December 31, 1997, an $8.6 million increase in
market value. The increase in market value of the investment securities
portfolio is directly related to the upward movement in both bond and stock
prices in 1997.
The change in the market value of the Bank's securities available for
sale also had the effect of increasing stockholders' equity by $5.1 million
since year-end 1996. The net unrealized gains on securities available for sale,
net of tax effect reported as part of stockholders' equity totaled $9.1 million
at year-end 1997, up from $4.0 million at December 31, 1996. Total stockholders'
equity was $103.8 million at December 31, 1997, up $11.5 million from $92.3
million at December 31, 1996. Also contributing to the increase in stockholders'
equity was the Company's record net income of $10.2 million in 1997 and the
issuance of common stock under the Company's stock option plan. These were
partially offset by the payment of $3.1 million in dividends to stockholders and
the cost of the additional shares of treasury stock repurchased during the year
of $1.7 million.
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FINANCIAL CONDITION (continued)
Record earnings in 1997 and a strong capital position have permitted the Company
to continue to reward its shareholders through the payment of higher quarterly
cash dividends. The Company's Board of Directors has increased the quarterly
cash dividend paid to shareholders twice during 1997. Annual cash dividends per
share paid to shareholders during 1997 increased 28% over the prior year. The
Company's book value per share at December 31, 1997 was $29.06, up $3.31 or
12.9% from the prior year.
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 deposits increased by $21.5 million
or 2.7% during the twelve months ended December 31, 1997, from $788.4 million at
year end 1996 to $809.9 million at the end of 1997. The increase is attributable
to the $29.8 million in deposits acquired in connection with the Glendale
purchase. Also, in 1997, the Bank experienced some modest deposit outflow due to
the strong performance of the stock market and mutual funds which were both
fierce competitors for the savers' dollars.
ASSET QUALITY
Net loans represented 29.2% of total assets at December 31, 1997 compared to
27.9% of total assets at December 31, 1996. The Bank's investment securities and
other short-term investments, representing 68.7% of total assets at December 31,
1997, consisted primarily of U.S. Treasury notes, government agency
mortgage-backed securities and federal funds sold. At December 31, 1997, the
Bank's loan portfolio consisted of residential mortgages of $244.9 million,
commercial mortgages of $3.9 million and consumer loans of $23.5 million.
Non-performing assets were $1.8 million at December 31, 1997, representing 0.19%
of total assets. This compares to $2.1 million, or 0.24% of total assets, at
December 31, 1996. At year end 1997, the Bank's allowance for loan losses was
approximately $2.3 million, representing 131.8% of non-performing loans and
0.86% of total loans. The Bank believes that its allowance for loan losses is
adequate to cover the risks inherent in the loan portfolio under current
conditions. Also, as of year-end 1997, the Company had no real estate acquired
through foreclosure on its balance sheet.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 1997 AND 1996
MASSBANK Corp. recorded record net income for the year ended December 31, 1997
of $10.2 million or $2.88 in basic earnings per share compared to $9.4 million
or $2.65 in basic earnings per share for the year ended December 31, 1996. On a
diluted basis, the Company earned $2.77 per share in 1997, up 7.4% or $0.19 per
share from the $2.58 in diluted earnings per share reported in 1996.
In 1997, MASSBANK achieved record breaking results in net income,
earnings per share and return on average realized equity, and increased its
return on average assets. Return on average realized equity and return on
average assets improved to 11.11% and 1.12% in 1997 from 11.01% and 1.08% in
1996, respectively. The Company's favorable financial performance in 1997 can be
attributed to an improvement in net interest income and higher securities gains,
partially offset by an increase in non-interest expenses and provision for loan
losses. Also, in 1997, the Bank received a non-recurring tax benefit of
approximately $260,000 from a donation of appreciated securities made to endow
the MASSBANK Charitable Foundation, a tax exempt private foundation established
for the purpose of making grants in future years to benefit the Bank's local
communities.
NET INTEREST INCOME
The Company's net interest income on a fully taxable equivalent ("FTE") basis
was $26.2 million in 1997, an increase of $1.0 million over the prior year. This
year's improvement in net interest income reflects the positive effect of
earning asset growth exceeding the negative effect of a slightly lower net
interest margin. The Company's average earning assets increased $42.3 million or
5% to $894.6 million in 1997, up from $852.3 million in 1996. The Company's net
interest margin was 2.93% in 1997, slightly below its 1996 net interest margin
of 2.96%.
The tables on pages 34 and 35 set forth, among other things, the extent
to which changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have affected interest
income and expense during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes due to (1) changes in volume and (2) changes in interest
rates.
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4
INTEREST AND DIVIDEND INCOME
Interest and dividend income on a fully taxable equivalent basis was $60.9
million for the year ended December 31, 1997, compared to $58.3 million for the
year ended December 31, 1996. The average total earning assets of the Company
increased to $894.6 million in 1997, up $42.3 million from $852.3 million in
1996. As reflected in the table on page 35, the combination of yield declines in
loans and investment securities, partially offset by yield increases in federal
funds sold and short-term investments, resulted in an overall decline in yield
on total average earning assets of 3 basis points. The weighted average yield on
earning assets for the year ended December 31, 1997 was 6.81% compared to 6.84%
in the prior year.
As exhibited in the rate/volume analysis table on page 34, the total
effect of lower earning asset rates on interest income in 1997 was a $270
thousand decline from 1996. Conversely, the total effect of higher average
earning assets on interest income in 1997 was a $2.9 million increase over 1996,
resulting in a net increase in total interest and dividend income of $2.6
million over 1996.
INTEREST EXPENSE
Total interest expense increased 4.9% to $34.7 million for the year ended
December 31, 1997 from $33.1 million for the year ended December 31, 1996. This
increase is due to an increase in the Company's average deposits, from $774.4
million in 1996 to $807.3 million in 1997, coupled with an increase in the
Company's average cost of funds from 4.27% in 1996 to 4.30% in 1997. The
increase in the Company's average total deposits in 1997 is attributable to the
deposits acquired in connection with the Glendale purchase and internal growth.
As reflected in the table on page 35, the migration from lower cost
savings deposits to higher cost CDs, combined with the growth in CDs in 1997,
contributed significantly to the Company's increased cost of funds in 1997.
As exhibited in the rate/volume analysis table on page 34, the effect on
total interest expense from changes in interest bearing deposit rates from a
year ago was a $219 thousand decrease from 1996. Conversely, the total effect of
higher average deposits on interest expense in 1997 was a $1.8 million increase
over 1996, resulting in a net increase in total interest expense of $1.6 million
over 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1997 was $260 thousand compared to $160
thousand in 1996. In determining the amount to provide for loan losses, the key
factor is the adequacy of the allowance for loan losses. In making its decision,
management considers a number of factors, including the risk characteristics of
the portfolio, underlying collateral, current and anticipated economic
conditions, and trends in loan delinquencies and charge-offs. At December 31,
1997, the allowance for loan losses was $2.3 million representing 131.8% of
non-performing loans. The Bank's non-performing loans totaled $1.8 million at
December 31, 1997 compared to $1.6 million a year earlier. Net charge-offs
totaled $268 thousand in 1997 compared to $452 thousand in 1996. Management
believes that the allowance for loan losses is adequate to cover the risks
inherent in the loan portfolio under current conditions.
NON-INTEREST INCOME
Non-interest income consists of gains or losses on securities, deposit account
service fees, and other non-interest income.
Non-interest income increased to $3.8 million for the year ended December
31, 1997, from $2.7 million for the year ended December 31, 1996. This
improvement is due to an increase in securities gains in 1997.
Net gains on securities totaled $1.9 million in 1997 compared to $868
thousand in 1996. Included in the $1.9 million in securities gains is $620
thousand in market appreciation on securities contributed to the MASSBANK
Charitable Foundation. All other non-interest income combined increased $62
thousand to $1.9 million from $1.8 million in the prior year.
NON-INTEREST EXPENSE
Non-interest expenses (i.e., operating expenses) increased by $1.3 million in
1997, from $12.1 million a year ago. This increase is due largely to an increase
in those expenses which are tied to the Company's stock performance and
non-recurring expenses incurred in 1997 which are summarized below:
Salaries and employee benefits increased by $528 thousand or 7.3%, to $7.7
million in 1997, from $7.2 million in 1996. The increase reflects a $247
thousand increase in Employee Stock Ownership Plan ("ESOP") and Deferred
Compensation Plan expenses which are tied to MASSBANK Corp.'s stock performance.
The price of MASSBANK Corp. stock increased by $19.03 or 66.6% in 1997, from
$28.59 at December 31, 1996 to $47.62 at December 31, 1997. In addition,
salaries increased by $289 thousand due primarily to normal salary increases
granted to employees. These increases were partially offset by a decrease in the
costs of employee retirement benefits of $86 thousand. The expense for all other
employee benefits combined increased $78 thousand over 1996.
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NON-INTEREST EXPENSE (continued)
Occupancy and equipment expense increased by $119 thousand to $2.1 million
in 1997. This is due largely to an increase in depreciation expense resulting
from building and leasehold improvements and the computer equipment that the
bank purchased in conjunction with its computer conversion in July, 1997. The
Bank made this change to its computer systems to enhance its technological
capabilities in order to better service its customers and continue to provide
increased efficiencies throughout the bank.
Data processing expenses were reduced by $170 thousand to $438 thousand in
1997, from $608 the previous year. This decrease reflects $150 thousand in total
credits that the bank negotiated as part of its initial contract with a new data
center which it converted to in July, 1997. The temporary reduction in data
processing expense was used to defray nonrecurring expenses which the bank
incurred in converting to the new data center.
Professional services expenses increased by $67 thousand to $407 thousand
in 1997, from $340 thousand in 1996. This increase was due mostly to an increase
of $40 thousand in legal fees.
The non-recurring merger and acquisition related expenses incurred in
connection with the acquisition of the Glendale Co-operative Bank totaled $156
thousand in 1997.
Advertising and marketing expenses were reduced by $33 thousand to $187
thousand in 1997, from $220 thousand in 1996.
The amortization of intangibles expense was $251 thousand in 1997, up from
$230 thousand in 1996. This increase is due to the Glendale acquisition.
Deposit insurance expense in 1997 increased $103 thousand over 1996 due to
increases in the FDIC deposit insurance and Depositors Insurance Fund ("DIF")
assessments. The DIF insures customer deposits in excess of the FDIC insurance
limits. The increased assessments are attributable to higher deposit volume and
the FDIC's Financing Corporation (FICO) debt service assessment which became
applicable to all insured institutions as of January 1, 1997, in accordance with
the Deposit Insurance Act of 1996.
The bank's contributions expense increased to $664 thousand in 1997, from
$60 thousand in the prior year. In the second quarter 1997, the bank established
and endowed a tax exempt private foundation -- the "MASSBANK Charitable
Foundation" -- for the purpose of making grants in future years to benefit the
bank's local communities. The bank contributed appreciated equity securities
valued at $622 thousand. This expense will benefit the bank by reducing its
contributions expense in future years, since many of the contributions
previously made by the bank will now be made by the Foundation.
Other expenses were reduced by $94 thousand to $1.4 million in 1997, from
$1.5 million in 1996. This decrease is essentially due to a reduction in real
estate acquired through foreclosure expenses.
INCOME TAX EXPENSE
The Company recorded a tax expense of $6.0 million in 1997 and 1996. The
effective income tax rate for the year ended December 31, 1997 was 37.1%, a
decrease from 38.9% in 1996. In 1997, the Bank received a non-recurring tax
benefit of approximately $260,000 as a result of having donated appreciated
securities to establish and endow the MASSBANK Charitable Foundation. For
further information on income taxes, see Note 12 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
Comparison of the Years 1996 and 1995
Massbank Corp. reported record net income for the year ended December 31, 1996
of $9.4 million or $2.65 in basic earnings per share compared to $8.8 million or
$2.43 in basic earnings per share for the year ended December 31, 1995. On a
diluted basis, the Company earned $2.58 per share in 1996, up 10.3% or $0.24 per
share from the $2.34 in diluted earnings per share reported in 1995.
This is the fourth consecutive year that the Company has achieved record
breaking results in net income, earnings per share and return on average
realized equity, and the sixth consecutive year of increase in the Company's
return on average assets. Return on average realized equity and return on
average assets improved to 11.01% and 1.08% in 1996 from 10.81% and 1.04% in
1995, respectively. The Company's improved financial performance in 1996 can be
attributed to several factors. Non-interest expenses were down again in 1996 due
to incremental improvements throughout the Bank and another substantial drop in
deposit insurance expense; securities gains increased significantly over 1995;
and the provision for loan losses decreased slightly. Offsetting these factors
were decreases in net interest income and other non-interest income.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis totaled $25.2
million for 1996, compared to $25.8 million for 1995. The decrease of $0.6
million was due principally to a decrease in net interest margin. The impact of
the lower net interest margin in 1996 was partially offset by an increase in the
Company's average earning assets from $822.0 million in 1995 to $852.3 million
in 1996. The Company's net interest margin in 1996 was 2.96%, 19 basis points
lower than the 3.15% of the prior year.
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NET INTEREST INCOME (continued)
The tables on pages 34 and 35 set forth, among other things, the extent to
which changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have affected interest
income and expense during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes due to (1) changes in volume and (2) changes in interest
rates.
INTEREST AND DIVIDEND INCOME
Interest and dividend income on an FTE basis was $58.3 million for the year
ended December 31, 1996, compared to $56.7 million for the year ended December
31, 1995. The weighted average yield on earning assets for the year ended
December 31, 1996 decreased to 6.84% from 6.90% for the year ended December 31,
1995. The average total earning assets of the Company increased to $852.3
million in 1996, up $30.3 million from $822.0 million in 1995.
Interest on loans decreased $0.1 million to $19.4 million for the year
ended December 31, 1996. The decrease in interest income earned on loans was due
principally to a decrease in yield. The yield on the Bank's loans declined 23
basis points to 7.70% for the year ended December 31, 1996 compared to 7.93% for
the year ended December 31, 1995. The reduction in yield was partially offset by
an increase of $6.1 million in average loan volume. The decline in market
interest rates in the first half of 1996 compared to 1995 generated more
residential loan growth for the Bank, but at lower yields. This, along with
floating rate loans and adjustable rate mortgage loans which repriced downward,
had the greatest impact on the Bank's loan yields during 1996.
Interest and dividend income (on an FTE basis) from investments consisting
of investment securities (including mortgage-backed securities), trading
securities, federal funds sold and other short-term investments increased by
$1.6 million to $38.8 million in 1996 from $37.2 million in 1995. This increase
resulted primarily from an increase of $24.2 million in average volume. Average
total investments were $600.3 million in 1996 compared to $576.1 million in
1995. The weighted average yield on investments was 6.47% in 1996 and 1995.
INTEREST EXPENSE
Total interest expense increased 7.0% to $33.1 million for the year ended
December 31, 1996 from $30.9 million for the year ended December 31, 1995. This
increase is due to an increase in the Company's average cost of funds from 4.11%
in 1995 to 4.27% in 1996, coupled with an increase of $21.9 million in the
Company's average deposits, from $752.5 million in 1995 to $774.4 million in
1996. The growth in average deposits is attributable to an increase in time
certificates of deposit (CD). The average CD volume increased by $52.3 million
to $352.4 million in 1996, from $300.1 million in 1995. Partially offsetting
this increase was a reduction of $30.4 million in the average savings, and
demand and NOW deposit volume, from $452.4 in 1995 to $422.0 million in 1996.
The migration from lower cost savings deposits to higher cost (longer term) CDs,
combined with the growth in CDs in 1996, contributed significantly to the
Company's increased cost of funds in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1996 was $160 thousand compared to $170
thousand in 1995. In determining the amount to provide for loan losses, the key
factor is the adequacy of the allowance for loan losses. In making its decision,
management considers a number of factors, including the risk characteristics of
the portfolio, underlying collateral, current and anticipated economic
conditions, and trends in loan delinquencies and charge-offs. At December 31,
1996, the allowance for loan losses was $2.2 million representing 139.7% of
non-performing loans. The Bank's non-performing loans totaled $1.6 million at
December 31, 1996 compared to $2.4 million a year earlier. Net charge-offs
totaled $452 thousand in 1996 compared to $207 thousand in 1995. Management
believes that the allowance for loan losses is adequate to cover the risks
inherent in the loan portfolio under current conditions.
NON-INTEREST INCOME
Non-interest income consists of gains on securities, deposit account service
fees and other non-interest income.
Non-interest income increased to $2.7 million for the year ended December
31, 1996, from $1.9 million for the year ended December 31, 1995. This
improvement is due to a significant increase in securities gains, the results of
a strong stock market in 1996, partially offset by a slight decrease in all
other non-interest income.
Net gains on securities totaled $868 thousand in 1996 compared to $92
thousand in 1995. All other non-interest income decreased from $1.9 million in
1995 to $1.8 million in 1996 due primarily to non-recurring income recorded in
1995. In 1995, the Company recorded interest on tax settlements which it had
received from the IRS totaling $51 thousand.
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NON-INTEREST EXPENSE
Non-interest expenses (i.e., operating expenses) decreased by $1.1 million or
8.0% to $12.1 million in 1996, from $13.2 million in 1995.
Salaries and employee benefits decreased by $45 thousand to $7.2 million
in 1996 from $7.3 million in 1995. This improvement was due to a decrease in the
costs of employee retirement benefits partially offset by a modest increase in
salaries due to normal salary increases granted to employees.
Occupancy and equipment expense decreased by $14 thousand to approximately
$2.0 million in 1996 due mostly to a reduction in depreciation expense.
Data processing and professional services expenses were reduced by $74
thousand to $948 thousand in 1996, from approximately $1.0 million the previous
year.
Deposit insurance expense in 1996 took another substantial drop due to a
further reduction in Federal Deposit Insurance Corporation ("FDIC") deposit
insurance rates. FDIC deposit insurance rates were reduced to an annual minimum
of $2 thousand for 1996. As a result, total deposit insurance expense decreased
from $914 thousand in 1995 to $13 thousand in 1996. Deposit insurance expense
also includes an assessment from the Depositors Insurance Fund ("DIF") to insure
customer deposits in excess of the FDIC insurance limits.
All other expenses essentially stayed flat in 1996.
INCOME TAX EXPENSE
The Company recorded a tax expense of $6.0 million in 1996 compared to
approximately $5.5 million in 1995. The effective income tax rate for the year
ended December 31, 1996 was 38.9%, a modest increase from 38.8% in 1995. For
further information on income taxes, see Note 12 of Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Bank must maintain a sufficient level 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 December 31, 1997, the Bank had $85.2 million or 9.2% of total assets
and $132.8 million or 14.4% of total assets invested, respectively, in overnight
federal funds sold and United States obligations.
The Bank is a Federal Deposit Insurance Corporation insured institution
subject to the FDIC regulatory capital requirements. The FDIC regulations
require all FDIC insured institutions to maintain minimum levels of Tier I
capital. Highly rated banks (i.e., those with a composite rating of 1 under the
CAMEL rating system) are required to maintain a minimum leverage ratio of Tier I
capital to total average 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 I 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 capital
components include supplemental capital components such as qualifying allowance
for loan losses and qualifying subordinated debt. Tier I capital 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 December 31, 1997, the Bank had a leverage
Tier I capital to average assets ratio of 9.85%, a Tier I capital to
risk-weighted assets ratio of 32.87% and a total capital to risk-weighted assets
ratio of 33.73%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to average assets of 10.23%, Tier I capital to risk-weighted
assets of 34.14% and total capital to risk-weighted assets of 35.01% at December
31, 1997.
YEAR 2000 ISSUES
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 issues and is developing a
comprehensive compliance plan to address the issues. The year 2000 problem is
the result of computer programs being written using two digits rather than four,
to define the applicable year. Any of the Company's systems that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a
30
8
YEAR 2000 ISSUES (continued)
system failure or in miscalculations. While the company uses a third party data
center for the majority of its data processing, the Company has incurred and
will continue to incur expenses in connection with the testing and updating of
its computer systems to prepare for the Year 2000. At this time, these
expenditures are not expected to be material.
Systems conversion and testing activities are currently in process. In
addition, the Company is developing contingency plans for any hardware or
software that does not function correctly on January 1, 2000.
Management presently does not believe that the Year 2000 issues will pose
significant operational problems for the Company. However, to comply with
regulatory directives, modifications and conversions must be made by the
Company's third party data center and other banks and governmental agencies that
interface with the Company. If such entities are not compliant in a timely
manner, the Year 2000 problem could have a material adverse affect on the
Company's operations.
ASSET AND LIABILITY MANAGEMENT
The goal of asset/liability management is to ensure that liquidity, capital and
market risk are prudently managed. Asset/liability management is governed by
policies reviewed and approved annually by the Bank's Board of Directors (the
"Board"). The Board establishes policy limits for long-term interest rate risk
assumption and delegates responsibility for monitoring and measuring the
Company's exposure to interest rate risk to the Asset/Liability Committee
("ALCO"). The ALCO which is comprised of members of the Company's Board of
Directors, members of senior management and the bank's comptroller, generally
meets quarterly to review the economic environment and the volume, mix and
maturity of the Company's assets and liabilities.
INTEREST RATE RISK
The primary goal of interest-rate risk management is to control the Company's
exposure to interest rate risk both within limits approved by the Board and
within narrower guidelines approved by ALCO. These limits and guidelines reflect
the Company's tolerance for interest rate risk over both short-term and
long-term time horizons. The Company monitors its interest rate exposures using
a variety of financial tools. It also produces a GAP analyses quarterly,
reflecting the known or assumed maturity, repricing and other cash flow
characteristics of the Company's interest-earning assets and interest-bearing
liabilities.
Interest rate risk materializes in two forms, market value risk and
reinvestment risk.
Financial instruments calling for future cash flows show market value
increases or decreases when rates change. Management monitors the potential
change in market value of the Company's debt securities assuming an immediate
(parallel) shift in interest rates of up to 200 basis points up or down. Results
are calculated using industry standard modeling analytics and securities data
from The Bloomberg. The Company uses the results to review the potential changes
in market value resulting from immediate rate shifts and to manage the effect of
market value changes on the Company's capital position.
Reinvestment risk occurs when an asset and the liability funding the asset
do not reprice and/or mature at the same time. The difference or mismatch with
respect to repricing frequency and/or maturity is a risk to net interest income.
Complicating management's efforts to control the Company's exposure to
interest rate risk is the fundamental uncertainty of the maturity, repricing
and/or runoff characteristics of a significant portion of the Company's assets
and liabilities. This uncertainty often reflects optional features embedded in
these financial instruments. The most important optional features are embedded
in the Company's deposits, loans and mortgage-backed securities.
For example, many of the Company's interest-bearing deposit products
(e.g., savings, money market deposit accounts and NOW accounts) have no
contractual maturity. Customers have the right to withdraw funds from these
deposit accounts freely. Deposit balances may therefore run off unexpectedly due
to changes in competitive or market conditions. In addition, when market
interest rates rise, customers with time certificates of deposit ("CDs") often
pay a penalty to redeem their CDs and reinvest at higher rates. Given the
uncertainties surrounding deposit runoff and repricing, the interest rate
sensitivity of the Company's liabilities cannot be determined precisely.
Similarly, customers have the right to prepay loans, particularly
residential mortgage loans, usually without penalty. As a result, the Company's
mortgage based assets (i.e., mortgage loans and mortgage-backed securities) are
subject to prepayment risk. This risk tends to increase when interest rates fall
due to the benefits of refinancing. Since the future prepayment behavior of the
Company's customers is uncertain, the interest rate sensitivity of mortgage
based assets cannot be determined exactly.
Management monitors and adjusts the difference between the Company's
interest-earning assets and interest-bearing liabilities repricing within
various time frames ("GAP position").
GAP analysis provides a static view of the maturity and repricing
characteristics of the Company's balance sheet positions. The interest rate GAP
is prepared by scheduling all interest-earning assets and interest-bearing
liabilities according to scheduled or anticipated repricing or maturity. The GAP
analysis identifies the difference between an institution's assets and
31
9
INTEREST RATE RISK (continued)
liabilities that will react to a change in market rates. GAP analysis theory
postulates that if the GAP is positive and rates increase, profits will increase
as more assets than liabilities react to the rate change. If the GAP is
negative, more liabilities than assets will react to a change in market rates.
If rates rise, the institution's profits will fall as more liabilities react to
market rates than assets.
In contrast, however, the Company's one-year GAP position in recent years
has been negative and its profits have moved in the same direction as the change
in market rates rather than in the opposite direction as GAP analysis theory
postulates. One of the more significant reasons for this is the fact that a GAP
presentation does not reflect the degrees to which interest earning assets and
deposit costs respond to changes in market interest rates. The rates on all
financial instruments do not always move by the same amount as the general
change in market rates. In addition, the Company has elected, in recent years,
either not to raise rates or to raise rates by a modest amount on its savings
and transaction-oriented accounts in response to a change in market rates. It
should be noted that for the above two reasons, among others, the Company's
profits have moved in the same direction as market interest rates in the past
and are likely to in the near future despite having a negative cumulative
one-year GAP position.
The Company's policy is to limit its one-year GAP position to 15 percent
of total assets. The Company has historically managed its interest rate GAP
primarily by lengthening or shortening the maturity structure of its securities
portfolio, by continually modifying the composition of its securities portfolio
and by selectively pricing and marketing its various deposit products.
The following table summarizes the Company's GAP position at December 31,
1997. As of this date, the Company's one-year cumulative GAP position was
negative $99.4 million, or approximately 10.74% of total assets. The cumulative
GAP-asset ratio measures the direction and extent of imbalance between an
institution's assets and liabilities repricing through the end of a particular
period.
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY PERIODS
3 MONTHS 3 TO 6 6 MONTHS 1 TO 5 OVER
(IN THOUSANDS) OR LESS MONTHS TO 1 YEAR YEARS 5 YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans $ 33,262 $ 14,170 $ 30,496 $111,834 $ 82,541 $272,303
Short-term investments:
Federal funds sold 85,241 85,241
Investment in money market funds 24,514 24,514
Term federal funds sold 10,000 10,000 20,000
Interest-bearing deposits in banks 67 791 1,225 2,083
Securities held to maturity 45 327 372
Securities available for sale 46,087 19,385 44,429 264,420 107,903 482,224
Trading securities 21,260 21,260
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 220,476 $ 43,555 $ 75,716 $377,806 $190,444 $907,997
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits 272,979 $ 76,768 $ 89,394 $ 92,102 $261,194 $792,437
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 272,979 $ 76,768 $ 89,394 $ 92,102 $261,194 $792,437
- -----------------------------------------------------------------------------------------------------------------------------
GAP for period $ (52,503) $(33,213) $ (13,678) $285,704 $(70,750)
Cumulative GAP $ (52,503) $(85,716) $ (99,394) $186,310 $115,560
Cumulative GAP as a percent of total assets (5.67%) (9.27%) (10.74%) 20.13% 12.49%
- -----------------------------------------------------------------------------------------------------------------------------
32
10
The following table shows the Company's financial instruments that are sensitive
to changes in interest rates, categorized by expected maturity, and the
instruments' fair values as of December 31, 1997.
EXPECTED MATURITY DATE
AT DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Fair Value
(In thousands) 1998 1999 2000 2001 2002 Thereafter Total at 12/31/97
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE ASSETS:
Fixed rate securities $ 38,318 $42,884 $32,207 $16,419 $10,384 $320,648 $460,860 $460,860
Average interest rate(1) 6.22% 6.56% 6.52% 6.60% 7.42% 6.79% 6.71%
Variable rate securities 39,919 -- 953 -- -- 2,124 42,996 42,996
Average interest rate(1) 5.55% -- 6.04% -- -- 6.56% 5.61%
Fixed rate loans 31,387 24,742 21,803 19,296 18,260 83,474 198,962 203,274
Average interest rate 7.72% 8.68% 8.32% 8.31% 8.04% 7.26% 7.28%
Variable rate loans 10,281 8,204 7,058 6,237 6,748 34,813 73,341 73,976
Average interest rate 9.08% 9.52% 7.71% 7.72% 9.12% 8.53% 8.29%
Other fixed rate assets 20,791 720 504 -- -- -- 22,015 22,015
Average interest rate 5.77% 6.02% 6.25% -- -- -- 5.79%
Other variable rate assets 109,823 -- -- -- -- -- 109,823 109,823
Average interest rate 5.95% -- -- -- -- -- 5.95%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive assets $250,519 $76,550 $62,525 $41,952 $35,392 $441,059 $907,997 $912,944
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE LIABILITIES:
Savings and money market
deposit accounts $ 11,577 $11,081 $10,606 $10,154 $ 9,721 $299,736 $352,875 $352,875
Average interest rate 3.29% 3.29% 3.29% 3.29% 3.29% 3.46% 3.44%
Fixed rate certificates of deposit 256,232 48,154 9,999 1,268 601 114 316,368 317,246
Average interest rate 5.48% 5.73% 5.73% 5.65% 5.83% 5.88% 5.53%
Variable rate certificates of deposit 25,005 27,368 22,097 186 10 -- 74,666 74,680
Average interest rate 6.33% 6.50% 6.64% 5.98% 5.98% -- 6.48%
NOW accounts -- -- -- -- -- 47,944 47,944 47,944
Average interest rate -- -- -- -- -- 1.14% 1.14%
Escrow deposits of borrowers 1,502 -- -- -- -- -- 1,502 1,502
Average interest rate 0.25% -- -- -- -- -- 0.25%
Deposit acquisition premium,
net of amortization (198) (230) (230) (231) (29) -- (918) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive liabilities $294,118 $86,373 $42,472 $11,377 $10,303 $347,794 $792,437 $794,247
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Securities rates presented are on a tax equivalent basis.
The Company uses certain assumptions to estimate fair values and expected
maturities. For interest-sensitive assets, expected maturities are based upon
contractual maturity, and projected repayments and prepayments of principal. For
interest-sensitive deposit liabilities, maturities are based on contractual
maturity and estimated deposit runoff based on the Bank's own historical
experience. The actual maturity of the Company's financial instruments could
vary significantly from what has been presented in the above table if actual
experience differs from the assumptions used.
OTHER MARKET RISKS
The Company's investment securities portfolio includes equity securities with a
market value of approximately $17.5 million at December 31, 1997. The net
unrealized gains on these securities totaled $8.2 million at year-end 1997.
Movements in equity prices may effect the amount of securities gains or losses
which the Company realizes from the sale of these securities and thus may have
an impact on earnings.
33
11
RATE/VOLUME ANALYSIS
The following table presents, for the years indicated, the changes in interest
and dividend income and the changes in interest expense attributable to changes
in interest rates and changes in the volume of earning assets and
interest-bearing liabilities. A change attributable to both volume and rate has
been allocated proportionately to the change due to volume and the change due to
rate.
- ------------------------------------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
(IN THOUSANDS) INCREASE (DECREASE) INCREASE (DECREASE)
YEARS ENDED DECEMBER 31, DUE TO DUE TO
- ------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Federal funds sold $ 634 $ 122 $ 756 $ 265 $ (537) $ (272)
Short-term investments 148 52 200 986 (30) 956
Investment securities (1,708) (325) (2,033) (3,580) 441 (3,139)
Trading securities 174 (2) 172 (2,043) (27) (2,070)
Mortgage-backed securities 3,069 (54) 3,015 6,449 (342) 6,107
Mortgage loans 795 (24) 771 675 (420) 255
Other loans (218) (39) (257) (263) (76) (339)
- ------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 2,894 (270) 2,624 2,489 (991) 1,498
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Demand and NOW 17 (55) (38) (10) (68) (78)
Savings (92) 64 (28) (1,006) 376 (630)
Time certificates of deposit 1,913 (228) 1,685 2,995 (121) 2,874
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 1,838 (219) 1,619 1,979 187 2,166
- ------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,056 $ (51) $ 1,005 $ 510 $(1,178) $ (668)
==================================================================================================================
34
12
AVERAGE BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST AVERAGE Interest Average Interest Average
AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/
BALANCE(4) EXPENSE RATE(4) Balance(4) Expense Rate(4) Balance(4) Expense Rate(4)
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning assets:
Federal funds sold $106,890 $ 5,840 5.46% $ 95,253 $ 5,084 5.34% $ 90,589 $ 5,356 5.91%
Short-term investments(2) 26,369 1,459 5.53 23,656 1,259 5.32 5,168 303 5.86
Investment securities 166,949 10,554 6.32 194,229 12,586 6.48 250,318 15,710 6.28
Mortgage-backed securities 321,521 22,368 6.96 277,409 19,353 6.98 184,976 13,246 7.16
Trading securities 12,741 735 5.77 9,719 563 5.79 45,012 2,633 5.85
Mortgage loans(1) 235,587 17,704 7.51 225,005 16,933 7.53 216,060 16,678 7.72
Other loans(1) 24,584 2,224 9.05 26,993 2,481 9.19 29,848 2,820 9.45
=============================================== =================== ====================
Total earning assets 894,641 60,884 6.81% 852,264 58,259 6.84% 821,971 56,746 6.90%
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for
loan losses (2,245) (2,414) (2,587)
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 892,396 849,850 819,384
Other assets 18,956 19,194 20,765
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $911,352 $869,044 $840,149
===========================================================================================================================
LIABILITIES:
Deposits:
Demand and NOW $ 65,895 536 0.81% $ 63,969 574 0.90% $ 64,946 652 1.00%
Savings 355,395 12,240 3.44 358,056 12,268 3.43 387,449 12,898 3.33
Time certificates
of deposit 386,062 21,905 5.67 352,385 20,220 5.74 300,141 17,346 5.78
=============================================== =================== ====================
Total deposits 807,352 34,681 4.30 774,410 33,062 4.27 752,536 30,896 4.11
- ---------------------------------------------------------------------------------------------------------------------------
Other liabilities 7,296 6,106 5,365
Total liabilities 814,648 780,516 757,901
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY: 96,704 88,528 82,248
Total liabilities and
stockholders' equity $911,352 $869,044 $840,149
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (tax-
equivalent basis) 26,203 25,197 25,850
Less adjustment of tax-
exempt interest income (151) (150) (135)
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $26,052 $25,047 $25,715
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.51% 2.57% 2.79%
- ---------------------------------------------------------------------------------------------------------------------------
Net interest margin(3) 2.93% 2.96% 3.15%
===========================================================================================================================
(1) Loans on nonaccrual 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.
35
13
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.
RECENT ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This Statement supersedes APB Opinion No. 15 regarding the presentation
of earnings per share ("EPS") on the face of the income statement. SFAS No. 128
replaces the presentation of Primary EPS with a Basic EPS calculation that
excludes the dilutive effect of common stock equivalents. The Statement requires
a dual presentation of Basic and Dilutive EPS, which is computed similarly to
Fully Diluted EPS pursuant to APB Opinion No. 15 for all entities with complex
capital structures. This Statement is effective for fiscal years ending after
December 15, 1997 and requires restatement of all prior-period EPS data
presented. The adoption of this pronouncement did not have a material impact on
the Company's earnings per share presentation.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure". This Statement establishes standards for disclosing
information about an entity's capital structure. It applies to all entities and
is effective for reporting periods ending after December 15, 1997. The Company's
disclosures comply with these new requirements.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued of SFAS 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.
Statement 130 is effective for interim and annual periods beginning
after December 15, 1997. Earlier application is permitted. Comparative financial
statements provided for earlier periods are required to be reclassified to
reflect application of the provisions of the Statement. The Statement is not
expected to have a material impact on the Company's financial presentation.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
reporting information about operating segments. An operating segment is defined
as a component of an enterprise for which separate financial information is
available and reviewed regularly by the enterprise's chief operating decision
maker in order to make decisions about resources to be allocated to the segment
and also to evaluate the segment's performance. SFAS No. 131 requires a company
to disclose certain balance sheet and income statement information by operating
segment, as well as provide a reconciliation of operating segment information to
the company's consolidated balances. This Statement is effective for reporting
periods beginning after December 15, 1997. This Statement is not expected to
have a material impact on the Company's financial presentation.
36
14
Independent Auditors' Report
[KPMG PEAT MARWICK LLP LETTERHEAD]
The Board of Directors and Stockholders
MASSBANK Corp.:
We have audited the accompanying consolidated balance sheets of
MASSBANK Corp. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
MASSBANK Corp. and subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
January 12, 1998 KPMG PEAT MARWICK LLP
37
15
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 6,808 $ 6,612
Short-term investments (Note 2) 109,755 134,310
- ----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 116,563 140,922
- ----------------------------------------------------------------------------------------------------------------
Term federal funds sold 20,000 10,000
Interest-bearing deposits in banks 2,083 1,751
Securities held to maturity, at amortized cost
(market value of $372 in 1997 and $160 in 1996) (Note 3) 372 160
Securities available for sale, at market value
(amortized cost of $466,749 in 1997 and $464,857 in 1996) (Note 3) 482,224 471,752
Trading securities, at market value (Note 4) 21,260 4,672
Loans (Notes 5, 7 and 11):
Mortgage loans 248,798 224,139
Other loans 23,505 25,522
- ----------------------------------------------------------------------------------------------------------------
Total loans 272,303 249,661
Less: allowance for loan losses (Note 6) (2,334) (2,237)
- ----------------------------------------------------------------------------------------------------------------
Net loans 269,969 247,424
- ----------------------------------------------------------------------------------------------------------------
Premises and equipment (Note 9) 4,369 4,095
Real estate acquired through foreclosure (Note 7) -- 503
Accrued interest receivable 5,395 5,647
Goodwill 1,487 --
Other assets 1,681 1,311
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 925,403 $ 888,237
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Notes 10 and 11):
Demand and NOW $ 66,859 $ 62,734
Savings 352,875 357,658
Time certificates of deposit 391,034 369,139
Deposit acquisition premium, net of amortization (918) (1,181)
- ----------------------------------------------------------------------------------------------------------------
Total deposits 809,850 788,350
Escrow deposits of borrowers 1,502 1,271
Employee stock ownership plan liability (Note 16) 781 937
Accrued and deferred income taxes payable (Note 12) 6,167 2,594
Other liabilities 3,324 2,835
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 821,624 795,987
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 8 and 9) -- --
Stockholders' equity (Notes 12, 15, 16 and 17):
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, 7,336,800 and 5,476,125 shares issued, respectively 7,337 5,476
Additional paid-in capital 58,737 57,858
Retained earnings 70,984 65,756
- ----------------------------------------------------------------------------------------------------------------
137,058 129,090
Treasury stock at cost, 3,766,022 and 2,789,411 shares, respectively (41,569) (39,904)
Net unrealized gains on securities available for sale, net of tax effect (Note 3) 9,071 4,001
Common stock acquired by ESOP (Note 16) (781) (937)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 103,779 92,250
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 925,403 $ 888,237
================================================================================================================
See accompanying notes to consolidated financial statements.
38
16
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Mortgage loans $ 17,704 $ 16,933 $ 16,678
Other loans 2,224 2,481 2,820
Securities available for sale:
Mortgage-backed securities 22,368 19,353 13,246
Other securities 10,385 12,425 15,553
Trading securities 735 563 2,633
Federal funds sold 5,840 5,084 5,356
Other investments 1,477 1,270 325
- --------------------------------------------------------------------------------------------------
Total interest and dividend income 60,733 58,109 56,611
- --------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
NOW 536 574 652
Savings 12,240 12,268 12,898
Time certificates of deposit 21,905 20,220 17,346
- --------------------------------------------------------------------------------------------------
Total interest expense 34,681 33,062 30,896
- --------------------------------------------------------------------------------------------------
Net interest income 26,052 25,047 25,715
PROVISION FOR LOAN LOSSES (Note 6) 260 160 170
Net interest income after provision for loan losses 25,792 24,887 25,545
- --------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Deposit account service fees 924 932 923
Gains on securities, net 1,939 868 92
Other 935 865 933
- --------------------------------------------------------------------------------------------------
Total non-interest income 3,798 2,665 1,948
- --------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 7,743 7,215 7,260
Occupancy and equipment 2,096 1,977 1,991
Data processing 438 608 608
Professional services 407 340 414
Merger and acquisition related expense 156 -- --
Advertising and marketing 187 220 228
Amortization of intangibles 251 230 230
Deposit insurance 116 13 914
Contributions 664 60 39
Other 1,367 1,461 1,494
- --------------------------------------------------------------------------------------------------
Total non-interest expense 13,425 12,124 13,178
- --------------------------------------------------------------------------------------------------
Income before income taxes 16,165 15,428 14,315
INCOME TAX EXPENSE (Note 12) 5,998 6,001 5,556
- --------------------------------------------------------------------------------------------------
Net income $ 10,167 $ 9,427 $ 8,759
==================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,524,657 3,556,660 3,605,480
Diluted 3,663,310 3,658,505 3,741,460
EARNINGS PER SHARE (in dollars):
Basic $ 2.88 $ 2.65 $ 2.43
Diluted 2.77 2.58 2.34
==================================================================================================
See accompanying notes to consolidated financial statements.
39
17
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,167 $ 9,427 $ 8,759
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization 853 735 757
Amortization of ESOP shares committed to be released 184 63 51
Charitable contribution of appreciated securities 622 5 --
Decrease (increase) in accrued interest receivable 464 1,633 (410)
Increase (decrease) in other liabilities 56 (388) (2,924)
Increase (decrease) in current income taxes payable 435 (75) (363)
Accretion of discounts on securities, net of
amortization of premiums (1,178) (1,052) (1,137)
Net trading securities activity (16,480) 2,065 109,289
(Gains) losses on securities available for sale (1,831) (950) 407
(Gains) losses on trading securities (108) 82 (499)
Increase in deferred mortgage loan origination fees, net of
amortization 168 114 57
Deferred income tax (benefit) expense (372) 238 276
Decrease (increase) in other assets 553 (74) (186)
Loans originated for sale (770) (215) (455)
Loans sold 770 378 455
Provision for loan losses 260 160 170
Provisions for losses and writedowns on real estate acquired
through foreclosure (21) 32 25
Gains on sales of real estate acquired through foreclosure (34) (26) --
Gains on sales of premises and equipment (1) (2) --
Increase in escrow deposits of borrowers 231 279 26
- -----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (6,032) 12,429 114,298
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and cash equivalents for acquisitions (2,874) -- --
Purchases of term federal funds (30,000) (10,000) (50,000)
Proceeds from maturities of term federal funds 20,000 5,000 45,000
Increase in interest-bearing bank deposits (1,649) (810) (941)
Proceeds from maturities of interest-bearing bank deposits 1,240 -- --
Proceeds from sales of investment securities available for sale 42,741 49,940 46,035
Proceeds from maturities of investment securities held to maturity
and available for sale 59,000 86,225 45,147
Purchases of investment securities available for sale (63,696) (56,196) (57,789)
Purchases of investment securities held to maturity (230) -- --
Purchases of mortgage-backed securities (63,661) (135,854) (61,092)
Principal repayments of mortgage-backed securities 42,246 36,858 22,084
Principal repayments of securities held to maturity 18 17 18
Principal repayments of securities available for sale 85 -- --
Loans originated (57,787) (51,152) (39,222)
Loan principal payments received 48,560 49,118 40,116
Loans purchased (201) -- --
Purchases of premises and equipment (491) (310) (360)
Proceeds from sale of premises and equipment 9 2 --
Proceeds from sale of real estate acquired through foreclosure 964 511 265
Net advances on real estate acquired through foreclosure (30) -- (7)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,756) (26,651) (10,746)
- -----------------------------------------------------------------------------------------------------------
40 (Continued)
18
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (8,523) 34,463 (6,250)
Payments to acquire treasury stock (1,665) (3,534) (3,082)
Issuance of common stock under stock option plan 466 738 891
Tax benefit resulting from stock options exercised 260 266 364
Cash dividends paid on common stock (3,124) (2,459) (1,981)
Tax benefit resulting from dividends paid on unallocated shares
held by the ESOP 15 15 --
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (12,571) 29,489 (10,058)
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (24,359) 15,267 93,494
Cash and cash equivalents at beginning of year 140,922 125,655 32,161
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 116,563 $ 140,922 $ 125,655
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH TRANSACTIONS:
Cash paid during the year for interest $ 34,671 $ 33,026 $ 30,984
Cash paid during the year for taxes 5,237 5,557 5,230
NON-CASH TRANSACTIONS:
SFAS 115:
Increase (decrease) in stockholders' equity 5,070 (3,239) 11,155
Increase (decrease) in deferred tax liabilities 3,510 (2,329) 8,194
Securities reclassified from held to maturity to available for sale -- -- 202,800
Transfers from loans to real estate acquired through foreclosure 376 765 409
Transfers from other assets to securities available for sale -- -- 214
Purchase of securities incomplete (not settled) as of year end 32 -- 138
Sales of securities incomplete (not settled) as of year end -- 30 --
Cost of donated securities 2 -- --
- ---------------------------------------------------------------------------------------------------------------------
In connection with the acquisition of Glendale Co-operative Bank in July, 1997,
assets acquired and liabilities assumed were as follows:
Assets acquired $ 31,561 -- --
Goodwill 1,530 -- --
Liabilities assumed 30,217 -- --
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
41
19
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------
Additional
Common paid-in Retained
stock capital earnings
- ------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 5,352 $ 55,609 $ 51,995
Net Income -- -- 8,759
Cash dividends declared
($0.5475 per share) -- -- (1,981)
Net decrease in liability to ESOP -- -- --
Amortization of ESOP shares
committed to be released -- 51 --
Purchase of treasury stock -- -- --
Exercise of stock options and
related tax benefits 73 1,182 --
Change in net unrealized
gains (losses) on securities
available for sale,
net of tax effect -- -- --
- ------------------------------------------------------------------------------------
Balance at December 31, 1995 5,425 56,842 58,773
Net Income -- -- 9,427
Cash dividends declared
($0.69 per share) -- -- (2,459)
Tax benefit resulting from dividends paid
on unallocated shares held by the ESOP -- -- 15
Net decrease in liability to ESOP -- -- --
Amortization of ESOP shares
committed to be released -- 63 --
Purchase of treasury stock -- -- --
Exercise of stock options and
related tax benefits 51 953 --
Change in net unrealized
gains (losses) on securities
available for sale,
net of tax effect -- -- --
- ------------------------------------------------------------------------------------
Balance at December 31, 1996 5,476 57,858 65,756
Net Income -- -- 10,167
Cash dividends declared
($0.885 per share) -- -- (3,124)
Tax benefit resulting from dividends paid
on unallocated shares held by the ESOP -- -- 15
Net decrease in liability to ESOP -- -- --
Amortization of ESOP shares
committed to be released -- 184 --
Purchase of treasury stock -- -- --
Exercise of stock options and
related tax benefits 31 695 --
Transfer resulting from four-for-three
stock split 1,830 -- (1,830)
Change in net unrealized
gains (losses) on securities
available for sale,
net of tax effect -- -- --
- ------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 7,337 $ 58,737 $ 70,984
====================================================================================
- -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
- -----------------------------------------------------------------------------------------------------------
Net unrealized
gains (losses)
on securities Common
available for stock
Treasury sale, net of acquired
stock tax effect by ESOP Total
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ (33,288) $ (3,915) $ (1,249) $ 74,504
Net Income -- -- -- 8,759
Cash dividends declared
($0.5475 per share) -- -- -- (1,981)
Net decrease in liability to ESOP -- -- 156 156
Amortization of ESOP shares
committed to be released -- -- -- 51
Purchase of treasury stock (3,082) -- -- (3,082)
Exercise of stock options and
related tax benefits -- -- -- 1,255
Change in net unrealized
gains (losses) on securities
available for sale,
net of tax effect -- 11,155 -- 11,155
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 (36,370) 7,240 (1,093) 90,817
Net Income -- -- -- 9,427
Cash dividends declared
($0.69 per share) -- -- -- (2,459)
Tax benefit resulting from dividends paid
on unallocated shares held by the ESOP -- -- -- 15
Net decrease in liability to ESOP -- -- 156 156
Amortization of ESOP shares
committed to be released -- -- -- 63
Purchase of treasury stock (3,534) -- -- (3,534)
Exercise of stock options and
related tax benefits -- -- -- 1,004
Change in net unrealized
gains (losses) on securities
available for sale,
net of tax effect -- (3,239) -- (3,239)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (39,904) 4,001 (937) 92,250
Net Income -- -- -- 10,167
Cash dividends declared
($0.885 per share) -- -- -- (3,124)
Tax benefit resulting from dividends paid
on unallocated shares held by the ESOP -- -- -- 15
Net decrease in liability to ESOP -- -- 156 156
Amortization of ESOP shares
committed to be released -- -- -- 184
Purchase of treasury stock (1,665) -- -- (1,665)
Exercise of stock options and
related tax benefits -- -- -- 726
Transfer resulting from four-for-three
stock split -- -- -- --
Change in net unrealized
gains (losses) on securities
available for sale,
net of tax effect -- 5,070 -- 5,070
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ (41,569) $ 9,071 $ (781) $ 103,779
===========================================================================================================
See accompanying notes to consolidated financial statements.
42
20
MASSBANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MASSBANK Corp. (the "Company") is a Delaware chartered holding company whose
principal subsidiary is MASSBANK (the "Bank"). The Bank operates fifteen full
service banking offices in Reading, Melrose, Stoneham, Wilmington, Medford,
Chelmsford, Tewksbury, Westford, Dracut, Lowell and Everett providing a
variety of deposit, lending and trust services. As a Massachusetts chartered
savings bank whose deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") and the Depositors Insurance Fund ("DIF"), the
activities of the Bank are 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 DIF. 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.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries: MASSBANK, Readibank
Properties, Inc., Readibank Investment Corporation and Melbank Investment
Corporation. The accounts of MASSBANK's subsidiary, Readibank Equipment
Corportation, which was sold in October, 1997 are also included through the
sale date. All significant intercompany balances and transactions have been
eliminated in consolidation. The accounting and reporting policies of the
Company conform to generally accepted accounting principles and to general
practices within the banking industry. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
balance sheet date and income and expenses for the period. Material estimates
that are particularly susceptible to change in the near term relate to the
determination of the allowance for loan losses.
Certain amounts in the prior years' consolidated financial statements
were reclassified to permit comparison with the current fiscal year. The
Company's reported per share amounts and average common and common equivalent
shares outstanding for 1997 and prior years have been restated to reflect the
Company's four-for-three stock split of September 15, 1997.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Under its investment policy, management determines the appropriate
classification of securities at the time of purchase. Those debt
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. 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. 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, 1997, stockholders' equity included approximately $9.1
million, representing the net unrealized gains on securities available for
sale, less applicable income taxes. Investments classified as trading
securities are stated at market value with unrealized gains and losses
included in earnings.
Income on debt securities 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.
LOANS
Loans are reported at the principal amount outstanding, net of unearned fees.
Loan origination fees and related direct incremental loan origination costs
are offset and the resulting net amount is deferred and amortized over the
life of the loan using the level-yield method.
The Bank generally does not accrue interest on loans which are 90
days or more past due. When a loan is placed on nonaccrual status, all
interest previously accrued but not collected is reversed from income and all
amortization of deferred loan fees is discontinued. Interest received on
nonaccrual loans is either applied against principal or reported as income
according to management's judgment as to the collectibility of principal.
Interest accruals are resumed on such loans only when they are brought
current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both
principal and interest.
Impairment on loans for which it is probable that the creditor will
be unable to collect all amounts due according to the contractual terms of
the loan agreement are measured on a discounted cash flow method, or at the
loan's observable market price, or at the fair value of the collateral if the
loan is collateral dependent. However, impairment must be measured based on
the fair value of the collateral if it is determined that foreclosure is
probable. Impaired loans consist of all nonaccrual commercial loans.
43
21
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for probable losses that are inherent in
the Company's loan portfolio. 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.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises, equipment and leasehold improvements are
stated at cost, less accumulated depreciation and amortization computed
primarily by use of the straight-line method over the estimated useful lives
of the related assets or terms of the related leases.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is comprised of foreclosed
properties where the Bank has actually received title and loans determined to
be substantially repossessed. Real estate loans that are substantially
repossessed include only those loans for which the Bank has taken possession
of the collateral but has not completed legal foreclosure proceedings. Loan
losses arising from the acquisition of such properties are charged against
the allowance for loan losses. Real estate acquired through foreclosure 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 and losses upon disposition are reflected
in earnings as realized.
GOODWILL
The excess of purchase price over the fair value of net assets of acquired
companies is classified and reported as goodwill. Goodwill is being
amortized using the straight-line method, over 15 years.
DEPOSIT ACQUISITION PREMIUM
The deposit acquisition premium arising from acquisitions is reported net of
accumulated amortization. Such premium is being amortized on a straight-line
basis over 10 years.
PENSION PLAN
The Bank accounts for pension benefits on the net periodic pension cost
method for financial reporting purposes. This method recognizes the
compensation cost of an employee's pension benefit over that employee's
approximate service period. Pension costs are funded in the year of accrual
using the aggregate cost method.
EMPLOYEES' STOCK OWNERSHIP PLAN ("ESOP")
The Company recognizes compensation cost equal to the fair value of the ESOP
shares committed to be released. Dividends on unallocated ESOP shares are
reported as a reduction of accrued interest on the ESOP loan. The Company
reports loans from outside lenders to its ESOP as a liability on its balance
sheet and reports interest cost on the debt. For earnings per share (EPS)
computations, ESOP shares that have been committed to be released are
considered outstanding. ESOP shares that have not been committed to be
released are not considered outstanding.
STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The
Statement establishes financial accounting and reporting standards for
stock-based compensation plans. SFAS No. 123 encourages, but does not
require, a fair value based method of accounting for stock-based compensation
plans. The statement allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method prescribed by
Accounting Principles Board ("APB") Opinion No. 25. For those entities
electing to use the intrinsic value based method, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share computed as if the
fair value based method had been applied. The Company continues to account
for stock-based compensation costs under APB Opinion No. 25.
44
22
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." This Statement supersedes APB Opinion No.
15 regarding the presentation of earnings per share ("EPS") on the face of
the income statement. SFAS No. 128 replaces the presentation of Primary EPS
with a Basic EPS calculation that excludes the dilutive effect of common
stock equivalents. The Statement requires a dual presentation of Basic and
Diluted EPS, which is computed similarly to Fully Diluted EPS pursuant to APB
Opinion No. 15 for all entities with complex capital structures. This
Statement is effective for fiscal years ending after December 15, 1997 and
requires restatement of all prior-period EPS data presented. The adoption of
this pronouncement did not have a material impact on the Company's earnings
per share presentation.
For earnings per share computations, ESOP shares that have been
committed to be released are considered outstanding. ESOP shares that have
not been committed to be released are not considered outstanding.
All share information set forth herein has been adjusted to reflect
the 4-for-3 split of the Company's common stock
effective September 15, 1997.
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.
As a nonmember of the Federal Reserve System, the Bank is required to
maintain certain reserve requirements of vault cash and/or deposits with the
Federal Reserve Bank of Boston. The amount of this reserve requirement,
included in "Cash and Due from Banks," was $3.6 million and $3.2 million at
December 31, 1997 and 1996, respectively.
INCOME TAXES
The Bank recognizes income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of the
Bank's assets and liabilities at enacted tax rates expected to be in effect
when the amounts related to such temporary differences are realized or
settled. The Bank's deferred tax asset is reviewed and adjustments to such
asset are recognized as deferred income tax expense or benefit based upon
management's judgment relating to the realizability of such asset. Based on
the Bank's historical and current pre-tax earnings, management believes it is
more likely than not that the Bank will realize its existing gross deferred
tax asset.
The Company and its subsidiaries file state and consolidated federal
income tax returns on an October 31 year-end.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996 and is to be applied prospectively. However, SFAS No. 127, "Deferral
of the Effective Date of Certain Provisions of SFAS No. 125," requires the
deferral of implementation as it relates to repurchase agreements,
dollar-rolls, securities lending and similar transactions until years
beginning after December 31, 1997. Earlier or retrospective applications of
this Statement is not permitted. SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on an approach that
focuses on control, whereby after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. The
adoption of this pronouncement did not have a significant effect on the
Company's financial position or results of operations.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This Statement establishes standards for disclosing
information about an entity's capital structure. It applies to all entities
and is effective for reporting periods ending after December 15, 1997. The
Company's disclosures comply with these new requirements.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS 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.
45
23
REPORTING COMPREHENSIVE INCOME (CONTINUED)
Statement 130 is effective for interim and annual periods beginning after
December 15, 1997. Earlier application is permitted. Comparative financial
statements provided for earlier periods are required to be reclassified to
reflect application of the provisions of the Statement. The Statement is
not expected to have a material impact on the Company's financial
presentation.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement establishes
standards for reporting information about operating segments. An operating
segment is defined as a component of an enterprise for which separate
financial information is available and reviewed regularly by the
enterprise's chief operating decision maker in order to make decisions
about resources to be allocated to the segment and also to evaluate the
segment's performance. SFAS No. 131 requires a company to disclose certain
balance sheet and income statement information by operating segment, as
well as provide a reconciliation of operating segment information to the
company's consolidated balances. This Statement is effective for reporting
periods beginning after December 15, 1997. This Statement is not expected
to have a material impact on the Company's financial presentation.
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
- -------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------
Federal funds sold (overnight) $ 85,241 $109,902
Money market funds 24,514 24,408
- -------------------------------------------------------------------------------------
Total short-term investments $109,755 $134,310
=====================================================================================
The investments above are stated at cost which approximates market value.
3. INVESTMENT SECURITIES
The amortized cost and market value of investment securities follows:
- -----------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED Market
(IN THOUSANDS) AT DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Other bonds and obligations $ 372 $ -- $ -- $ 372
- -----------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 372 -- -- 372
- -----------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations 121,399 1,622 -- 123,021
U.S. Government agency obligations 9,800 24 (11) 9,813
- -----------------------------------------------------------------------------------------------------------------------
Total 131,199 1,646 (11) 132,834
- -----------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage Association 60,493 1,247 (31) 61,709
Federal Home Loan Mortgage Corporation 248,744 4,257 (180) 252,821
Federal National Mortgage Association 7,733 258 -- 7,991
Collateralized mortgage obligations 7,836 62 -- 7,898
Other 298 14 -- 312
- -----------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 325,104 5,838 (211) 330,731
- -----------------------------------------------------------------------------------------------------------------------
Total debt securities 456,303 7,484 (222) 463,565
- -----------------------------------------------------------------------------------------------------------------------
Investments in mutual funds 1,110 4 -- 1,114
Equity securities 9,336 8,227 (18) 17,545
- -----------------------------------------------------------------------------------------------------------------------
Total securities available for sale 466,749 $ 15,715 $ (240) $482,224
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 15,475
- -----------------------------------------------------------------------------------------------------------------------
Total securities available for sale, net 482,224
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities, net $482,596
=======================================================================================================================
46
24
3. INVESTMENT SECURITIES (continued)
The amortized cost and market value of investment securities follows:
- -----------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(IN THOUSANDS) At December 31, 1996 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Other bonds and obligations $ 160 $ -- $ -- $ 160
- -----------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 160 -- -- 160
- -----------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations 139,197 1,509 -- 140,706
U.S. Government agency obligations 7,899 31 (53) 7,877
Other bonds and obligations 1,000 -- -- 1,000
- -----------------------------------------------------------------------------------------------------------------------
Total 148,096 1,540 (53) 149,583
- -----------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage Association 69,903 987 (480) 70,410
Federal Home Loan Mortgage Corporation 226,130 1,878 (1,920) 226,088
Federal National Mortgage Association 9,261 356 -- 9,617
Other 453 27 -- 480
- -----------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 305,747 3,248 (2,400) 306,595
- -----------------------------------------------------------------------------------------------------------------------
Total debt securities 453,843 4,788 (2,453) 456,178
- -----------------------------------------------------------------------------------------------------------------------
Equity securities 11,014 4,624 (64) 15,574
- -----------------------------------------------------------------------------------------------------------------------
Total securities available for sale 464,857 $ 9,412 $ (2,517) $471,752
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 6,895
- -----------------------------------------------------------------------------------------------------------------------
Total securities available for sale, net 471,752
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities, net $471,912
=======================================================================================================================
During the years ended December 31, 1997, 1996 and 1995, the Company
realized gains and losses on sales of securities
available for sale as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
REALIZED Realized Realized
GAINS LOSSES Gains Losses Gains Losses
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 38 $ (35) $ 118 $ (103) $ 4 $ (889)
Mortgage-backed securities -- (301) -- (166) -- --
Marketable equity securities 2,201 (96) 1,146 (45) 574 (96)
Other equity securities 25 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) $2,264 $ (432) $1,264 $ (314) $ 578 $ (985)
===================================================================================================================================
Proceeds from sales of debt securities available for sale during 1997, 1996 and
1995 were $34.1 million, $40.8 million and $41.9 million, respectively. Proceeds
from sales of marketable equity securities available for sale during 1997, 1996
and 1995, were $8.6 million, $9.1 million and $4.1 million, respectively.
There were no sales of investment securities held-to-maturity
during 1997, 1996 and 1995.
47
25
3. INVESTMENT SECURITIES (continued)
The amortized cost and market value of debt securities held to maturity
and debt securities available for sale by contractual
maturity are as follows:
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
AMORTIZED MARKET Amortized Market
COST VALUE Cost Value
- ------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity:
Other bonds and obligations:
Maturing after 1 year but within 5 years $ 230 $ 230 $ -- $ --
Maturing after 5 years but within 10 years 97 97 111 111
Maturing after 10 years but within 15 years 45 45 49 49
- ------------------------------------------------------------------------------------------------------------------------
Total debt securities held to maturity 372 372 160 160
- ------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale:
U.S. Treasury obligations:
Maturing within 1 year 35,869 36,001 55,820 56,120
Maturing after 1 year but within 5 years 85,530 87,020 80,390 81,566
Maturing after 5 years but within 10 years -- -- 2,987 3,020
- ------------------------------------------------------------------------------------------------------------------------
Total 121,399 123,021 139,197 140,706
- ------------------------------------------------------------------------------------------------------------------------
U.S. Government agency obligations:
Maturing within 1 year 2,000 2,006 -- --
Maturing after 1 year but within 5 years 6,600 6,614 6,899 6,904
Maturing after 5 years but within 10 years 1,000 994 1,000 973
Maturing after 15 years 200 199 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total 9,800 9,813 7,899 7,877
- ------------------------------------------------------------------------------------------------------------------------
Other bonds and obligations:
Maturing within 1 year -- -- 1,000 1,000
- ------------------------------------------------------------------------------------------------------------------------
Total -- -- 1,000 1,000
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Maturing within 1 year 312 311 -- --
Maturing after 1 year but within 5 years 8,826 8,984 2,408 2,458
Maturing after 5 years but within 10 years 30,677 31,617 15,975 16,544
Maturing after 10 years but within 15 years 279,147 283,631 287,364 287,593
Maturing after 15 years 6,142 6,188 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total 325,104 330,731 305,747 306,595
- ------------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale 456,303 463,565 453,843 456,178
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized gains on debt securities
available for sale 7,262 -- 2,335 --
- ------------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale,
net carrying value $463,565 $463,565 $456,178 $456,178
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities are shown at their contractual maturity but are
expected to have shorter average lives due to prepayments.
48
26
4. TRADING SECURITIES
The amortized cost and market values of trading securities are as follows:
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
AMORTIZED MARKET Amortized Market
COST VALUE Cost Value
- ------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $18,548 $18,542 $ -- $ --
Investments in mutual funds 2,757 2,718 4,790 4,672
- ------------------------------------------------------------------------------------------------------
Total trading securities $21,305 $21,260 $ 4,790 $ 4,672
======================================================================================================
During the years ended December 31, 1997, 1996 and 1995, the Company
realized gains and losses on sales of trading securities as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
REALIZED Realized Realized
GAINS LOSSES Gains Losses Gains Losses
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 22 $-- $-- $-- $ 20 $--
Investments in mutual funds -- (33) -- (44) -- (133)
Marketable equity securities 46 -- 65 -- 4 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) $ 68 $ (33) $ 65 $ (44) $ 24 $(133)
=================================================================================================================================
Proceeds from sales of trading securities during 1997, 1996 and 1995 were
$16.3 million, $3.1 million and $26.5 million, respectively. Unrealized
gains or (losses) included in income in 1997, 1996 and 1995 were $73
thousand, $(103) thousand and $608 thousand, respectively.
5. LOANS
The Bank's lending activities are conducted principally in the local
communities in which it operates banking offices, and to a lesser extent,
in selected areas of Massachusetts and southern New Hampshire.
The Bank offers single family and multi-family residential
mortgage loans, mortgage loans secured by commercial or investment
property such as apartment buildings and commercial or corporate
facilities, and a variety of consumer loans. The Bank also offers loans
for the construction of residential homes, multi-family properties and for
land development. Most loans granted by the Bank are either collateralized
by real estate or guaranteed by federal or local governmental authorities.
The ability of single family residential and consumer borrowers to honor
their repayment commitments is generally dependent on the level of overall
economic activity within the borrowers' geographic areas. The ability of
commercial real estate and construction loan borrowers to honor their
repayment commitments is generally dependent on the economic health of the
real estate sector in the borrowers' geographic areas and the overall
economy.
49
27
5. LOANS (continued)
The composition of the Bank's loan portfolio is summarized as follows:
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- -----------------------------------------------------------------------------------------------------
Mortgage loans:
Residential:
Conventional:
Fixed rate $ 193,319 $ 168,000
Variable rate 50,163 48,832
FHA and VA 1,843 2,515
Commercial 3,861 4,121
Construction 492 1,388
- -----------------------------------------------------------------------------------------------------
Total mortgage loans 249,678 224,856
Add: premium on loans 343 325
Less: deferred mortgage loan origination fees (1,223) (1,042)
- -----------------------------------------------------------------------------------------------------
Mortgage loans, net 248,798 224,139
- -----------------------------------------------------------------------------------------------------
Other loans:
Consumer:
Installment 2,199 1,967
Guaranteed education 8,934 9,729
Other secured 1,600 1,611
Home equity lines of credit 10,470 11,316
Unsecured 266 271
- -----------------------------------------------------------------------------------------------------
Total consumer loans 23,469 24,894
Commercial 36 628
- -----------------------------------------------------------------------------------------------------
Total other loans 23,505 25,522
- -----------------------------------------------------------------------------------------------------
Total loans $ 272,303 $ 249,661
=====================================================================================================
In the ordinary course of business, the Bank makes loans to its directors,
officers and their associates and affiliated companies ("related parties")
at substantially the same terms as those prevailing at the time of
origination for comparable transactions with unrelated borrowers. An
analysis of total related party loans for the year ended December 31, 1997
follows:
- ------------------------------------------------------
(IN THOUSANDS)
- ------------------------------------------------------
Balance at December 31, 1996 $ 395
Additions 48
Repayments (103)
- ------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 340
======================================================
50
28
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
- --------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
Balance at beginning of year $ 2,237 $ 2,529 $ 2,566
Glendale Co-operative Bank acquisition 105 -- --
Provision for loan losses 260 160 170
Recoveries of loans previously charged-off 59 90 42
- --------------------------------------------------------------------------------------------------
Total 2,661 2,779 2,778
- --------------------------------------------------------------------------------------------------
Less charge-offs:
Mortgage loans (221) (480) (124)
Other loans (106) (62) (125)
- --------------------------------------------------------------------------------------------------
Balance at end of year $ 2,334 $ 2,237 $ 2,529
==================================================================================================
The following table shows the allocation of the allowance for loan losses
by category of loans at December 31, 1997, 1996 and 1995.
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
PERCENTAGE Percentage Percentage
OF LOANS of Loans of Loans
AMOUNT TO TOTAL Amount to Total Amount to Total
- -------------------------------------------------------------------------------------------------------------------
Mortgage loans:
Residential $1,544 90% $1,915 88% $2,101 86%
Commercial 12 1 3 2 104 3
Consumer loans 160 9 119 10 237 11
Other loans -- -- 57 -- 61 --
Unallocated 618 -- 143 -- 26 --
- -------------------------------------------------------------------------------------------------------------------
Total $2,334 100% $2,237 100% $2,529 100%
===================================================================================================================
7. NON-PERFORMING ASSETS
The following schedule summarizes non-performing assets at the dates
shown:
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 1,771 $1,601 $2,428
Total real estate acquired through foreclosure -- 503 255
- --------------------------------------------------------------------------------------------------------
Total non-performing assets $ 1,771 $2,104 $2,683
========================================================================================================
Percent of non-performing loans to total loans 0.65% 0.64% 0.97%
Percent of non-performing assets to total assets 0.19% 0.24% 0.31%
The reduction in interest income associated with nonaccrual loans is as
follows:
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Interest income that would have been recorded under original terms $163 $149 $204
Interest income actually recorded 97 78 60
- -----------------------------------------------------------------------------------------------------------------------
Reduction in interest income $ 66 $ 71 $144
=======================================================================================================================
During 1997 and 1996 the Company had no impaired loans. During 1995, its
average recorded investment in impaired loans was negligible.
51
29
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and involve, to
varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated balance sheet. The contract or notional
amounts reflect the extent of involvement the Bank has in particular
classes of these instruments. The Bank's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument is
represented by the contractual or notional amount of those instruments.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
- -------------------------------------------------------------------------------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to originate residential mortgage loans $ 4,090 $ 4,264
Unadvanced portions of construction loans 496 332
Unused credit lines, including unused portions of equity lines of credit 19,445 19,546
==================================================================================================================
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee by the customer. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit-worthiness on a case-by-case
basis. The amount of collateral obtained, if any, is based on management's
credit evaluation of the borrower.
9. PREMISES AND EQUIPMENT
A summary of premises and equipment and their estimated useful lives used
for depreciation purposes is as follows:
- -------------------------------------------------------------------------------------------------------------------
ESTIMATED
USEFUL LIFE
(IN THOUSANDS) AT DECEMBER 31, 1997 1996 (IN YEARS)
- -------------------------------------------------------------------------------------------------------------------
Premises:
Land $1,227 $1,168 --
Buildings 3,642 3,395 15 - 45
Building and leasehold improvements 1,635 1,587 3 - 30
Equipment 3,405 3,093 3 - 20
- -------------------------------------------------------------------------------------------------------------------
9,909 9,243
Less: accumulated depreciation and amortization 5,540 5,148
- -------------------------------------------------------------------------------------------------------------------
Total premises and equipment, net $4,369 $4,095
==================================================================================================================
The Bank is obligated under a number of noncancelable operating leases for
various banking offices. These operating leases expire at various dates
through 2008 with options for renewal. Rental expenses for the years ended
December 31, 1997, 1996 and 1995 amounted to $522 thousand, $508 thousand
and $494 thousand, respectively.
The minimum rental commitments, with initial or remaining terms of
one year or more exclusive of operating costs and real estate taxes to be
paid by the Bank under these leases, as of December 31, 1997, are as
follows:
- -------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS
- -------------------------------------------------------------------------
1998 $ 481
1999 438
2000 234
2001 234
2002 143
Later years 465
- -------------------------------------------------------------------------
Total $ 1,995
=========================================================================
52
30
10. DEPOSITS
Deposits are summarized as follows:
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE
- -------------------------------------------------------------------------------------------------------------
Demand and NOW:
NOW accounts $ 47,944 1.14% $ 45,352 1.16%
Demand accounts 18,915 -- 17,382 --
- -------------------------------------------------------------------------------------------------------------
Total demand and NOW 66,859 0.82 62,734 0.84
- -------------------------------------------------------------------------------------------------------------
Savings:
Regular savings and special notice accounts 329,348 3.47 333,834 3.49
Money market accounts 23,527 3.09 23,824 3.12
- -------------------------------------------------------------------------------------------------------------
Total savings 352,875 3.44 357,658 3.47
- -------------------------------------------------------------------------------------------------------------
Time certificates:
Fixed rate certificates 316,368 5.53 303,722 5.52
Variable rate certificates 74,666 6.48 65,417 6.37
- -------------------------------------------------------------------------------------------------------------
Total time certificates 391,034 5.71 369,139 5.67
- -------------------------------------------------------------------------------------------------------------
Deposit acquisition premium, net of amortization (918) -- (1,181) --
- -------------------------------------------------------------------------------------------------------------
Total deposits $809,850 4.32% $788,350 4.29%
=============================================================================================================
The maturity distribution and related rate structure of the Bank's time
certificates at December 31, 1997 follows:
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------
AVERAGE
AMOUNT INTEREST RATE
- -------------------------------------------------------------------------------------------------------------
Due within 3 months $106,163 5.52%
Due within 3 - 6 months 78,224 5.44
Due within 6 - 12 months 96,851 5.70
Due within 1 - 2 years 75,522 6.01
Due within 2 - 3 years 32,096 6.36
Due within 3 - 5 years 2,064 5.73
Thereafter 114 5.88
- -------------------------------------------------------------------------------------------------------------
Total $391,034 5.71%
=============================================================================================================
At December 31, the Bank had individual time certificates of deposit of
$100 thousand or more maturing as follows:
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------
Due within 3 months $22,757 $18,834
Due within 3 - 6 months 9,298 7,479
Due within 6 - 12 months 17,969 15,327
Due within 1 - 2 years 12,293 13,545
Due within 2 - 3 years 8,602 5,411
Due within 3 - 5 years 114 439
- -------------------------------------------------------------------------------------------------------------
Total $71,033 $61,035
=============================================================================================================
53
31
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Bank disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Bank's financial
instruments.
CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND ACCRUED INTEREST
RECEIVABLE
The carrying amounts for these financial instruments approximate fair
value because they mature in 90 days or less.
INTEREST-BEARING DEPOSITS IN BANKS AND TERM FEDERAL FUNDS SOLD
The carrying amounts of the interest-bearing deposits in banks and term
federal funds sold reported in the balance sheet at December 31, 1997 and
1996 approximate fair value.
SECURITIES
The fair value of investment securities is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers.
Statement 107 specifies that fair values should be calculated
based on the value of one unit without regard to any premium or discount
that may result from concentrations of ownership of a financial
instrument, possible tax ramifications, or estimated transaction costs.
The carrying amount and estimated fair values of the Company's
investment securities are as follows:
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
CARRYING CALCULATED Carrying Calculated
AMOUNT FAIR VALUE Amount Fair Value
- ------------------------------------------------------------------------------------------------------
Securities held to maturity $ 372 $ 372 $ 160 $ 160
Securities available for sale 482,224 482,224 471,752 471,752
Trading securities 21,260 21,260 4,672 4,672
- ------------------------------------------------------------------------------------------------------
Total securities $503,856 $503,856 $476,584 $476,584
======================================================================================================
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential
mortgage, commercial real estate, consumer and other.
The fair values of residential, commercial, and certain consumer
and other loans are calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the Bank's historical experience with repayments for
each loan classification, modified, as required, by an estimate of the
effect of current economic and lending conditions. For certain variable
rate consumer loans, including home equity lines of credit, carrying value
approximates fair value. Assumptions regarding credit risk, cash flows,
and discount rates are judgmentally determined using available market
information.
The following table presents information for loans:
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
CARRYING CALCULATED Carrying Calculated
AMOUNT FAIR VALUE Amount Fair Value
- ------------------------------------------------------------------------------------------------------
Real estate:
Residential:
Adjustable $ 50,068 $ 50,709 $ 49,261 $ 49,240
Fixed 194,881 199,220 170,774 171,766
Commercial:
Adjustable 3,833 3,867 4,034 4,047
Fixed 16 16 70 75
Consumer and other 23,505 23,438 25,522 25,527
- ------------------------------------------------------------------------------------------------------
Total loans 272,303 277,250 249,661 250,655
Less: allowance for loan losses (2,334) -- (2,237) --
- ------------------------------------------------------------------------------------------------------
Net loans $269,969 $277,250 $247,424 $250,655
======================================================================================================
54
32
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
DEPOSIT LIABILITIES
Under Statement 107, the fair value of deposits with no stated maturity,
such as demand deposits, NOW accounts, regular savings and special notice
accounts, and money market accounts, is equal to the amount payable on
demand as of December 31, 1997 and 1996. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits
of similar remaining maturities.
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
- -------------------------------------------------------------------------------------------------------------
Demand accounts $ 18,915 $ 18,915 $ 17,382 $ 17,382
NOW accounts 47,944 47,944 45,352 45,352
Regular savings and special notice accounts 329,348 329,348 333,834 333,834
Money market accounts 23,527 23,527 23,824 23,824
Time certificates 391,034 391,926 369,139 371,368
Deposit acquisition premium, net of amortization (918) -- (1,181) --
- -------------------------------------------------------------------------------------------------------------
Total deposits 809,850 811,660 788,350 791,760
Escrow deposits of borrowers 1,502 1,502 1,271 1,271
- -------------------------------------------------------------------------------------------------------------
Total $811,352 $813,162 $789,621 $793,031
=============================================================================================================
The fair value estimates and the carrying amounts above do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates.
The Bank estimates the fair value of the cost to terminate
commitments to advance funds on construction loans and for residential
mortgage loans in the pipeline at December 31, 1997 and 1996 to be
immaterial. Unused credit lines, including unused portions of equity lines
of credit, are at floating interest rates and therefore there is no fair
value adjustment.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Bank's entire holdings
of a particular financial instrument. Because no market exists for a
significant portion of the Bank's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Bank has a
trust department that contributes net fee income annually. The trust
department is not considered a financial instrument, and its value has not
been incorporated into the fair value estimates. Other significant assets
and liabilities that are not considered financial assets or liabilities
include deferred tax liabilities, premises and equipment and goodwill. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates.
55
33
12. INCOME TAXES
Income tax payable was allocated as follows:
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------
Current income tax payable:
Federal $1,192 $ 633
State 48 172
- -------------------------------------------------------------------------------------------------------------
Total current income tax payable 1,240 805
- -------------------------------------------------------------------------------------------------------------
Deferred income tax payable:
Federal 3,735 1,327
State 1,192 462
- -------------------------------------------------------------------------------------------------------------
Total deferred income tax payable 4,927 1,789
- -------------------------------------------------------------------------------------------------------------
Total income tax payable $6,167 $2,594
=============================================================================================================
Income tax expense (benefit) was allocated as follows:
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Current income tax expense:
Federal $5,096 $4,641 $4,209
State 1,034 1,122 1,071
- -------------------------------------------------------------------------------------------------------------
Total current tax expense 6,130 5,763 5,280
- -------------------------------------------------------------------------------------------------------------
Deferred income tax expense (benefit):
Federal (102) 194 183
State (26) 53 115
Change in valuation reserve (4) (9) (22)
- -------------------------------------------------------------------------------------------------------------
Total deferred tax expense (benefit) (132) 238 276
- -------------------------------------------------------------------------------------------------------------
Total income tax expense $5,998 $6,001 $5,556
=============================================================================================================
Income tax expense attributable to income from operations for the years
ended December 31, differed from the amounts computed by applying the
federal income tax rate of 35 percent as a result of the following:
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Computed "expected" income tax expense at statutory rate $5,658 $5,400 $5,010
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit 656 764 771
Dividends received deduction (95) (94) (72)
Other (217) (60) (131)
Change in valuation reserve (4) (9) (22)
- -------------------------------------------------------------------------------------------------------------
Income tax expense $5,998 $6,001 $5,556
- -------------------------------------------------------------------------------------------------------------
Effective income tax rate 37.10% 38.90% 38.81%
=============================================================================================================
56
34
12. INCOME TAXES (continued)
At December 31, 1997 and 1996, the Bank had gross deferred tax assets and
gross deferred tax liabilities as follows:
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Loan losses $ 257 $ 248
Deferred loan fees, net 195 256
Deferred compensation and pension cost 546 409
Depreciation 83 35
Purchase accounting 468 194
Other 26 36
- -------------------------------------------------------------------------------------------------------------
Gross deferred tax asset 1,575 1,178
- -------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Valuation of securities 6,404 2,894
Other unrealized securities gains 86 56
Other 12 17
- -------------------------------------------------------------------------------------------------------------
Gross deferred tax liability 6,502 2,967
- -------------------------------------------------------------------------------------------------------------
Net deferred tax liability $4,927 $1,789
=============================================================================================================
Based on the Company's historical and current pretax earnings,
management believes it is more likely than not that the Company will
realize the gross deferred tax asset existing at December 31, 1997. The
primary sources of recovery of the gross federal deferred tax asset are
federal income taxes paid in 1997, 1996 and 1995 that are available for
carryback and the expectation that the existing net deductible temporary
differences will reverse during periods in which the Company generates net
taxable income. Since there is no carryback provision for state income tax
purposes, management believes the existing net deductible temporary
differences which give rise to the gross deferred state income tax asset
will reverse during periods in which the Company generates net taxable
income. There can be no assurance, however, that the Company will generate
any earnings or any specific level of continuing earnings.
As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method. However, the tax
effect of the pre-1988 bad debt reserve amount of approximately $7.3
million remains subject to recapture in the event that the Bank pays
dividends in excess of its reserves and profits.
57
35
13. ACQUISITION (UNAUDITED)
On July 21, 1997, MASSBANK Corp., through the Bank, acquired all the
outstanding common stock of Glendale Co-operative Bank ("Glendale") for
$7.38 million in cash. Glendale was a Massachusetts chartered co-operative
bank founded in 1928 which operated from a single office in the city of
Everett. Glendale was merged with and into the Bank on the acquisition
date. The acquisition has been accounted for by the purchase method and,
accordingly, the results of operations of Glendale have been included in
MASSBANK Corp.'s consolidated financial statements from the date of
acquisition. The excess of the purchase price over the fair value of the
net identifiable assets acquired of $1.53 million has been recorded as
goodwill and is being amortized on a straight line basis over 15 years.
The following unaudited condensed pro forma financial information
presents the combined results of operations of MASSBANK Corp. and Glendale
as if the acquisition had occurred as of the beginning of 1997 and 1996,
after giving effect to certain adjustments, including amortization of
goodwill. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred had MASSBANK Corp. and
Glendale constituted a single entity during such periods.
- -------------------------------------------------------------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 62,879 $60,341
Interest expense 35,878 34,275
- -------------------------------------------------------------------------------------------------------------
Net interest income 27,001 26,066
Provision for loan losses 260 160
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 26,741 25,906
Non-interest income 3,923 2,844
Non-interest expense 14,045 12,796
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 16,619 15,954
Income tax expense 6,186 6,219
- -------------------------------------------------------------------------------------------------------------
Net Income $ 10,433 $ 9,735
- -------------------------------------------------------------------------------------------------------------
Earnings per share (in dollars):
Basic $ 2.96 $ 2.74
Diluted 2.85 2.66
- -------------------------------------------------------------------------------------------------------------
14. EARNINGS PER SHARE
The following is a calculation of earnings per share for the years
indicated:
- -----------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) BASIC DILUTED Basic Diluted Basic Diluted
- -----------------------------------------------------------------------------------------------------------------
Net income $ 10,167 $ 10,167 $ 9,427 $ 9,427 $ 8,759 $ 8,759
Average shares outstanding 3,575,962 3,575,962 3,616,769 3,616,769 3,674,385 3,674,385
Dilutive stock options -- 138,653 -- 101,845 -- 135,980
Unallocated Employee Stock
Ownership Plan ("ESOP") shares
not committed to be released (51,305) (51,305) (60,109) (60,109) (68,905) (68,905)
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 3,524,657 3,663,310 3,556,660 3,658,505 3,605,480 3,741,460
Earnings per share (in dollars) $ 2.88 $ 2.77 $ 2.65 $ 2.58 $ 2.43 $ 2.34
=================================================================================================================
58
36
15. STOCKHOLDERS' EQUITY
The Company may not declare or pay cash dividends on its shares of common
stock if the effect thereof would cause its stockholders' equity to be
reduced below or to otherwise violate legal or regulatory requirements.
Substantially all of the Company's retained earnings are unrestricted at
December 31, 1997.
The Bank is a Federal Deposit Insurance Corporation insured
institution subject to the FDIC regulatory capital requirements. The FDIC
regulations require all FDIC insured institutions to maintain minimum
levels of Tier I capital. Highly rated banks (i.e., those with a composite
rating of 1 under the CAMEL rating system) are required to maintain a
minimum leverage ratio of Tier I capital to total average 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 I
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 capital components include supplemental capital components
such as qualifying allowance for loan losses and qualifying subordinated
debt. Tier I capital plus the Tier II capital components is referred to as
total qualifying capital.
The capital ratios of the Company and its principal subsidiary
"MASSBANK" set forth below currently exceed the minimum ratios for "well
capitalized" banks as defined by federal regulators.
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR CAPITAL TO BE WELL
AT DECEMBER 31, 1997 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1)
- -------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------
TIER I CAPITAL (TO AVERAGE ASSETS):
MASSBANK Corp. (consolidated) $92,303 10.23% $27,071 3.00% N/A --
MASSBANK (the "Bank") 88,852 9.85 27,071 3.00 $45,118 5.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 92,303 34.14 10,814 4.00 N/A --
MASSBANK (the "Bank") 88,852 32.87 10,814 4.00 16,221 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 94,637 35.01 21,628 8.00 N/A --
MASSBANK (the "Bank") 91,186 33.73 21,628 8.00 27,035 10.00
=============================================================================================================
(1) This column presents the minimum amounts and ratios that a financial
institution must have to be categorized as adequately capitalized.
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR CAPITAL TO BE WELL
AT DECEMBER 31, 1996 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1)
- -------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------
TIER I CAPITAL (TO AVERAGE ASSETS):
MASSBANK Corp. (consolidated) $87,068 10.09% $25,899 3.00% N/A --
MASSBANK (the "Bank") 85,688 9.93 25,899 3.00 $43,165 5.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 87,068 33.41 10,423 4.00 N/A --
MASSBANK (the "Bank") 85,688 32.88 10,423 4.00 15,634 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated) 89,305 34.27 20,846 8.00 N/A --
MASSBANK (the "Bank") 87,925 33.74 20,846 8.00 26,057 10.00
=============================================================================================================
(1) This column presents the minimum amounts and ratios that a financial
institution must have to be categorized as adequately capitalized.
59
37
16. EMPLOYEE BENEFITS
PENSION PLAN
The Bank sponsors a noncontributory defined benefit pension plan that
covers all employees who meet specified age and length of service
requirements, which is administered by the Savings Banks Employees
Retirement Association ("SBERA"). The plan provides for benefits to be
paid to eligible employees at retirement based primarily upon their years
of service with the Bank and compensation levels near retirement.
Contributions to the plan reflect benefits attributed to employees'
service to date, as well as services expected to be earned in the future.
Pension plan assets consist principally of government and agency
securities, equity securities (primarily common stocks) and short-term
investments.
The following table sets forth the plan's funded status and
amounts recognized in the Company's consolidated financial statements for
the plan years ended October 31, 1997, 1996 and 1995, the plan's latest
valuation dates:
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT OCTOBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested $4,028 $3,636 $3,845
Non-vested 35 25 55
- --------------------------------------------------------------------------------------------------------------------------------
Total accumulated benefit obligation $4,063 $3,661 $3,900
================================================================================================================================
Actuarial present value of projected benefit obligation for
service rendered to date $4,990 $4,287 $4,622
Plan assets at fair value 5,810 5,090 4,181
- --------------------------------------------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets over projected benefit obligation $ 820 $ 803 $ (441)
================================================================================================================================
Assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows:
Discount rate 7.25% 7.50% 7.00%
Rate of increase in compensation levels 4.50% 4.50% 4.00%
================================================================================================================================
Certain changes in the items shown are not recognized as they occur, but
are amortized systematically over subsequent periods. Unrecognized amounts
to be amortized and the amounts included in the consolidated balance
sheets are shown below:
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT OCTOBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Unrecognized net asset at October 31, being recognized over 21 years $ 211 $ 232 $ 254
Unrecognized net gains or (losses) 886 670 (412)
Accrued pension cost (277) (99) (283)
- --------------------------------------------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets over projected benefit obligation $ 820 $ 803 $ (441)
================================================================================================================================
Net pension expense for the years ended December 31, included the
following components:
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Service cost -- benefits earned during the period $ 367 $ 309 $ 319
Accrual of discount 322 308 303
Actual return on plan assets (769) (632) (686)
Net amortization and deferral 257 283 412
- --------------------------------------------------------------------------------------------------------------------------------
Net pension expense $ 177 $ 268 $ 348
================================================================================================================================
Assumptions used to develop the net pension expense data were:
Discount rate 7.50% 7.00% 7.50%
Expected long-term rate of return on assets 8.00% 8.00% 7.50%
Rate of increase in compensation levels 4.50% 4.00% 5.50%
================================================================================================================================
60
38
16. EMPLOYEE BENEFITS (continued)
PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLANS
The Bank's Profit Sharing and Incentive Compensation Bonus Plans provide
for payments to employees under certain circumstances based upon a
year-end measurement of the Company's net income and attainment of
individual goals and objectives by certain key officers. Payments of $417
thousand, $418 thousand and $413 thousand were awarded under the plan in
1997, 1996 and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Bank has an Employees' Stock Ownership Plan ("ESOP") for the benefit
of each employee who has completed at least 1,000 hours of service with
the Company in the previous twelve months. Under the plan, the ESOP has
borrowed funds from a third party bank to invest in the Company's common
stock. As this obligation will be liquidated primarily through future
contributions to the ESOP by the Bank, the obligation is reflected as a
liability of the Company and a reduction of stockholders' equity on the
consolidated balance sheet. As of December 31, 1997 and 1996, such
outstanding liabilities totaled $781 thousand and $937 thousand,
respectively.
Shares of the Company's common stock purchased with the loan
proceeds are held in a suspense account. As the loan is repaid, a
proportionate number of shares are released for allocation to plan
participants. The shares are allocated to plan participants annually, on a
pro rata basis, based on compensation.
The ESOP acquired unallocated shares in 1986 when the plan was
first established and more recently in 1993. At December 31, 1997, the
ESOP held 44,000 unallocated shares and 116,963 shares which have been
allocated to participants. The fair value of the unallocated shares at
December 31, 1997 was $2,096 thousand.
Dividends on unallocated shares are used to offset a portion of
the interest paid on the ESOP loan. Dividends on allocated shares held by
the ESOP are allocated to plan participants proportionately based on the
number of shares in the participant's allocated account.
Total compensation and interest expense applicable to the ESOP
amounted to $398 thousand, $314 thousand and $303 thousand for the years
ended December 31, 1997, 1996 and 1995, respectively.
EMPLOYEE AGREEMENTS
The Bank has entered into employment agreements with certain executive
officers which provide that the officer will receive a minimum amount of
annual compensation from the Bank for a specified period. The agreements
also provide for the continued payment of compensation to the officer for
a specified period after termination under certain circumstances,
including if the officer's termination follows a "change of control,"
generally defined to mean a person or group attaining ownership of 25% or
more of the shares of the Company.
EXECUTIVE SUPPLEMENTAL RETIREMENT AGREEMENTS
The Bank maintains executive supplemental retirement agreements for
certain executive officers. These agreements provide retirement benefits
designed to supplement benefits available through the Bank's retirement
plan for employees. Total expenses for benefits payable under the
agreements amounted to $132 thousand, $99 thousand and $94 thousand in
1997, 1996 and 1995, respectively.
STOCK OPTION PLAN
Effective May 28, 1986, the Board of Directors of the Bank adopted a stock
option plan for the benefit of its officers and other employees. In
January, 1991, the plan was amended to authorize the grant of options to
non-employee Directors of the Company. All but 42/3 of the 690,000 shares
reserved for issuance under the plan were issued. On April 19, 1994,
shareholders approved and the Bank adopted the Company's 1994 Stock
Incentive Plan. The total number of shares of common stock that can be
issued under this plan is 190,000 shares. Both incentive stock options and
non-qualified stock options may be granted under the plans. As of December
31, 1997, there were 146,760.7 non-qualified stock options and 213,439.3
incentive stock options granted and outstanding to purchase shares under
the plans. The maximum option term is ten years. Further stock options may
be granted pursuant to the 1994 Stock Incentive Plan and will generally
have an exercise price equal to, or in excess of, the fair market value of
a share of common stock of the Company on the date the option is granted.
61
39
16. EMPLOYEE BENEFITS (continued)
A summary of the status of the Company's fixed stock option plan as of
December 31, 1997, 1996 and 1995, and changes during the years ended on
those dates is presented below:(1)
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
SHARES AVERAGE Shares Average Shares Average
UNDER EXERCISE Under Exercise Under Exercise
FIXED OPTIONS OPTION PRICE Option Price Option Price
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 347,166.7 $15.46 369,776 $13.60 423,154.7 $12.19
Granted 48,333.3 30.09 46,000 23.40 44,333.3 17.54
Exercised (35,300) 13.19 (68,605.3) 10.74 (96,710.7) 9.21
Forfeited -- -- (4) 8.63 (1,001.3) 17.24
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 360,200 $17.65 347,166.7 $15.46 369,776 $13.60
================================================================================================================================
Options exercisable at year-end 360,200 347,166.7 369,776
================================================================================================================================
The following table summarizes information about fixed stock options
outstanding and exercisable at December 31, 1997:
- ---------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997 OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------------------------------------------------------
$6.88 to $10.75 73,966.7 3.6 years $8.73 73,966.7 $8.73
16.00 to 17.34 190,566.7 5.7 years 16.62 190,566.7 16.62
18.28 to 19.88 3,666.6 7.5 years 19.44 3,666.6 19.44
23.25 to 30.09 92,000 8.6 years 26.87 92,000 26.87
- --------------------------------------------------------------------------------------------------------------------------------
$6.88 to $30.09 360,200 6.0 years $17.65 360,200 $17.65
================================================================================================================================
(1) All share information presented has been adjusted to reflect the 4-for-3
and 3-for-2 split of the Company's common stock effective September 15,
1997 and September 9, 1994, respectively
As discussed in Note 1, the Company adopted SFAS No. 123 on January 1,
1996, but continues to account for its stock option plan using the
intrinsic value based method prescribed by APB Opinion No. 25.
Accordingly, no compensation cost for this plan has been recognized in the
Consolidated Statements of Income for 1997.
In determining the pro forma disclosures required by SFAS No. 123,
the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following table presents
pro forma net income and earnings per share assuming the stock option plan
was accounted for using the fair value method prescribed by SFAS No. 123,
the weighted average assumptions used and the grant date fair value of
options granted in 1997, 1996 and 1995:
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Net income As reported $ 10,167 $ 9,427 $8,759
Pro forma 9,916 9,230 8,598
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share As reported $ 2.88 $ 2.65 $ 2.43
Pro forma 2.81 2.60 2.38
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share As reported $ 2.77 $ 2.58 $ 2.34
Pro forma 2.70 2.52 2.30
================================================================================================================================
Weighted average fair value $ 8.84 $ 8.04 $ 6.93
Expected life 7.4 years 7.2 years 7.4 years
Risk-free interest rate 6.47% 5.64% 7.66%
Expected volatility 22.0% 23.0% 23.0%
Expected dividend yield 2.3% 2.7% 2.7%
================================================================================================================================
62
40
17. SHAREHOLDER RIGHTS AGREEMENT
In January, 1990, the Board of Directors adopted a Shareholders Rights
Plan. Under the Plan, the Rights automatically become part of and trade
with the Company's shares of common stock. Although the Rights are not
exercisable initially, they become exercisable upon the occurrence of one
of three triggering events as specified in the Plan. In the event they
become exercisable, each holder of a Right would then be entitled to buy a
unit consisting of one one-hundredth of a share of the Company's preferred
stock at an exercise price of $70. The provisions of the Rights Plan,
including the time periods set forth therein, generally may be extended or
amended by the Board of Directors. The Rights will expire January 16,
2000, but they may be redeemed at the option of the Board of Directors for
$0.01 per Right until ten days after a person becomes a 15% shareholder of
MASSBANK Corp. or until certain other triggering events have occurred.
18. PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed financial statements for MASSBANK Corp.
(the "Parent Company") only:
BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) AT DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 13 $ 20
Interest-bearing deposits in banks 3,390 1,365
Investment in subsidiaries 101,109 91,807
Other assets 77 14
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 104,589 $ 93,206
==================================================================================================================================
LIABILITIES:
Employee stock ownership plan liability (Note 16) $ 781 $ 937
Due to subsidiaries -- 3
Other liabilities 29 16
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 810 956
==================================================================================================================================
STOCKHOLDERS' EQUITY (Notes 12, 15, 16 and 17):
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, 7,336,800 and 5,476,125 shares issued,
respectively 7,337 5,476
Additional paid-in capital 58,737 57,858
Retained earnings 70,984 65,756
- ----------------------------------------------------------------------------------------------------------------------------------
137,058 129,090
Treasury stock at cost, 3,766,022 and 2,789,411 shares, respectively (41,569) (39,904)
Net unrealized gains on securities available for sale, net of tax effect (Note 3) 9,071 4,001
Common stock acquired by ESOP (Note 16) (781) (937)
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 103,779 92,250
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $104,589 $93,206
==================================================================================================================================
63
41
18. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Income:
Dividends received from subsidiaries $ 6,400 $5,750 $4,400
Interest and dividend income 56 20 22
- -------------------------------------------------------------------------------------------------------------------
6,456 5,770 4,422
Non-interest expense 118 103 95
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,338 5,667 4,327
Income tax benefit 40 14 130
- -------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 6,378 5,681 4,457
Equity in undistributed earnings of subsidiaries 3,789 3,746 4,302
- -------------------------------------------------------------------------------------------------------------------
Net income $10,167 $9,427 $8,759
- -------------------------------------------------------------------------------------------------------------------
The Parent Company only Statements of Changes in Stockholders' Equity are
identical to the consolidated statements and therefore are not presented
here.
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 10,167 $ 9,427 $ 8,759
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (3,789) (3,746) (4,302)
Decrease (increase) in other assets -- 25 (25)
Decrease in accrued income taxes payable (59) (21) (80)
Deferred income tax benefit (4) (2) --
Increase in other liabilities 13 6 10
(Decrease) increase in amount due to subsidiaries (3) (121) 121
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,325 5,568 4,483
- -------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Payments to acquire treasury stock (1,665) (3,534) (3,082)
Issuance of common stock under stock option plan 467 738 891
Tax benefit resulting from stock options exercised -- 28 8
Dividends paid on common stock (3,124) (2,459) (1,981)
Tax benefit resulting from dividends paid on unallocated
shares held by the ESOP 15 15 --
- -------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,307) (5,212) (4,164)
- -------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,018 356 319
Cash and cash equivalents at beginning of year 1,385 1,029 710
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,403 $ 1,385 $ 1,029
- -------------------------------------------------------------------------------------------------------------------
During the years ended December 31, 1997, 1996 and 1995, the Company made
cash payments for income taxes of $16 thousand, $23 thousand and $13
thousand, respectively, and no payments for interest.
In addition, the Company made cash payments to the state of
Delaware for franchise taxes in the amount of $42 thousand, $41 thousand
and $28 thousand during the years ended December 31, 1997, 1996 and 1995,
respectively.
64
42
19. TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 10,167 $9,427 $ 8,759 $8,185 $6,695 $ 4,677 $ 2,250 $ 725
Basic earnings per share(2) 2.88 2.65 2.43 2.19 1.71 1.22 0.59 0.16
Cash dividends declared per share(2) 0.88 1/2 0.69 0.54 3/4 0.45 0.34 0.26 1/2 0.22 3/4 0.22
Book value per share, at year end(2) 29.06 25.75 24.84 20.09 20.46 18.37 17.54 16.20
Return on average assets 1.12% 1.08% 1.04% 0.96% 0.79% 0.61% 0.60% 0.23%
Return on average realized equity(1) 11.11% 11.01% 10.81% 10.62% 8.98% 6.79% 3.39% 1.03%
================================================================================================================================
- -------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1989 1988
- -------------------------------------------------------------
Net income $2,668 $4,917
Basic earnings per share(2) 0.50 0.86
Cash dividends declared per share(2) 0.21 0.19
Book value per share, at year end(2) 15.16 14.21
Return on average assets 0.86% 1.56%
Return on average realized equity(1) 3.38% 6.20%
=============================================================
(1) Excludes average net unrealized gains or losses on securities
available for sale.
(2) All share information presented has been adjusted to reflect the
4-for-3 and 3-for-2 split of the Company's common stock effective
September 15, 1997 and September 9, 1994, respectively.
20. QUARTERLY DATA (UNAUDITED)
- -------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT 4th 3rd 2nd 1st
PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------
Interest and dividend income $15,496 $15,460 $15,017 $14,760
Interest expense 8,840 8,937 8,555 8,349
- -------------------------------------------------------------------------------------------------
Net interest income 6,656 6,523 6,462 6,411
Provision for loan losses 95 45 52 68
- -------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,561 6,478 6,410 6,343
Non-interest income 882 886 1,136 894
Non-interest expense 3,115 3,191 3,924 3,195
- -------------------------------------------------------------------------------------------------
Income before income taxes 4,328 4,173 3,622 4,042
Income tax expense 1,672 1,584 1,173 1,569
- -------------------------------------------------------------------------------------------------
Net income $ 2,656 $ 2,589 $ 2,449 $ 2,473
=================================================================================================
Earnings per share (in dollars):(1)
Basic $ 0.75 $ 0.74 $ 0.69 $ 0.70
Diluted 0.72 0.70 0.67 0.68
- -------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding:(1)
Basic 3,521 3,520 3,529 3,530
Diluted 3,683 3,671 3,653 3,647
=================================================================================================
- -------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT 4th 3rd 2nd 1st
PER SHARE DATA) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------
Interest and dividend income $14,828 $14,767 $14,390 $14,124
Interest expense 8,473 8,441 8,139 8,009
- -------------------------------------------------------------------------------------------------
Net interest income 6,355 6,326 6,251 6,115
Provision for loan losses 10 85 35 30
- -------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,345 6,241 6,216 6,085
Non-interest income 621 703 724 617
Non-interest expense 3,117 2,921 3,030 3,056
- -------------------------------------------------------------------------------------------------
Income before income taxes 3,849 4,023 3,910 3,646
Income tax expense 1,459 1,579 1,540 1,423
- -------------------------------------------------------------------------------------------------
Net income $ 2,390 $ 2,444 $ 2,370 $ 2,223
=================================================================================================
Earnings per share (in dollars):(1)
Basic $ 0.68 $ 0.69 $ 0.66 $ 0.62
Diluted 0.66 0.67 0.65 0.60
- -------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding:(1)
Basic 3,524 3,526 3,574 3,604
Diluted 3,629 3,621 3,673 3,711
=================================================================================================
(1) Computation of earnings per share is further described in Note 1.
65
43
MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA
YEARS ENDED DECEMBER 31, 1997 AND 1996
MASSBANK Corp.'s common stock is currently traded on the Nasdaq Stock
Market under the symbol "MASB." At December 31, 1997 there were 3,570,778
shares outstanding and 957 shareholders of record. Shareholders of record
do not reflect the number of persons or entities who hold their stock in
nominee or "street" name.
The following table includes the quarterly ranges of high and low
sales prices for the common stock, as reported by Nasdaq, and dividends
declared per share for the periods indicated.
- ------------------------------------------------------------------------------------
PRICE PER SHARE(1) CASH
------------------------- DIVIDENDS
HIGH LOW DECLARED
- ------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------------
Fourth Quarter 48 1/4 41 $ 0.24
Third Quarter 47 1/2 35 5/8 0.24
Second Quarter 35 13/16 29 29/32 0.2025
First Quarter 31 7/8 28 1/8 0.2025
- ------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------------
Fourth Quarter 29 1/16 24 27/32 $ 0.18
Third Quarter 25 11/16 24 3/8 0.18
Second Quarter 25 5/16 24 9/16 0.165
First Quarter 25 7/8 23 1/4 0.165
- ------------------------------------------------------------------------------------
(1) Stock prices have been adjusted to reflect the 4-for-3 split of the
Company's common stock effective September 15, 1997.
CORPORATE INFORMATION
MASSBANK Corp.
123 Haven Street
Reading, MA 01867
(781) 662-0100
FAX (781) 942-1022
Savings and Mortgage
24-Hour-Rate Lines
(781) 662-0154
(978) 446-9285
Notice of Shareholders' Meeting
The Annual Meeting of the
Shareholders of MASSBANK Corp.
will be held at 10:00 A.M.
on Tuesday, April 21, 1998 at the
Tara Ferncroft Conference Center
50 Ferncroft Road
Danvers, MA 01923
Trademark
MASSBANK and its logo are
registered trademarks of
the Company
Form 10-K
Shareholders may obtain without
charge a copy of the Company's
1997 Form 10-K. Written requests
should be addressed to:
Shareholder Services
MASSBANK Corp.
159 Haven Street
Reading, MA 01867
Dividend Reinvestment and
Stock Purchase Plan
Shareholders may obtain a brochure
containing a detailed description of
the plan by writing to:
Shareholder Services
MASSBANK Corp.
159 Haven Street
Reading, MA 01867
Transfer Agent
Boston EquiServe
Shareholder Services
P.O. Box 644
Boston, MA 02102-0644
Independent Auditors
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Reports on Effectiveness
of Internal Control Structure
Over Financial Reporting
Shareholders may obtain without
charge a copy of Management's
and the Independent Auditors'
1997 Reports on the Effectiveness
of the Company's Internal Control
Structure Over Financial Reporting.
Written requests should be
addressed to:
Shareholder Services
MASSBANK Corp.
159 Haven Street
Reading, MA 01867
66
44
OFFICERS AND DIRECTORS
MASSBANK CORP.
OFFICERS
Gerard H. Brandi
Chairman, President and
Chief Executive Officer
Reginald E. Cormier
Vice President, Treasurer and
Chief Financial Officer
Robert S. Cummings
Secretary
Donna H. West
Assistant Secretary
BOARD OF DIRECTORS
Samuel Altschuler
President, Altron Incorporated
*Mathias B. Bedell
Retired, Bedell Brothers Insurance
Agency, Inc.
*Gerard H. Brandi
Chairman, President and
Chief Executive Officer,
MASSBANK Corp.
Allan S. Bufferd
Deputy Treasurer and
Director of Investments
Massachusetts Institute of Technology
+Peter W. Carr
Retired, Guilford Transportation
Industries
Alexander S. Costello
Editorial Page Editor,
Lowell Sun Publishing Co., Inc.
*Robert S. Cummings
Senior Partner, Peabody and Brown
Louise A. Hickey
Retired, Melrose-Wakefield Hospital
Leonard Lapidus
United States Government Official
*Stephen E. Marshall
President, C.H. Cleaves Insurance
Agency, Inc.
+Arthur W. McPherson
Certified Financial Planner
+*Herbert G. Schurian
Certified Public Accountant
*Dr. Donald B. Stackhouse
Dentist
*Member, Executive Committee
+Member, Audit Committee
OFFICERS AND DIRECTORS
MASSBANK
OFFICERS
Gerard H. Brandi
Chairman, President and
Chief Executive Officer
Donald R. Washburn
Senior Vice President, Lending
Donna H. West
Senior Vice President,
Community Banking
Raymond A. Brearey
Vice President,
Senior Trust Officer
David F. Carroll
Vice President, Operations
Reginald E. Cormier
Vice President, Treasurer
and Chief Financial Officer
Marilyn H. Abbott
Assistant Treasurer
Andrea S. Bradford
Assistant Vice President
Gregory W. Bowe
Assistant Vice President
Ernest G. Campbell, Jr.
Collections Officer
Marianne J. Carpenter
Assistant Treasurer
Charles F. Coupe
Information Officer
Janet L. Daniels
Assistant Vice President
Aunali Dohadwala
Auditor
Karen J. Downs
Assistant Treasurer
Karen L. Flammia
Assistant Vice President
Melissa J. Flanagan
Assistant Treasurer
Ana M. Foster
Compliance and
Security Officer
Gerard F. Frechette
Loan Officer
Rachael E. Garneau
Assistant Treasurer
Margo E. Higgins
Assistant Vice President
and Human Resources
Officer
Brian W. Hurley
Assistant Vice President
Kenneth A. Masson
Assistant Vice President
Mindy S. Peloquin
Assistant Treasurer
Thomas J. Queeney
Assistant Vice President
Renald A. Robillard
Assistant Treasurer
Alice B. Sweeney
Assistant Comptroller
Richard A. Tatarczuk
Assistant Vice President
and Comptroller
Patricia A. Witts
Assistant Treasurer
Michael J. Woods
Assistant Vice President
BOARD OF DIRECTORS AND
EXECUTIVE COMMITTEE
Mathias B. Bedell
Gerard H. Brandi, Chairman
Robert S. Cummings, Clerk
Stephen E. Marshall
Herbert G. Schurian
Dr. Donald B. Stackhouse
Donna H. West
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MASSBANK BRANCH OFFICES d/b/a
MASSBANK of Reading*
123 Haven Street
Reading, MA 01867
(781) 942-8188
MASSBANK of Chelmsford
296 Chelmsford Street
Eastgate Plaza
Chelmsford, MA 01824
(978) 256-3751
17 North Road
Chelmsford, MA 01824
(978) 256-3733
MASSBANK of Dracut
45 Broadway Road
Dracut, MA 01826
(978) 441-0040
MASSBANK of Everett
738 Broadway
Everett, MA 02149
(617) 387-5115
MASSBANK of Lowell
50 Central Street
Lowell, MA 01852
(978) 446-9200
755 Lakeview Avenue
Lowell, MA 01850
(978) 446-9216
MASSBANK of Medford
4110 Mystic Valley Parkway
Wellington Circle Plaza
Medford, MA 02155
(781) 395-4899
MASSBANK of Melrose
476 Main Street
Melrose, MA 02176
(781) 662-0100
27 Melrose Street
Towers Plaza
Melrose, MA 02176
(781) 662-0165
MASSBANK of Stoneham
240 Main Street
Stoneham, MA 02180
(781) 662-0177
MASSBANK of Tewksbury
1800 Main Street
Tewksbury, MA 01876
(978) 851-0300
MASSBANK of Westford
203 Littleton Road
Westford, MA 01886
(978) 692-3467
MASSBANK of Wilmington
370 Main Street
Wilmington, MA 01887
(978) 658-4000
219 Lowell Street
Lucci's Plaza
Wilmington, MA 01887
(978) 658-5775
*Main Office
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