1
FINANCIAL HIGHLIGHTS
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MASSBANK CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
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(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
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BALANCE SHEET DATA:
Total assets $946,625 $925,403 $888,237 $854,542 $843,647
Mortgage loans 283,654 248,798 224,139 220,603 220,269
Other loans 21,335 23,505 25,522 28,582 30,547
Allowance for loan losses 2,450 2,334 2,237 2,529 2,566
Investments(1) 624,082 635,694 622,645 586,768 568,635
Real estate acquired through foreclosure 86 -- 503 255 129
Deposits 824,031 809,850 788,350 753,657 759,676
Stockholders' equity 110,489 103,779 92,250 90,817 74,504
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(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
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OPERATING DATA:
Interest and dividend income $ 59,834 $ 60,733 $ 58,109 $ 56,611 $ 51,451
Interest expense 34,320 34,681 33,062 30,896 26,152
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Net interest income 25,514 26,052 25,047 25,715 25,299
Provision for loan losses 193 260 160 170 705
Gains (losses) on securities, net 2,893 1,939 868 92 (533)
Other non-interest income 1,697 1,859 1,797 1,856 3,070
Non-interest expense 12,515 13,425 12,124 13,178 14,213
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Income before income taxes 17,396 16,165 15,428 14,315 12,918
Income tax expense 6,482 5,998 6,001 5,556 4,733
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Net income $ 10,914 $ 10,167 $ 9,427 $ 8,759 $ 8,185
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YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
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OTHER DATA:
Yield on average interest-earning assets 6.56% 6.81% 6.84% 6.90% 6.22%
Cost of average interest-bearing liabilities 4.23 4.30 4.27 4.11 3.41
Interest rate spread 2.33 2.51 2.57 2.79 2.81
Net interest margin 2.81 2.93 2.96 3.15 3.07
Non-interest expense to average assets(5) 1.35 1.39 1.40 1.57 1.67
Efficiency ratio(2)(5)(6) 41.4 43.0 43.5 47.4 50.8
Return on assets (net income/average assets) 1.17 1.12 1.08 1.04 0.96
Return on equity (net income/average
stockholders' equity) 10.05 10.51 10.65 10.65 10.62
Return on average realized equity(3) 11.08 11.11 11.01 10.81 10.62
Percent non-performing loans to total loans 0.33 0.65 0.64 0.97 0.84
Percent non-performing assets to total assets 0.12 0.19 0.24 0.31 0.26
Stockholders' equity to assets, at year-end 11.67 11.21 10.39 10.63 8.83
Book value per share, at year-end(4) $ 31.58 $ 29.06 $ 25.75 $ 24.84 $ 20.09
Earnings per share:(4)
Basic 3.09 2.88 2.65 2.43 2.19
Diluted 2.97 2.77 2.58 2.34 2.13
Cash dividends declared per share(4) 1.02 0.885 0.69 0.5475 0.45
Dividend payout ratio 33% 31% 26% 23% 21%
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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
1998 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.
The Company's earnings results are also affected by the provision for loan
losses; non-interest income, such as fee-based revenues and net securities
gains; non-interest expense; and income taxes.
FINANCIAL CONDITION
Total assets at December 31, 1998 were $946.6 million, up $21.2 million or
2.3% from $925.4 million a year ago. The growth in total assets was driven by
$32.7 million growth in the loan portfolio, offset by a decline of $11.6
million in the investment portfolio. Other assets increased by $0.1 million
in 1998.
The Bank's total loan portfolio at December 31, 1998 amounted to $305.0
million compared with $272.3 million at December 31, 1997, an increase of $32.7
million or 12.0%. MASSBANK benefited from the favorable mortgage interest rate
environment in 1998. Loan originations reached record levels in 1998 due to an
increased volume of home mortgage refinancing. Loan originations totaled $105.2
million in 1998, up 79.5% or $46.6 million, compared with $58.6 million in 1997.
The increase in the total loan portfolio was achieved despite a continued
high level of principal amortization and payoffs in the Bank's loan portfolio,
making it more difficult to grow the portfolio. This is due in part to the
shorter term mortgages 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 deposits,
decreased from $635.7 million at December 31, 1997 to $624.1 million at December
31, 1998. The decrease is mainly attributable to a decrease in mortgage-backed
securities and U.S. Treasury and government agency securities, offset by an
increase in trading and equity securities, and term federal funds sold. The
primary component of the Bank's investment securities portfolio, mortgage-backed
securities, accounted for 43.7% of total investments at December 31, 1998, down
from 52.0% at year-end 1997. Mortgage-backed securities which totaled $330.7
million at year-end 1997 decreased to $272.6 million at year-end 1998 due
primarily to the significant pre-payments received during 1998.
This decrease in total investments was offset in part by a change in net
unrealized gains on securities available for sale from $15.5 million at December
31, 1997 to $19.8 million at December 31, 1998, a net increase in market value
of $4.3 million. The increase in market value of the Bank's investment
securities available for sale portfolio is directly related to the upward
movement in both bond and stock prices in 1998.
The change in the market value of the Bank's securities available for sale
also had the effect of increasing stockholders' equity by $2.6 million since
year-end 1997. The net unrealized gains on securities available for sale, net of
tax effect reported as part of stockholders' equity totaled $11.7 million at
year-end 1998, up from $9.1 million at December 31, 1997. Total stockholder s'
equity was $110.5 million at December 31, 1998, up $6.7 million from $103.8
million at December 31, 1997. Also contributing to the increase in stockholders'
equity was the Company's record net income of $10.9 million in 1998 and the
issuance of common stock under the Company's stock option plan. These were
partially offset by the payment of $3.6 million in dividends to stockholders and
the cost of additional shares of treasury stock repurchased during the year in
the amount of $4.7 million. The Company's book value per share at December 31,
1998 was $31.58, up $2.52 or 8.7% 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. Total deposits increased $14.1 million during
1998 to $824.0 million at December 31, 1998 from $809.9 million at year-end
1997.
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3
ASSET QUALITY
Asset quality continued to improve during 1998. Nonaccrual loans, generally
those loans which are 90 days or more delinquent, amounted to only $1.0
million at December 31, 1998, compared to $1.8 million at December 31, 1997.
The bank's provision for loan losses, which amounted to $260 thousand in
1997, decreased by $67 thousand to $193 thousand in 1998, partially as a
result of lower net loan charge-offs. Loan charge-offs, net of recoveries,
amounted to $77 thousand in 1998, down from $268 thousand in 1997 and $452
thousand in 1996.
The Bank continued to add to its allowance for loan losses in 1998 in
response to increased residential lending. The bank's allowance for loan losses
at December 31, 1998 totaled approximately $2.5 million, representing 244.0% of
nonaccrual loans and 0.80% 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. Real estate acquired through foreclosure totaled $86
thousand at year-end 1998.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 1998 AND 1997
MASSBANK Corp. recorded net income for the year ended December 31, 1998 of
$10.9 million or $3.09 in basic earnings per share compared to $10.2 million
or $2.88 in basic earnings per share for the year ended December 31, 1997.
This was the sixth consecutive year of record net income for the Company.
Diluted earnings per share for 1998 increased to $2.97 from $2.77 in the
prior year.
In 1998, MASSBANK's return on average assets rose to 1.17% from 1.12% in
the prior year. Return on average realized equity was 11.08% in 1998, down
slightly from 11.11% in 1997. The Company's favorable earnings performance in
1998 is mainly attributable to higher securities gains and lower non-interest
expenses and provision for loan losses, partially offset by a decrease in net
interest income and non-interest income (exclusive of securities gains).
NET INTEREST INCOME
The Company's net interest income on a fully taxable equivalent ("FTE") basis
was $25.7 million in 1998, a decrease of $0.5 million from the prior year.
The decrease is the result of a lower net interest margin, due mainly to the
flattening of the yield curve which was seen in 1998, partially offset by the
positive effect of earning asset growth. The Company's net interest margin
was 2.81% in 1998, down from its prior year net interest margin of 2.93%. The
Company's average earning assets increased $18.3 million or 2.0% to $912.9
million in 1998, from $894.6 million in 1997.
The tables on pages 19 and 20 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 effected 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 a fully taxable equivalent basis was $60.0
million for the year ended December 31, 1998, compared to $60.9 million for
the year ended December 31, 1997. The average total earning assets of the
Company increased to $912.9 million in 1998, up $18.3 million from $894.6
million in 1997. As reflected in the table on page 19, the Company saw a
decline in yield in all categories of earning assets this past year. This
resulted in an overall decline in yield on total average earning assets of
25 basis points in 1998. The yield on average earning assets for the year
ended December 31, 1998 was 6.56% compared to 6.81% in the prior year.
As exhibited in the rate volume analysis table on page 20, the total effect
of lower market interest rates on interest income in 1998 was a $1.9 million
decline from 1997. Conversely, the total effect of higher average earning assets
on interest income in 1998 was a $1.0 million increase over 1997, resulting in a
net decrease in total interest and dividend income of $899 thousand from 1997.
INTEREST EXPENSE
Total interest expense decreased 1.0% to $34.3 million for the year ended
December 31, 1998 from $34.7 million for the year ended December 31, 1997.
This decrease is due to a decrease in the Company's average cost of funds
from 4.30% in 1997 to 4.23% in 1998, partially offset by the higher interest
expense resulting from an increase in the Company's average total deposits,
from $807.3 million in 1997 to $811.6 million in 1998.
The principal reason for the Company's lower cost of funds was lower market
interest rates in 1998.
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4
INTEREST EXPENSE (CONTINUED)
As exhibited in the rate/volume analysis table on page 20, the effect on
total interest expense from changes in interest-bearing deposit rates from a
year ago was a $522 thousand decrease from 1997. Conversely, the total effect of
higher average deposits on interest expense in 1998 was a $161 thousand increase
over 1997, resulting in a net decrease in total interest expense of $361
thousand from 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1998 was $193 thousand compared to $260
thousand in 1997. 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 loan portfolio, underlying collateral, current and anticipated economic
conditions, and trends in loan delinquencies and charge-offs. At December 31,
1998, the allowance for loan losses was approximately $2.5 million representing
244.0% of non-performing loans. The Bank's non-performing loans totaled $1.0
million at December 31, 1998 compared to $1.8 million a year earlier. Net
charge-offs totaled $77 thousand in 1998 compared to $268 thousand in 1997.
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 $4.6 million for the year ended December
31, 1998, from $3.8 million for the year ended December 31, 1997. This
improvement is due to an increase in securities gains in 1998.
Net gains on securities totaled $2.9 million in 1998 compared to $1.9
million in the prior year. The bank's equity securities portfolio continued to
contribute significant returns in 1998 through a combination of gains on the
sale of securities in the amount of $2.6 million and unrealized gains. The
pretax unrealized gains in the bank's equity securities portfolio amounted to
$10.5 million at year-end 1998, up from $8.2 million at December 31, 1997. All
other non-interest income combined decreased $162 thousand to $1.7 million from
$1.9 million in the prior year.
NON-INTEREST EXPENSE
One measure often used in the banking industry to assess the level of
non-interest expense is the efficiency ratio. The efficiency ratio measures
how much it cost to generate one dollar of revenue. MASSBANK's efficiency
ratio continued its steady improvement of the past several years, reaching
41.4% in 1998.
MASSBANK's non-interest expenses (i.e., operating expenses) decreased by
$910 thousand to $12.5 million in 1998, from $13.4 million a year ago. This
decrease is due largely to non-recurring expenses incurred in 1997, summarized
below, and to a decrease in compensation expenses which are tied to the
Company's stock performance.
Salaries and employee benefits decreased by $317 thousand or 4.1%, to $7.4
million in 1998, from $7.7 million in 1997. The decrease reflects a reduction of
$311 thousand in Deferred Compensation Plan expenses which are tied to the
Company's stock performance. The price of MASSBANK Corp. stock decreased by
$8.50 or 17.8% in 1998, from $47.62 at December 31, 1997 to $39.12 at December
31, 1998. Conversely, in 1997 the Company saw the price of it's common stock
increase by $19.03 or 66.6%. This significantly increased Deferred Compensation
Plan expenses in 1997. Normal salary increases and higher employee benefit
costs, in 1998, were partly offset by staff reductions and more loan origination
related salary expenses (which are amortized over the life of the loan) being
deferred due to increased residential lending activity in 1998.
Occupancy and equipment expense decreased by $37 thousand to $2.1 million
in 1998. This decrease reflects a reduction in utilities expenses and a drop in
real estate tax expenses due to real estate tax abatements received in 1998.
Data processing expenses increased by $72 thousand to $510 thousand in
1998, from $438 thousand in the previous year. 1997 expenses, however, reflect a
reduction $150 thousand due to a one-time credit the bank negotiated as part of
its initial contract with a new service bureau. This temporary reduction in data
processing expense was used in part to defray nonrecurring expenses the bank
incurred in converting to the new service bureau.
Professional services expenses increased by $54 thousand to $461 thousand
in 1998, from $407 thousand in 1997. This increase was due mostly to higher
legal fees.
In 1998, the Company did not incur any merger and acquisition related
expenses. As a result, 1998 expenses when compared to the prior year, show a
decrease of $156 thousand due to the nonrecurring merger and acquisition related
expenses incurred in 1997 in connection with the bank's acquisition of the
Glendale Co-operative Bank ("Glendale").
Advertising and marketing expenses declined slightly in 1998 to $171
thousand, from $187 thousand in the prior year.
The amortization of intangibles expense increased by $51 thousand to $302
thousand in 1998, from $251 thousand in 1997. The increase reflects the
additional amortization of goodwill recorded in 1998 in connection with the
Glendale acquisition. In 1997, the goodwill was only amortized for a partial
year since the acquisition was completed in July of that year.
11
5
NON-INTEREST EXPENSE (CONTINUED)
Deposit insurance expense totaled $116 thousand in 1998, unchanged from the
prior year.
The bank's contributions expense decreased by $650 thousand to $14 thousand
in 1998, from $664 thousand in the prior year. This decrease is due to a
significant contribution made in the prior year. The bank, in 1997, contributed
appreciated securities valued at $622 thousand to establish and endow a tax
exempt private foundation. The establishment of the MASSBANK Charitable
Foundation benefits the bank by reducing its contributions expense in 1998 and
future years, since many of the contributions previously made by the bank are
now made by the Foundation.
Other expenses increased by $89 thousand to $1.5 million in 1998, from $1.4
million in 1997 due to increases in several other non-interest expense
categories.
INCOME TAX EXPENSE
The Company recorded a tax expense of $6.5 million in 1998 compared to $6.0
million in 1997. The increase in income tax expense is due primarily to
higher pretax earnings and a slight increase in the Company's effective
income tax rate. The effective income tax rate for the year ended December
31, 1998 was 37.3%, up from 37.1% in the prior year. The increase in the
Company's effective income tax rate in 1998 was due to a non-recurring tax
benefit in the amount of $260 thousand the Company recorded in 1997 as a
result of having donated appreciated securities to establish and endow a tax
exempt private foundation. This reduced the effective income tax rate for
1997. In 1998, there were two factors which reduced the effective income tax
rate for the year. The Company, in 1998, received a state tax refund, net of
federal tax, of approximately $44 thousand due to the settlement of a state
tax issue from prior years. It also changed its year-end for tax filing
purposes from October 31 to December 31. This change, because of the bank tax
reform legislation signed into law in 1995 which lowered the bank tax rate
from 12.54% to 10.50% over five years, accelerated the scheduled reduction
in the Bank's state excise tax rate by one full year from 11.32% to 10.91%.
For years beginning after 1998, the rate is 10.50%. For further information
on income taxes, see Note 12 of Notes to Consolidated Financial Statements.
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 thousand 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 19 and 20 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 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 19, 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.
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6
INTEREST AND DIVIDEND INCOME (CONTINUED)
As exhibited in the rate/volume analysis table on page 20, the total effect
of lower market interest 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 19, 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 20, 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.
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 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.
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7
NON-INTEREST EXPENSE (CONTINUED)
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 thousand 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.
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, 1998, the Bank had $123.2 million or 13.0% of total
assets and $124.0 million or 13.1% 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
CAMELS 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, qualifying subordinated debt and up to 45 percent of the pretax
net unrealized holding gains on certain available for sale equity securities.
Tier I capital plus the Tier II capital components are referred to as total
qualifying capital.
The capital ratios of the Bank and the Company currently exceed the minimum
regulatory requirements. At December 31, 1998, the Bank had a leverage Tier I
capital to average assets ratio of 10.34%, a Tier I capital to risk-weighted
assets ratio of 31.59% and a total capital to risk-weighted assets ratio of
34.00%. The Company, on a consolidated basis, had ratios of leverage Tier I
capital to average assets of 10.61%, Tier I capital to risk-weighted assets of
32.40% and total capital to risk-weighted assets of 34.81% at December 31, 1998.
14
8
YEAR 2000 ISSUE
As we near the 21st century, MASSBANK is taking important steps to tackle the
computer glitch dubbed the Year 2000 Problem, Y2K, or Millennium Bug. The
problem originated from software designers' attempt to save memory by
recording years in a two digit format "98" instead of "1998" for example
which didn't take into account that the year 2000, or "00" could also be
interpreted, by any system that has time sensitive software, as the year 1900
rather than the year 2000. This could result in a system failure or in
miscalculations.
In May 1997, the Company organized a Year 2000 project team to address the
Y2K critical issues in order to resolve its Year 2000 computer problems. The
project team provides direct oversight of the Year 2000 initiative. The
Company's Board of Directors receives project updates on a quarterly basis and
the Bank's Board of Directors receives a monthly project update.
The project team has completed its assessment of the Company's technology
and non-information technology systems, such as vault doors, elevators, and
security systems, to identify the systems that could be affected by the Year
2000 issue and has developed a plan to address this issue. The project plan,
which incorporates the Federal Financial Institutions Examination Council
("FFIEC") recommended guidelines, encompasses a service bureau for systems that
are outsourced, in-house systems, vendors, customers and suppliers (including
correspondent banks). In addition to addressing the Company's technology issues,
the project plan includes a customer awareness program designed to keep the
bank's customers informed about the Year 2000 issue and the Company's state of
readiness.
The Company has incurred and will continue to incur expenses in connection
with the testing and upgrading of its computer systems to prepare for the Year
2000. Year 2000 project expenditures approximated $53 thousand in 1998.
Approximately $33 thousand of the expenditures were expensed as incurred, while
the cost of new hardware and software of approximately $20 thousand was
capitalized and will be amortized over the software and hardware's useful life.
The capitalized expenditures represent the cost of a new general ledger system
and the replacement of some personal computers that were not Year 2000 ready.
Expenses for the remainder of the Year 2000 project are not expected to exceed
$300 thousand. This includes an estimated $150 thousand to upgrade the Bank's
check processing equipment. Since the majority of these expenditures will be to
replace or upgrade existing hardware and software, the majority of these
expenditures will be capitalized and amortized in accordance with the Company's
standard accounting practices.
The Company relies on a third party service bureau for its primary business
processes (e.g., loans and deposits applications). It continues to work closely
with the service bureau to monitor the progress of their Year 2000 efforts. The
service bureau's Y2K remediation efforts are also being monitored by the federal
banking regulators. The service bureau expects to have substantially completed
the remediation and testing of all its applications by the end of the first
quarter of 1999. The Company's testing with the service bureau that began April
1998 is expected to be substantially completed by the end of the second quarter
of 1999. However, the Company expects to continue testing into the third quarter
of 1999.
The Company has made significant progress in testing, upgrading, and/or
replacing its information systems to assure Y2K compliance. The testing of all
of the Company's computer hardware and mission critical internal information
systems has been substantially completed, with the exception of its trust and
items processing department systems. These systems are being replaced with
hardware and software that is Year 2000 ready. The delivery of these systems is
expected by May 1999 and the Company expects testing to be substantially
completed by the end of the second quarter of 1999.
Most of the Company's other date sensitive systems operate on software
supported by outside vendors. The Company continues to monitor the progress of
their Year 2000 efforts and is seeking to receive written verification from
these vendors as to their Year 2000 readiness.
Testing of the Company's non-mission critical internal information systems
and interfaces is expected to be substantially completed by June 30, 1999.
Examination of the Company's non-information technology systems indicated that
no significant replacements are required for Year 2000 readiness.
While the Company continues to receive written verification from its
service bureau and vendors as to their Year 2000 compliance, and continues to
test their systems, there is no guarantee that these systems will not fail in
the Year 2000. Also, there can be no assurance that the systems of other
companies, banks, government agencies, etc. that interface with the Company will
be timely remediated. If they are not successful, the Year 2000 problem could
have a material effect on the Company's operations. The Company, therefore, has
drafted contingency and business resumption plans for its primary lines of
business. These plans are being enhanced to address potential Year 2000
scenarios. This process will be completed by the end of the second quarter of
1999.
The expenditures of the project and the dates on which the Bank plans to
complete Year 2000 testing and contingency and business resumption plans, are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availablility of certain
resources, third party modification plans and other factors.
Management presently does not believe that the Year 2000 issue will result
in significant operational problems for the Company. In addition, the Company's
efforts to address the Year 2000 issue are being monitored by its federal
banking regulators. Failure to be Year 2000 compliant on a timely basis could
subject the Company to formal supervisory or enforcement actions.
15
9
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 analysis 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
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 net interest income has 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 net
interest income has 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.
16
10
INTEREST RATE RISK (CONTINUED)
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,
1998. As of this date, the Company's one-year cumulative GAP position was
negative $21.6 million, or approximately 2.28% 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 $ 32,525 $ 14,469 $ 30,637 $165,685 $ 61,673 $304,989
Short-term investments:
Federal funds sold 123,207 -- -- -- -- 123,207
Investment in money market funds 24,569 -- -- -- -- 24,569
Term federal funds sold 25,000 -- -- -- -- 25,000
Interest-bearing deposits in banks 544 749 -- 740 -- 2,033
Securities held to maturity 42 82 -- 230 -- 354
Securities available for sale 60,306 27,401 48,818 212,210 69,391 418,126
Trading securities 30,793 -- -- -- -- 30,793
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $296,986 $ 42,701 $ 79,455 $378,865 $131,064 $929,071
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits $277,176 $ 83,556 $ 79,989 $ 99,968 $260,931 $801,620
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $277,176 $ 83,556 $ 79,989 $ 99,968 $260,931 $801,620
- ----------------------------------------------------------------------------------------------------------------------------
GAP for period $ 19,810 $(40,855) $ (534) $278,897 $129,867) $127,451
Cumulative GAP $ 19,810 $(21,045) $(21,579) $257,318 $127,451
Cumulative GAP as a percent of total assets 2.09% (2.22%) (2.28%) 27.18% 13.46%
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative GAP - December 31, 1997 $(52,503) $(85,716) $(99,394) $186,310 $115,560
==============================================================================================================================
17
11
INTEREST RATE RISK (CONTINUED)
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, 1998.
- -----------------------------------------------------------------------------------------------------------------------------------
EXPECTED MATURITY DATE
AT DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE
(IN THOUSANDS) 1998 1999 2000 2001 2002 THEREAFTER TOTAL AT 12/31/98
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE ASSETS:
Fixed rate securities $111,888 $ 81,582 $56,145 $48,685 $26,028 $ 69,391 $393,719 $393,719
Average interest rate(1) 6.40% 6.56% 6.54% 6.58% 6.77% 6.61% 6.54%
Variable rate securities 52,373 979 -- -- -- 2,202 55,554 55,554
Average interest rate(1) 4.18% 4.61% -- -- -- 6.49% 4.28%
Fixed rate loans 50,443 39,631 32,807 28,677 30,437 59,948 241,943 248,997
Average interest rate 6.99% 6.99% 7.01% 7.04% 6.99% 6.93% 6.98%
Variable rate loans 13,313 10,501 7,562 5,720 4,353 21,597 63,046 63,841
Average interest rate 7.64% 7.61% 7.62% 7.67% 7.74% 8.13% 7.81%
Other fixed rate assets 26,293 639 101 -- -- -- 27,033 27,033
Average interest rate 5.54% 6.11% 5.50% -- -- -- 5.55%
Other variable rate assets 147,776 -- -- -- -- -- 147,776 147,776
Average interest rate 4.96% -- -- -- -- -- 4.96%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive assets $402,086 $133,332 $96,615 $83,082 $60,818 $153,138 $929,071 $936,920
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE LIABILITIES:
Savings and money market
deposit accounts $ 5,504 $ 3,901 $ 3,804 $ 3,714 $ 3,631 $327,495 $348,049 $348,049
Average interest rate 3.23% 3.20% 3.21% 3.21% 3.22% 3.44% 3.43%
Fixed rate certificates of deposit 251,132 56,103 9,428 1,134 538 156 318,491 320,007
Average interest rate 5.22% 5.26% 5.25% 5.40% 5.19% 4.92% 5.23%
Variable rate certificates of deposit 33,730 28,772 19,415 116 -- -- 82,033 82,033
Average interest rate 5.79% 5.90% 6.02% 6.02% -- -- 5.88%
NOW accounts -- -- -- -- -- 52,324 52,324 52,324
Average interest rate -- -- -- -- -- 1.16% 1.16%
Escrow deposits of borrowers 1,438 -- -- -- -- -- 1,438 1,438
Average interest rate 0.25% -- -- -- -- -- 0.25%
Deposit acquisition premium,
net of amortization (226) (230) (230) (29) -- -- (715) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive liabilities $291,578 $ 88,546 $32,417 $ 4,935 $ 4,169 $379,975 $801,620 $803,851
- ------------------------------------------------------------------------------------------------------------------------------------
(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 $21.6 million at December 31, 1998. The net
unrealized gains on these securities totaled $10.5 million at year-end 1998.
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.
18
12
AVERAGE BALANCE SHEETS
==================================================================================================================================
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
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 $ 137,123 $ 7,316 5.34% $106,890 $ 5,840 5.46% $ 95,253 $ 5,084 5.34%
Short-term investments(2) 26,792 1,440 5.37 26,369 1,459 5.53 23,656 1,259 5.32
Investment securities 145,863 8,473 5.81 166,949 10,554 6.32 194,229 12,586 6.48
Mortgage-backed securities 299,368 20,496 6.85 321,521 22,368 6.96 277,409 19,353 6.98
Trading securities 16,460 819 4.98 12,741 735 5.77 9,719 563 5.79
Mortgage loans(1) 264,898 19,413 7.33 235,587 17,704 7.51 225,005 16,933 7.53
Other loans(1) 22,375 2,021 9.03 24,584 2,224 9.05 26,993 2,481 9.19
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 912,879 59,978 6.56% 894,641 60,884 6.81% 852,264 58,259 6.84%
==================================================================================================================================
Allowance for
loan losses (2,375) (2,245) (2,414)
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 910,504 892,396 849,850
Other assets 19,512 18,956 19,194
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 930,016 $911,352 $869,044
==================================================================================================================================
LIABILITIES:
Deposits:
Demand and NOW $ 70,159 554 0.79% $ 65,895 536 0.81% $ 63,969 574 0.90%
Savings 349,637 11,959 3.42 355,395 12,240 3.44 358,056 12,268 3.43
Time certificates of deposit 391,816 21,807 5.57 386,062 21,905 5.67 352,385 20,220 5.74
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 811,612 34,320 4.23 807,352 34,681 4.30 774,410 33,062 4.27
- ----------------------------------------------------------------------------------------------------------------------------------
Other liabilities 9,776 7,296 6,106
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 821,388 814,648 780,516
==================================================================================================================================
STOCKHOLDERS' EQUITY: 108,628 96,704 88,528
Total liabilities and
stockholders' equity $ 930,016 $911,352 $869,044
==================================================================================================================================
Net interest income (tax-
equivalent basis) 25,658 26,203 25,197
Less adjustment of tax-
exempt interest income (144) (151) (150)
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 25,514 $ 26,052 $ 25,047
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.33% 2.51% 2.57%
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest margin(3) 2.81% 2.93% 2.96%
==================================================================================================================================
(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.
19
13
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.
- --------------------------------------------------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
(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 $ 1,616 $ (140) $ 1,476 $ 634 $ 122 $ 756
Short-term investments 23 (42) (19) 148 52 200
Investment securities (1,248) (826) (2,074) (1,708) (325) (2,033)
Trading securities 194 (110) 84 174 (2) 172
Mortgage-backed securities (1,521) (351) (1,872) 3,069 (54) 3,015
Mortgage loans 2,157 (448) 1,709 795 (24) 771
Other loans (200) (3) (203) (218) (39) (257)
- --------------------------------------------------------------------------------------------------------------
Total interest and dividend income 1,021 (1,920) (899) 2,894 (270) 2,624
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Demand and NOW 34 (16) 18 17 (55) (38)
Savings (197) (84) (281) (92) 64 (28)
Time certificates of deposit 324 (422) (98) 1,913 (228) 1,685
- --------------------------------------------------------------------------------------------------------------
Total interest expense 161 (522) (361) 1,838 (219) 1,619
- --------------------------------------------------------------------------------------------------------------
Net interest income $ 860 $(1,398) $ (538) $ 1,056 $ (51) $ 1,005
==============================================================================================================
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
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair market
value. Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This Statement is not expected to have a material effect on the Company's
consolidated financial statements.
20
14
INDEPENDENT AUDITORS' REPORT
[KPMG PEAT MARWICK LLP LOGO OMITTED]
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 11, 1999
21
15
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 7,038 $ 6,808
Short-term investments (Note 2) 147,776 109,755
- -----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 154,814 116,563
- -----------------------------------------------------------------------------------------------------
Term federal funds sold 25,000 20,000
Interest-bearing deposits in banks 2,033 2,083
Securities held to maturity, at amortized cost
(market value of $354 in 1998 and $372 in 1997) (Note 3) 354 372
Securities available for sale, at market value
(amortized cost of $398,343 in 1998 and $466,749 in 1997) (Note 3) 418,126 482,224
Trading securities, at market value (Note 4) 30,793 21,260
Loans (Notes 5, 7 and 11):
Mortgage loans 283,654 248,798
Other loans 21,335 23,505
- -----------------------------------------------------------------------------------------------------
Total loans 304,989 272,303
Less: allowance for loan losses (Note 6) (2,450) (2,334)
- -----------------------------------------------------------------------------------------------------
Net loans 302,539 269,969
- -----------------------------------------------------------------------------------------------------
Premises and equipment (Note 9) 4,320 4,369
Real estate acquired through foreclosure (Note 7) 86 --
Accrued interest receivable 5,058 5,395
Goodwill 1,387 1,487
Other assets 2,115 1,681
- -----------------------------------------------------------------------------------------------------
Total assets $946,625 $925,403
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Notes 10 and 11):
Demand and NOW $ 76,173 $ 66,859
Savings 348,049 352,875
Time certificates of deposit 400,524 391,034
Deposit acquisition premium, net of amortization (715) (918)
- -----------------------------------------------------------------------------------------------------
Total deposits 824,031 809,850
Escrow deposits of borrowers 1,438 1,502
Employee stock ownership plan liability (Note 15) 625 781
Accrued and deferred income taxes payable (Note 12) 7,484 6,167
Other liabilities 2,558 3,324
- -----------------------------------------------------------------------------------------------------
Total liabilities 836,136 821,624
- -----------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 8 and 9)
Stockholders' equity (Notes 12, 14, 15 and 16): -- --
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, 7,384,332 and 7,336,800 shares issued, respectively 7,384 7,337
Additional paid-in capital 60,003 58,737
Retained earnings 78,308 70,984
- -----------------------------------------------------------------------------------------------------
145,695 137,058
Treasury stock at cost, 3,885,222 and 3,766,022 shares, respectively (46,272) (41,569)
Accumulated other comprehensive income (Note 1) 11,691 9,071
Common stock acquired by ESOP (Note 15) (625) (781)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 110,489 103,779
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $946,625 $925,403
=====================================================================================================
See accompanying notes to consolidated financial statements.
22
16
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Mortgage loans $ 19,413 $ 17,704 $ 16,933
Other loans 2,021 2,224 2,481
Securities available for sale:
Mortgage-backed securities 20,496 22,368 19,353
Other securities 8,310 10,385 12,425
Trading securities 819 735 563
Federal funds sold 7,316 5,840 5,084
Other investments 1,459 1,477 1,270
- ------------------------------------------------------------------------------------------------------
Total interest and dividend income 9,834 60,733 58,109
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
NOW 554 536 574
Savings 11,959 12,240 12,268
Time certificates of deposit 21,807 21,905 20,220
- ------------------------------------------------------------------------------------------------------
Total interest expense 34,320 34,681 33,062
- ------------------------------------------------------------------------------------------------------
Net interest income 25,514 26,052 25,047
PROVISION FOR LOAN LOSSES (NOTE 6) 193 260 160
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 25,321 25,792 24,887
- ------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Deposit account service fees 811 924 932
Gains on securities, net 2,893 1,939 868
Other 886 935 865
- ------------------------------------------------------------------------------------------------------
Total non-interest income 4,590 3,798 2,665
- ------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 7,426 7,743 7,215
Occupancy and equipment 2,059 2,096 1,977
Data processing 510 438 608
Professional services 461 407 340
Merger and acquisition related expense -- 156 --
Advertising and marketing 171 187 220
Amortization of intangibles 302 251 230
Deposit insurance 116 116 13
Contributions 14 664 60
Other 1,456 1,367 1,461
- ------------------------------------------------------------------------------------------------------
Total non-interest expense 12,515 13,425 12,124
- ------------------------------------------------------------------------------------------------------
Income before income taxes 17,396 16,165 15,428
INCOME TAX EXPENSE (NOTE 12) 6,482 5,998 6,001
- ------------------------------------------------------------------------------------------------------
Net income $ 10,914 $ 10,167 $ 9,427
======================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,528,817 3,524,657 3,556,660
Diluted 3,676,642 3,663,310 3,658,505
EARNINGS PER SHARE (IN DOLLARS):
Basic $ 3.09 $ 2.88 $ 2.65
Diluted 2.97 2.77 2.58
======================================================================================================
See accompanying notes to consolidated financial statements.
23
17
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,914 $ 10,167 $ 9,427
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization 928 853 735
Loan interest capitalized (88) -- --
Amortization of ESOP shares committed to be released 243 184 63
Charitable contribution of appreciated securities -- 622 5
Decrease in accrued interest receivable 337 464 1,633
(Decrease) increase in other liabilities (734) 56 (388)
(Decrease) increase in current income taxes payable (517) 435 (75)
Accretion of discounts on securities, net of
amortization of premiums (1,152) (1,178) (1,052)
Net trading securities activity (8,671) (16,480) 2,065
Gains on securities available for sale (2,798) (1,831) (950)
(Gains) losses on trading securities (95) (108) 82
Increase in deferred mortgage loan origination fees, net of
amortization 231 168 114
Deferred income tax (benefit) expense 146 (372) 238
Decrease (increase) in other assets 85 553 (74)
Loans originated for sale (129) (770) (215)
Loans sold 129 770 378
Provision for loan losses 193 260 160
Provisions for losses and writedowns on real estate acquired
through foreclosure -- (21) 32
Gains on sales of real estate acquired through foreclosure (5) (34) (26)
Gains on sales of premises and equipment -- (1) (2)
(Decrease) increase in escrow deposits of borrowers (64) 231 279
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1,047) (6,032) 12,429
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and cash equivalents for acquisitions -- (2,874) --
Purchases of term federal funds (35,000) (30,000)
Proceeds from maturities of term federal funds 30,000 20,000 5,000
Increase in interest-bearing bank deposits (766) (1,649) (810)
Proceeds from maturities of interest-bearing bank deposits 816 1,240 --
Proceeds from sales of investment securities available for sale 26,580 42,741 49,940
Proceeds from maturities of investment securities held to maturity
and available for sale 43,650 59,000 86,225
Purchases of investment securities available for sale (59,291) (63,696) (56,196)
Purchases of investment securities held to maturity -- (230) --
Purchases of mortgage-backed securities (10,043) (63,661) (135,854)
Principal repayments of mortgage-backed securities 70,203 42,246 36,858
Principal repayments of securities held to maturity 18 18 17
Principal repayments of securities available for sale 4 85 --
Loans originated (105,103) (57,787) (51,152)
Loan principal payments received 71,687 48,560 49,118
Loans purchased -- (201) --
Purchases of premises and equipment (508) (491) (310)
Proceeds from sale of premises and equipment -- 9 2
Proceeds from sale of real estate acquired through foreclosure 316 964 511
Net advances on real estate acquired through foreclosure (20) (30) --
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 32,543 (5,756) (26,651)
- ---------------------------------------------------------------------------------------------------------------
(Continued)
24
18
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 13,978 (8,523) 34,463
Payments to acquire treasury stock (4,703) (1,665) (3,534)
Issuance of common stock under stock option plan 741 466 738
Tax benefit resulting from stock options exercised 329 260 266
Cash dividends paid on common stock (3,605) (3,124) (2,459)
Tax benefit resulting from dividends paid on unallocated shares
held by the ESOP 15 15 15
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,755 (12,571) 29,489
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 38,251 (24,359) 15,267
Cash and cash equivalents at beginning of year 116,563 140,922 125,655
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 154,814 $ 116,563 $ 140,922
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH TRANSACTIONS:
Cash paid during the year for interest $ 34,319 $ 34,671 $ 33,026
Cash paid during the year for taxes 6,185 5,237 5,557
NON-CASH TRANSACTIONS:
SFAS 115:
Increase (decrease) in stockholders' equity 2,620 5,070 (3,239)
Increase (decrease) in deferred tax liabilities 1,688 3,510 (2,329)
Securities reclassified from available for sale to trading 1,111 -- --
Transfers from loans to real estate acquired through foreclosure 377 376 765
Transfers from loans to other assets 56 -- --
Transfers from premises and equipment to other assets 9 -- --
Purchases of securities incomplete (not settled) at beginning of
year which settled during the year 32 -- --
Purchase of securities incomplete (not settled) as of year-end 129 32 --
Sales of securities incomplete (not settled) as of year-end 583 -- 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.
25
19
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $5,425 $56,842 $ 58,773 $(36,370) $ 7,240 $(1,093) $ 90,817
Net Income -- -- 9,427 -- -- -- 9,427
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment -- -- -- -- (3,239) -- (3,239)
-------
Comprehensive income -- -- -- -- -- -- 6,188
Cash dividends declared
($0.69 per share) -- -- (2,459) -- -- -- (2,459)
Tax benefit resulting from dividends paid
on unallocated shares held by the ESOP -- -- 15 -- -- -- 15
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 63 -- -- -- -- 63
Purchase of treasury stock -- -- -- (3,534) -- -- (3,534)
Exercise of stock options and
related tax benefits 51 953 -- -- -- -- 1,004
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,476 57,858 65,756 (39,904) 4,001 (937) 92,250
Net Income -- -- 10,167 -- -- -- 10,167
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (Note 1) -- -- -- -- 5,070 -- 5,070
-------
Comprehensive income -- -- -- -- -- -- 15,237
Cash dividends declared
($0.885 per share) -- -- (3,124) -- -- -- (3,124)
Tax benefit resulting from dividends paid
on unallocated shares held by the ESOP -- -- 15 -- -- -- 15
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 184 -- -- -- -- 184
Purchase of treasury stock -- -- -- (1,665) -- -- (1,665)
Exercise of stock options and
related tax benefits 31 695 -- -- -- -- 726
Transfer resulting from four-for-three
stock split 1,830 -- (1,830) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 7,337 58,737 70,984 (41,569) 9,071 (781) 103,779
Net Income -- -- 10,914 -- -- -- 10,914
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (Note 1) -- -- -- -- 2,620 -- 2,620
-------
Comprehensive income -- -- -- -- -- -- 13,534
Cash dividends declared
($1.02 per share) -- -- (3,605) -- -- -- (3,605)
Tax benefit resulting from dividends paid
on unallocated shares held by the ESOP -- -- 15 -- -- -- 15
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 243 -- -- -- -- 243
Purchase of treasury stock -- -- -- (4,703) -- -- (4,703)
Exercise of stock options and
related tax benefits 47 1,023 -- -- -- -- 1,070
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $7,384 $60,003 $ 78,308 $(46,272) $ 11,691 $ (625) $ 110,489
===================================================================================================================================
See accompanying notes to consolidated financial statements.
26
20
MASSBANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 subsidiary MASSBANK and its subsidiaries: Readibank
Properties, Inc., Readibank Investment Corporation and Melbank Investment
Corporation. The accounts of MASSBANK'S subsidiary, Readibank Equipment
Corporation, which was sold in October, 1997 are also included through the
sale date.
The Company has one reportable operating segment. 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, 1998, stockholders' equity included
approximately $11.7 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 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.
27
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.
28
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.
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 $2.7 million and $3.6 million at
December 31, 1998 and 1997, 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 pretax earnings, management believes it is
more likely than not that the Bank will realize its existing gross deferred
tax asset.
REPORTING COMPREHENSIVE INCOME
The Company has adopted 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.
Comparative financial statements provided for earlier periods have been
reclassified to reflect application of the provisions of the Statement. The
adoption of this Statement did not have a material impact on the Company's
financial presentation.
The Company's other comprehensive income and related tax effect
for the year ended December 31, 1998 and the year ended December 31, 1997 is
as follows:
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
TAX NET- TAX NET-
BEFORE-TAX (EXPENSE) OF-TAX BEFORE-TAX (EXPENSE) OF-TAX
AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gains on securities:
Unrealized holding gains arising during period $ 7,106 $(2,864) $ 4,242 $ 10,411 $(4,290) $ 6,121
Less: reclassification adjustment for
gains realized in net income (2,798) 1,176 (1,622) (1,831) 780 (1,051)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized gains 4,308 (1,688) 2,620 8,580 (3,510) 5,070
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 4,308 $(1,688) $ 2,620 $ 8,580 $(3,510) $ 5.070
======================================================================================================================
29
23
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment
of SFAS Nos. 87, 88 and 106." SFAS No. 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures required by SFAS Nos. 87, 88
and 106. The adoption of this pronouncement also requires restatement of
disclosures for earlier periods. The adoption of this pronouncement did not
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, 1998 1997
- ------------------------------------------------------------
Federal funds sold (overnight) $123,207 $ 85,241
Money market funds 24,569 24,514
- ------------------------------------------------------------
Total short-term investments $147,776 $109,755
============================================================
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, 1998 COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------
Securities held to maturity:
Other bonds and obligations $ 354 $ -- $ -- $ 354
----------------------------------------------------------------------------------------------
Total securities held to maturity 354 -- -- 354
----------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations 112,627 2,354 -- 114,981
U.S. Government agency obligations 8,966 26 -- 8,992
----------------------------------------------------------------------------------------------
Total 121,593 2,380 -- 123,973
----------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage Association 48,347 1,517 -- 49,864
Federal Home Loan Mortgage Corporation 205,949 5,116 (6) 211,059
Federal National Mortgage Association 4,984 181 -- 5,165
Collateralized mortgage obligations 6,193 60 (3) 6,250
Other 223 12 -- 235
----------------------------------------------------------------------------------------------
Total mortgage-backed securities 265,696 6,886 (9) 272,573
----------------------------------------------------------------------------------------------
Total debt securities 387,289 9,266 (9) 396,546
----------------------------------------------------------------------------------------------
Equity securities 11,054 10,579 (53) 21,580
----------------------------------------------------------------------------------------------
Total securities available for sale 398,343 $19,845 $ (62) $418,126
----------------------------------------------------------------------------------------------
Net unrealized gains on securities:
available for sale 19,783
----------------------------------------------------------------------------------------------
Total securities available for sale, net 418,126
----------------------------------------------------------------------------------------------
Total investment securities, net $418,480
==============================================================================================
30
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, 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
===================================================================================================================
During the years ended December 31, 1998, 1997 and 1996, the Company
realized gains and losses on sales of securities available for sale as
follows:
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
REALIZED Realized Realized
GAINS LOSSES Gains Losses Gains Losses
- -------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 180 $-- $ 38 $ (35) $ 118 $(103)
Mortgage-backed securities -- -- -- (301) -- (166)
Marketable equity securities 3,577 (959) 2,201 (96) 1,146 (45)
Other equity securities -- -- 25 -- -- --
- -------------------------------------------------------------------------------------------------
Total realized gains (losses) $3,757 $(959) $2,264 $(432) $1,264 $(314)
=================================================================================================
Proceeds from sales of debt securities available for sale during 1998, 1997
and 1996 were $13.1 million, $34.1 million and $40.8 million, respectively.
Proceeds from sales of equity securities available for sale during 1998,
1997 and 1996, were $13.7 million, $8.6 million and $9.1 million,
respectively.
There were no sales of investment securities held-to-maturity during
1998, 1997 and 1996.
31
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, 1998 1997
- ---------------------------------------------------------------------------------------------------
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 $ 230 $ 230
Maturing after 5 years but within 10 years 82 82 97 97
Maturing after 10 years but within 15 years 42 42 45 45
- ---------------------------------------------------------------------------------------------------
Total debt securities held to maturity 354 354 372 372
===================================================================================================
Investment securities available for sale:
U.S. Treasury obligations:
Maturing within 1 year 50,876 51,260 35,869 36,001
Maturing after 1 year but within 5 years 58,790 60,557 85,530 87,020
Maturing after 5 years but within 10 years 2,961 3,164 -- --
- ---------------------------------------------------------------------------------------------------
Total 112,627 114,981 121,399 123,021
- ---------------------------------------------------------------------------------------------------
U.S. Government agency obligations:
Maturing within 1 year 2,000 2,006 2,000 2,006
Maturing after 1 year but within 5 years 6,771 6,788 6,600 6,614
Maturing after 5 years but within 10 years -- -- 1,000 994
Maturing after 15 years 195 198 200 199
- ---------------------------------------------------------------------------------------------------
Total 8,966 8,992 9,800 9,813
- ---------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Maturing within 1 year 371 367 312 311
Maturing after 1 year but within 5 years 6,014 6,155 8,826 8,984
Maturing after 5 years but within 10 years 35,087 36,073 30,677 31,617
Maturing after 10 years but within 15 years 219,579 225,298 279,147 283,631
Maturing after 15 years 4,645 4,680 6,142 6,188
- ---------------------------------------------------------------------------------------------------
Total 265,696 272,573 325,104 330,731
- ---------------------------------------------------------------------------------------------------
Total debt securities available for sale 387,289 396,546 456,303 463,565
===================================================================================================
Net unrealized gains on debt securities
available for sale 9,257 -- 7,262 --
- ---------------------------------------------------------------------------------------------------
Total debt securities available for sale,
net carrying value $396,546 $396,546 $463,565 $463,565
===================================================================================================
Mortgage-backed securities are shown at their contractual maturity but are
expected to have shorter average lives due to normal principal amortization
and prepayments.
32
26
4. TRADING SECURITIES
The amortized cost and market values of trading securities are as follows:
- -----------------------------------------------------------------------------------------
(In thousands) AT DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
- -----------------------------------------------------------------------------------------
U.S. Treasury obligations $29,690 $29,707 $18,548 $18,542
Investments in mutual funds 1,112 1,086 2,757 2,718
- -----------------------------------------------------------------------------------------
Total trading securities $30,802 $30,793 $21,305 $21,260
=========================================================================================
During the years ended December 31, 1998, 1997 and 1996, the Company realized
gains and losses on sales of trading securities as follows:
- -----------------------------------------------------------------------------------------
(In thousands) YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
REALIZED REALIZED REALIZED
GAINS LOSSES GAINS LOSSES GAINS LOSSES
- -----------------------------------------------------------------------------------------
U.S. Treasury obligations $ 48 $ -- $22 $ -- $-- $ --
Investments in mutual funds 11 (35) -- (33) -- (44)
Marketable equity securities 55 (20) 46 -- 65 --
- -----------------------------------------------------------------------------------------
Total realized gains
(losses) $114 $(55) $68 $(33) $65 $(44)
=========================================================================================
Proceeds from sales of trading securities during 1998, 1997 and 1996 were $50.2
million, $16.3 million and $3.1 million, respectively. Unrealized gains or
(losses) included in income in 1998, 1997 and 1996 were $36 thousand, $73
thousand and $(103) 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.
33
27
5. LOANS (continued)
The composition of the Bank's loan portfolio is summarized as follows:
- -----------------------------------------------------------------------------------------
(In thousands) AT DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------
Mortgage loans:
Residential:
Conventional:
Fixed rate $237,979 $193,319
Variable rate 42,702 50,163
FHA and VA 1,181 1,843
Commercial 2,257 3,861
Construction 730 492
- -----------------------------------------------------------------------------------------
Total mortgage loans 284,849 249,678
Add: premium on loans 259 343
Less: deferred mortgage loan origination fees (1,454) (1,223)
- -----------------------------------------------------------------------------------------
Mortgage loans, net 283,654 248,798
- -----------------------------------------------------------------------------------------
Other loans:
Consumer:
Installment 1,547 2,199
Guaranteed education 7,967 8,934
Other secured 1,366 1,600
Home equity lines of credit 10,159 10,470
Unsecured 235 266
- -----------------------------------------------------------------------------------------
Total consumer loans 21,274 23,469
Commercial 61 36
- -----------------------------------------------------------------------------------------
Total other loans 21,335 23,505
- -----------------------------------------------------------------------------------------
Total loans $304,989 $272,303
=========================================================================================
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, 1998 follows:
- -----------------------------------------------------------------------------------------
(In thousands)
- -----------------------------------------------------------------------------------------
Balance at December 31, 1997 $340
Additions 342
Repayments (120)
- -----------------------------------------------------------------------------------------
Balance at December 31, 1998 $562
=========================================================================================
34
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, 1998 1997 1996
- -----------------------------------------------------------------------------------------
Balance at beginning of year $2,334 $2,237 $2,529
Glendale Co-operative Bank acquisition -- 105 --
Provision for loan losses 193 260 160
Recoveries of loans previously charged-off 26 59 90
- -----------------------------------------------------------------------------------------
Total 2,553 2,661 2,779
- -----------------------------------------------------------------------------------------
Less charge-offs:
Mortgage loans (81) (221) (480)
Other loans (22) (106) (62)
- -----------------------------------------------------------------------------------------
Balance at end of year $2,450 $2,334 $2,237
=========================================================================================
The following table shows the allocation of the allowance for loan losses by
category of loans at December 31, 1998, 1997 and 1996.
- -----------------------------------------------------------------------------------------
(In thousands) AT DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF LOANS OF LOANS OF LOANS
AMOUNT TO TOTAL AMOUNT TO TOTAL AMOUNT TO TOTAL
- -----------------------------------------------------------------------------------------
Mortgage loans:
Residential $1,786 92% $1,544 90% $1,915 88%
Commercial 2 1 12 1 3 2
Consumer loans 153 7 160 9 119 10
Other loans 25 -- -- -- 57 --
Unallocated 484 -- 618 -- 143 --
- -----------------------------------------------------------------------------------------
Total $2,450 100% $2,334 100% $2,237 100%
=========================================================================================
7. NON-PERFORMING ASSETS
The following schedule summarizes non-performing assets at the dates shown:
- -----------------------------------------------------------------------------------------
(In thousands) AT DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
Total nonaccrual loans $1,004 $1,771 $1,601
Total real estate acquired through foreclosure 86 -- 503
- -----------------------------------------------------------------------------------------
Total non-performing assets $1,090 $1,771 $2,104
=========================================================================================
Percent of non-performing loans to total loans 0.33% 0.65% 0.64%
Percent of non-performing assets to total assets 0.12% 0.19% 0.24%
The reduction in interest income associated with nonaccrual loans is as follows:
- -----------------------------------------------------------------------------------------
(In thousands) YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
Interest income that would have been recorded
under original terms $84 $163 $149
Interest income actually recorded 61 97 78
- -----------------------------------------------------------------------------------------
Reduction in interest income $23 $ 66 $ 71
=========================================================================================
During 1998, 1997 and 1996 the Company had no impaired loans.
35
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, 1998 1997
- -----------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent
credit risk:
Commitments to originate residential mortgage loans $ 7,941 $ 4,090
Unadvanced portions of construction loans 281 496
Unused credit lines, including unused portions of
equity lines of credit 29,163 19,445
=========================================================================================
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, 1998 1997 (IN YEARS)
- -----------------------------------------------------------------------------------------
Premises:
Land $1,227 $1,227 --
Buildings 3,637 3,642 25-45
Building and leasehold improvements 1,937 1,635 1-20
Equipment 3,606 3,405 1-30
- -----------------------------------------------------------------------------------------
10,407 9,909
Less: accumulated depreciation and amortization 6,087 5,540
- -----------------------------------------------------------------------------------------
Total premises and equipment, net $4,320 $4,369
=========================================================================================
The Bank is obligated under a number of noncancelable operating leases for
various banking offices. These operating leases expire at various dates through
2006 with options for renewal. Rental expenses for the years ended December 31,
1998, 1997 and 1996 amounted to $518 thousand, $522 thousand and $508 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, 1998, are as follows:
- -----------------------------------------------------------------------------------------
(In thousands) YEARS ENDING DECEMBER 31, PAYMENTS
- -----------------------------------------------------------------------------------------
1999 $ 465
2000 252
2001 252
2002 165
2003 110
Later years 98
- -----------------------------------------------------------------------------------------
Total $1,342
=========================================================================================
36
30
10. DEPOSITS
Deposits are summarized as follows:
- -----------------------------------------------------------------------------------------
(In thousands) AT DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE
- -----------------------------------------------------------------------------------------
Demand and NOW:
NOW accounts $ 52,324 1.16% $ 47,944 1.14%
Demand accounts 23,849 -- 18,915 --
- -----------------------------------------------------------------------------------------
Total demand and NOW 76,173 0.80 66,859 0.82
- -----------------------------------------------------------------------------------------
Savings:
Regular savings and special notice accounts 326,192 3.46 329,348 3.47
Money market accounts 21,857 2.99 23,527 3.09
- -----------------------------------------------------------------------------------------
Total savings 348,049 3.43 352,875 3.44
- -----------------------------------------------------------------------------------------
Time certificates:
Fixed rate certificates 318,491 5.23 316,368 5.53
Variable rate certificates 82,033 5.88 74,666 6.48
- -----------------------------------------------------------------------------------------
Total time certificates 400,524 5.36 391,034 5.71
- -----------------------------------------------------------------------------------------
Deposit acquisition premium, net of amortization (715) -- (918) --
- -----------------------------------------------------------------------------------------
Total deposits $824,031 4.13% $809,850 4.32%
=========================================================================================
The maturity distribution and related rate structure of the Bank's time
certificates at December 31, 1998 follows:
- -----------------------------------------------------------------------------------------
(In thousands) AT DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------
AVERAGE
AMOUNT INTEREST RATE
- -----------------------------------------------------------------------------------------
Due within 3 months $103,985 5.34%
Due within 3-6 months 87,696 5.10
Due within 6-12 months 93,181 5.41
Due within 1-2 years 84,874 5.48
Due within 2-3 years 28,843 5.77
Due within 3-5 years 1,789 5.38
Thereafter 156 4.92
- -----------------------------------------------------------------------------------------
Total $400,524 5.36%
=========================================================================================
At December 31, the Bank had individual time certificates of deposit of $100
thousand or more maturing as follows:
- -----------------------------------------------------------------------------------------
(In thousands) AT DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------
Due within 3 months $24,283 $22,757
Due within 3-6 months 13,338 9,298
Due within 6-12 months 15,511 17,969
Due within 1-2 years 16,997 12,293
Due within 2-3 years 6,759 8,602
Due within 3-5 years 100 114
- -----------------------------------------------------------------------------------------
Total $76,988 $71,033
=========================================================================================
37
31
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 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, 1998 and 1997
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, 1998 1997
- -----------------------------------------------------------------------------------------
CARRYING CALCULATED CARRYING CALCULATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -----------------------------------------------------------------------------------------
Securities held to maturity $ 354 $ 354 $ 372 $ 372
Securities available for sale 418,126 418,126 482,224 482,224
Trading securities 30,793 30,793 21,260 21,260
- -----------------------------------------------------------------------------------------
Total securities $449,273 $449,273 $503,856 $503,856
=========================================================================================
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, 1998 1997
- -----------------------------------------------------------------------------------------
CARRYING CALCULATED CARRYING CALCULATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -----------------------------------------------------------------------------------------
Real estate:
Residential:
Variable $ 42,617 $ 43,142 $ 50,068 $ 50,709
Fixed 238,787 245,858 194,881 199,220
Commercial:
Variable 2,243 2,267 3,833 3,867
Fixed 7 7 16 16
Consumer and other 21,335 21,564 23,505 23,438
- -----------------------------------------------------------------------------------------
Total loans 304,989 312,838 272,303 277,250
Less: allowance for loan losses (2,450) -- (2,334) --
- -----------------------------------------------------------------------------------------
Net loans $302,539 $312,838 $269,969 $277,250
=========================================================================================
38
32
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
DEPOSITS
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, 1998 and 1997. 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, 1998 1997
- -----------------------------------------------------------------------------------------
CARRYING CALCULATED CARRYING CALCULATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -----------------------------------------------------------------------------------------
Demand accounts $ 23,849 $ 23,849 $ 18,915 $ 18,915
NOW accounts 52,324 52,324 47,944 47,944
Regular savings and special
notice accounts 326,192 326,192 329,348 329,348
Money market accounts 21,857 21,857 23,527 23,527
Time certificates 400,524 402,040 391,034 391,926
Deposit acquisition premium, net
of amortization (715) -- (918) --
- -----------------------------------------------------------------------------------------
Total deposits 824,031 826,262 809,850 811,660
Escrow deposits of borrowers 1,438 1,438 1,502 1,502
- -----------------------------------------------------------------------------------------
Total $825,469 $827,700 $811,352 $813,162
========================================================================================
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, 1998 and 1997 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 active 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.
39
33
12. INCOME TAXES
Income tax payable was allocated as follows:
- -----------------------------------------------------------------------------------------
(In thousands) AT DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------
Current income tax payable (receivable):
Federal $1,010 $1,192
State (287) 48
- -----------------------------------------------------------------------------------------
Total current income tax payable 723 1,240
- -----------------------------------------------------------------------------------------
Deferred income tax payable:
Federal 5,298 3,735
State 1,463 1,192
- -----------------------------------------------------------------------------------------
Total deferred income tax payable 6,761 4,927
- -----------------------------------------------------------------------------------------
Total income tax payable $7,484 $6,167
=========================================================================================
Income tax expense (benefit) was allocated as follows:
- -----------------------------------------------------------------------------------------
(In thousands) YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
Current income tax expense:
Federal $5,565 $5,096 $4,641
State 771 1,034 1,122
- -----------------------------------------------------------------------------------------
Total current tax expense 6,336 6,130 5,763
=========================================================================================
Deferred income tax expense (benefit):
Federal 110 (102) 194
State 40 (26) 53
Change in valuation reserve (4) (4) (9)
- -----------------------------------------------------------------------------------------
Total deferred tax expense (benefit) 146 (132) 238
- -----------------------------------------------------------------------------------------
Total income tax expense $6,482 $5,998 $6,001
=========================================================================================
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, 1998 1997 1996
- -----------------------------------------------------------------------------------------
Computed "expected" income tax expense at statutory rate $6,089 $5,658 $5,400
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit 527 656 764
Dividends received deduction (87) (95) (94)
Other (43) (217) (60)
Change in valuation reserve (4) (4) (9)
- -----------------------------------------------------------------------------------------
Income tax expense $6,482 $5,998 $6,001
- -----------------------------------------------------------------------------------------
Effective income tax rate 37.26% 37.10% 38.90%
=========================================================================================
40
34
12. INCOME TAXES (continued)
At December 31, 1998 and 1997, the Bank had gross deferred tax assets and gross
deferred tax liabilities as follows:
- -----------------------------------------------------------------------------------------
(In thousands) YEARS ENDED DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------
Deferred tax assets:
Loan losses $ 431 $ 257
Deferred loan fees, net 100 195
Deferred compensation and pension cost 463 546
Depreciation 33 83
Purchase accounting 419 468
Other 6 26
- -----------------------------------------------------------------------------------------
Gross deferred tax asset 1,452 1,575
- -----------------------------------------------------------------------------------------
Deferred tax liabilities:
Valuation of securities 8,092 6,404
Other unrealized securities gains 102 86
Other 19 12
- -----------------------------------------------------------------------------------------
Gross deferred tax liability 8,213 6,502
- -----------------------------------------------------------------------------------------
Net deferred tax liability $6,761 $4,927
=========================================================================================
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, 1998. The primary sources of
recovery of the gross federal deferred tax asset are federal income taxes paid
in 1998, 1997 and 1996 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.
13. EARNINGS PER SHARE
The following is a calculation of earnings per share for the years indicated:
- ----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
(In thousands except share data) Basic Diluted Basic Diluted Basic Diluted
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 10,914 $ 10,914 $ 10,167 $ 10,167 $ 9,427 $ 9,427
Average shares outstanding 3,571,298 3,571,298 3,575,962 3,575,962 3,616,769 3,616,769
Dilutive stock options -- 147,825 -- 138,653 -- 101,845
Unallocated Employee Stock
Ownership Plan ("ESOP") shares
not committed to be released (42,481) (42,481) (51,305) (51,305) (60,109) (60,109)
- ----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 3,528,817 3,676,642 3,524,657 3,663,310 3,556,660 3,658,505
Earnings per share (in dollars) $ 3.09 $ 2.97 $ 2.88 $ 2.77 $ 2.65 $ 2.58
======================================================================================================================
41
35
14. 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, 1998.
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
CAMELS 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, qualifying subordinated debt and up to 45 percent of the pretax
net unrealized holding gains on certain available for sale equity securities.
Tier I capital plus the Tier II capital components are 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, 1998 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1)
- ------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------
TIER I CAPITAL (TO AVERAGE ASSETS):
Massbank Corp. (consolidated) $ 96,696 10.61% $27,349 3.00 N/A --
Massbank (the "Bank") 94,305 10.34 27,349 3.00 $45,583 5.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
Massbank Corp. (consolidated) 96,696 32.40 11,936 4.00 N/A --
Massbank (the "Bank") 94,305 31.59 11,939 4.00 17,909 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Massbank Corp. (consolidated) 103,883 34.81 23,872 8.00 N/A --
Massbank (the "Bank") 101,492 34.00 23,878 8.00 29,848 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, 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.
42
36
15. 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, 1998 and 1997, the plan's latest valuation dates:
- -------------------------------------------------------------------------------------------------
(In thousands) YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Actuarial present value of vested benefits $4,442 $4,028 $3,636
Total accumulated benefit obligation 4,481 4,063 3,661
Change in benefit obligation
Projected benefit obligation at beginning of year $4,990 $4,287 $4,622
Service cost 443 367 309
Interest cost 362 321 308
Actuarial loss (gain) 283 221 (742)
Benefits paid (290) (206) (210)
- -------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year $5,788 $4,990 $4,287
=================================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $5,810 $5,090 $4,181
Actual return on plan assets 469 926 667
Employer contribution 254 -- 452
Benefits paid (290) (206) (210)
- -------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $6,243 $5,810 $5,090
- -------------------------------------------------------------------------------------------------
Excess of plan assets over projected benefit obligation $ 455 $ 820 $ 803
=================================================================================================
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:
Unrecognized net actuarial gain $ 487 $ 886 $ 670
Transition asset 190 211 232
Accrued benefit cost (222) (277) (99)
- -------------------------------------------------------------------------------------------------
Excess of plan assets over projected benefit obligation $ 455 $ 820 $ 803
=================================================================================================
Assumptions used in determining the actuarial
present value of the projected benefit obligation
were as follows:
Discount rate 6.75% 7.25% 7.50%
Rate of compensation increase 4.50% 4.50% 4.50%
Assumptions used to develop the
net periodic benefit cost data were:
Discount rate 7.25% 7.50% 7.00%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.50% 4.50% 4.50%
Components of net periodic benefit cost
Service cost $ 443 $ 367 $ 309
Interest cost 362 322 308
Expected return on plan assets (465) (407) (335)
Transition obligation (21) (21) (21)
Recognized net actuarial (gain) loss (119) (84) 7
- -------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 200 $ 177 $ 268
=================================================================================================
43
37
15. 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 $399 thousand, $417 thousand
and $418 thousand were awarded under the plan in 1998, 1997 and 1996,
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,
1998 and 1997, such outstanding liabilities totaled $625 thousand and $781
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, 1998, the ESOP held
35,200 unallocated shares and 123,563 shares which have been allocated to
participants. The fair value of the unallocated shares at December 31, 1998 was
approximately $1.4 million.
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
$462 thousand, $398 thousand and $314 thousand for the years ended December 31,
1998, 1997 and 1996, 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 $105
thousand, $132 thousand and $99 thousand in 1998, 1997 and 1996, 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 360,000 shares.
Both incentive stock options and non-qualified stock options may be granted
under the plans. As of December 31, 1998, there were 141,010.7 non-qualified
stock options and 206,906.6 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.
44
38
15. EMPLOYEE BENEFITS (CONTINUED)
A summary of the status of the Company's fixed stock option plan as of December
31, 1998, 1997 and 1996, and changes during the years ended on those dates is
presented below:(1)
- --------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
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 360,200 $17.65 347,166.7 $ 15.46 369,776 $13.60
Granted 35,250 44.25 48,333.3 30.09 46,000 23.40
Exercised (47,532) 15.59 (35,300) 13.19 (68,605.3) 10.74
Forfeited (0.7) 30.09 -- -- (4) 8.63
- --------------------------------------------------------------------------------------------------------
Outstanding at end of year 347,917.3 $20.62 360,200 $17.65 347,166.7 $15.46
- --------------------------------------------------------------------------------------------------------
Options exercisable at year-end 347,917.3 360,200 347,166.7 --
- --------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options outstanding
and exercisable at December 31, 1998:
- ----------------------------------------------------------------------------------------
AT DECEMBER 31, 1998 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 61,700 2.6 years $ 8.66 61,700 $ 8.66
16.00 to $17.34 159,884 4.8 years 16.62 159,884 16.62
18.28 to $19.88 3,666.7 6.5 years 19.44 3,666.7 19.44
23.25 to $44.25 122,666.6 8.0 years 31.89 122,666.6 31.89
- ----------------------------------------------------------------------------------------
$6.88 to $44.25 347,917.3 5.5 years $20.62 347,917.3 $20.62
========================================================================================
(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 1998.
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 1998, 1997
and 1996:
- -------------------------------------------------------------------------------------------
(In thousands except per share data) Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
Net income As reported $ 10,914 $ 10,167 $9,427
Pro forma 0,743 9,916 9,230
- -------------------------------------------------------------------------------------------
Basic earnings per share As reported $ 3.09 $ 2.88 $ 2.65
Pro forma 3.04 2.81 2.60
- -------------------------------------------------------------------------------------------
Diluted earnings per share As reported $ 2.97 $ 2.77 $ 2.58
Pro forma 2.92 2.70 2.52
- -------------------------------------------------------------------------------------------
Weighted average fair value $ 8.23 $ 8.84 $ 8.04
Expected life 7.3 years 7.4 years 7.2 years
Risk-free interest rate 5.53% 6.47% 5.64%
Expected volatility 23.0% 22.0% 23.0%
Expected dividend yield 2.7% 2.3% 2.7%
===========================================================================================
45
39
16. 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.
17. PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed financial statements for MASSBANK Corp. (the
"Parent Company") only:
Balance Sheets
- -------------------------------------------------------------------------------------
(In thousands except share data) AT DECEMBER 31, 1998 1997
- -------------------------------------------------------------------------------------
Assets:
Cash $ 1 $ 13
Interest-bearing deposits in banks 2,324 3,390
Investment in subsidiaries 108,724 101,109
Due from subsidiaries 45 --
Other assets 53 77
- -------------------------------------------------------------------------------------
Total assets $111,147 $104,589
=====================================================================================
Liabilities:
Employee stock ownership plan liability (Note 15) $ 625 $ 781
Other liabilities 33 29
- -------------------------------------------------------------------------------------
Total liabilities 658 810
=====================================================================================
Stockholders' equity (Notes 12, 14, 15 and 16):
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, 7,384,332 and
7,336,800 shares issued, respectively 7,384 7,337
Additional paid-in capital 60,003 58,737
Retained earnings 78,308 70,984
- -------------------------------------------------------------------------------------
145,695 137,058
Treasury stock at cost, 3,885,222 and
3,766,022 shares, respectively (46,272) (41,569)
Accumulated other comprehensive income (Note 1) 11,691 9,071
Common stock acquired by ESOP (Note 15) (625) (781)
- -------------------------------------------------------------------------------------
Total stockholders' equity 110,489 103,779
- -------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $111,147 $104,589
=====================================================================================
46
40
17. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------
(In thousands) YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------
Income:
Dividends received from subsidiaries $ 6,400 $ 6,400 $5,750
Interest and dividend income 96 56 20
- --------------------------------------------------------------------------------------
Total interest and dividend income 6,496 6,456 5,770
Non-interest expense 99 118 103
- --------------------------------------------------------------------------------------
Income before income taxes 6,397 6,338 5,667
Income tax benefit 28 40 14
- --------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries 6,425 6,378 5,681
Equity in undistributed earnings of subsidiaries 4,489 3,789 3,746
- --------------------------------------------------------------------------------------
Net income $10,914 $10,167 $9,427
======================================================================================
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, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $10,914 $10,167 $ 9,427
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (4,489) (3,789) (3,746)
Decrease in other assets -- -- 25
Increase (decrease) in accrued income taxes payable 25 (59) (21)
Deferred income tax benefit (1) (4) (2)
Increase in other liabilities 4 13 6
Increase in amount due from subsidiaries (45) -- --
Decrease in amount due to subsidiaries -- (3) (121)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,408 6,325 5,568
- -------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Payments to acquire treasury stock (4,703) (1,665) (3,534)
Issuance of common stock under stock option plan 741 467 738
Tax benefit resulting from stock options exercised 66 -- 28
Dividends paid on common stock (3,605) (3,124) (2,459)
Tax benefit resulting from dividends paid on unallocated
shares held by the ESOP 15 15 15
- -------------------------------------------------------------------------------------------------------
Net cash used in financing activities (7,486) (4,307) (5,212)
- -------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,078) 2,018 356
Cash and cash equivalents at beginning of year 3,403 1,385 1,029
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,325 $ 3,403 $ 1,385
=======================================================================================================
During the years ended December 31, 1998, 1997 and 1996, the Company made cash
payments for income taxes of $24 thousand, $16 thousand and $23 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 $29 thousand, $42 thousand and $41 thousand
during the years ended December 31, 1998, 1997 and 1996, respectively.
47
41
18. TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data)
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------------
Net income $10,914 $10,167 $9,427 $ 8,759 $8,185 $6,695 $ 4,677 $ 2,250 $ 725 $2,668
Basic earnings per share(2) 3.09 2.88 2.65 2.43 2.19 1.71 1.22 0.59 0.16 0.50
Cash dividends declared per share(2) 1.02 0.88 1/2 0.69 0.54 3/4 0.45 0.34 0.26 1/2 0.22 1/4 0.22 0.21
Book value per share, at year end(2) 31.58 29.06 25.75 24.84 20.09 20.46 18.37 17.54 16.20 15.16
Return on average assets 1.17% 1.12% 1.08% 1.04% 0.96% 0.79% 0.61% 0.60% 0.23% 0.86%
Return on average realized equity(1) 11.08% 11.11% 11.01% 10.81% 10.62% 8.98% 6.79% 3.39% 1.03% 3.38%
================================================================================================================================
(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.
19. QUARTERLY DATA (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands except 4th 3rd 2nd 1st 4th 3rd 2nd 1st
per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $14,721 $14,995 $15,025 $15,093 $15,496 $15,460 $15,017 $14,760
Interest expense 8,534 8,703 8,562 8,521 8,840 8,937 8,555 8,349
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 6,187 6,292 6,463 6,572 6,656 6,523 6,462 6,411
Provision for loan losses 88 15 45 45 95 45 52 68
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,099 6,277 6,418 6,527 6,561 6,478 6,410 6,343
Non-interest income 1,447 796 1,101 1,246 882 886 1,136 894
Non-interest expense 3,269 2,871 3,119 3,256 3,115 3,191 3,924 3,195
Income before income taxes 4,277 4,202 4,400 4,517 4,328 4,173 3,622 4,042
Income tax expense 1,598 1,507 1,694 1,683 1,672 1,584 1,173 1,569
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 2,679 $ 2,695 $ 2,706 $ 2,384 $ 2,656 $ 2,589 $ 2,449 $ 2,473
=============================================================================================================================
Earnings per share (in dollars):(1)
Basic $ 0.77 $ 0.76 $ 0.76 $ 0.80 $ 0.75 $ 0.74 $ 0.69 $ 0.70
Diluted 0.74 0.73 0.73 0.77 0.72 0.70 0.67 0.68
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding:(1)
Basic 3,487 3,548 3,546 3,535 3,521 3,520 3,529 3,530
Diluted 3,610 3,692 3,709 3,697 3,683 3,671 3,653 3,647
=============================================================================================================================
(1) Computation of earnings per share is further described in Note 1.
48
42
MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA
YEARS ENDED DECEMBER 31, 1998 AND 1997
MASSBANK Corp.'s common stock is currently traded on the Nasdaq Stock Market
under the symbol "MASB." At December 31, 1998 there were 3,499,110 shares
outstanding and 925 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, 1998
- ------------------------------------------------------------------------
Fourth Quarter 40 1/2 29 1/2 $ 0.27
Third Quarter 50 3/4 38 3/4 0.25
Second Quarter 54 1/4 47 1/2 0.25
First Quarter 51 1/4 43 3/4 0.25
- ------------------------------------------------------------------------
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
- ------------------------------------------------------------------------
(1) Stock prices have been adjusted to reflect the 4-for-3 split of the
Company's common stock effective September 15, 1997.
49
43
MASSBANK BRANCH OFFICES d/b/a
MASSBANK of Reading* MASSBANK of Melrose
123 Haven Street 476 Main Street
Reading, MA 01867 Melrose, MA 02176
(781) 942-8188 (781) 662-0100
(978) 446-9200
27 Melrose Street
MASSBANK of Chelmsford Towers Plaza
Melrose, MA 02176
296 Chelmsford Street (781) 662-0165
Eastgate Plaza
Chelmsford, MA 01824 MASSBANK of Stoneham
(978) 256-3751
240 Main Street
17 North Road Stoneham, MA 02180
Chelmsford, MA 01824 (781) 662-0177
(978) 256-3733
MASSBANK of Tewksbury
MASSBANK of Dracut
1800 Main Street
45 Broadway Road Tewksbury, MA 01876
Dracut, MA 01826 (978) 851-0300
(978) 441-0040
MASSBANK of Westford
MASSBANK of Everett
203 Littleton Road
738 Broadway Westford, MA 01886
Everett, MA 02149 (978) 692-3467
(617) 387-5115
MASSBANK of Wilmington
MASSBANK of Lowell
370 Main Street
50 Central Street Wilmington, MA 01887
Lowell, MA 01852 (978) 658-4000
(978) 446-9200
219 Lowell Street
755 Lakeview Avenue Lucci's Plaza
Lowell, MA 01850 Wilmington, MA 01887
(978) 446-9216 (978) 658-5775
MASSBANK of Medford
4110 Mystic Valley Parkway
Wellington Circle Plaza
Medford, MA 02155
(781) 395-4899
* Main Office
50
44
CORPORATE INFORMATION
MASSBANK CORP. Form 10-K Independent Auditors
123 Haven Street Shareholders may obtain without KPMG Peat Marwick LLP
Reading, MA 01867 charge a copy of the Company's 1998 99 High Street
(781) 662-0100 Form 10-K. Written requests Boston, MA 02110
(978) 446-9200 should be addressed to:
FAX (781) 942-1022 Shareholder Services Legal Counsel
Massbank Corp.
Savings and Mortgage 159 Haven Street Goodwin, Procter & Hoar
24-Hour-Rate Lines Reading, MA 01867 Exchange Place
(781) 662-0154 Boston, MA 02109
(978) 446-9285 Dividend Reinvestment and
Stock Purchase Plan Reports on Effectiveness
Notice of Shareholders' Meeting of Internal Control Structure
Shareholders may obtain a brochure Over Financial Reporting
The Annual Meeting of the containing a detailed description
Shareholders of Massbank Corp. of the plan by writing to: Shareholders may obtain without
will be held at 10:00 Shareholder Services charge a copy of Management's and
A.M. on Tuesday, Massbank Corp. the Independent Auditors' 1998
April 20, 1999 at the 159 Haven Street Reports on the Effectiveness of
Tara Ferncroft Conference Center Reading, MA 01867 the Company's Internal Control
50 Ferncroft Road Structure Over Financial Reporting.
Danvers, MA 01923 Transfer Agent Written requests should be addressed to:
Shareholder Services
Trademark EquiServe Massbank Corp.
Boston EquiServe Division 159 Haven Street
MASSBANK and its logo are Shareholder Services Reading, MA 01867
registered trademarks of P.O. Box 644
the Company Boston, MA 02102-0644
51
45
OFFICERS AND DIRECTORS
MASSBANK CORP.
OFFICERS BOARD OF DIRECTORS *Robert S. Cummings
Senior Partner, Peabody and Brown
Gerard H. Brandi Samuel Altschuler
Chairman, President and Executive Vice President Louise A. Hickey
Chief Executive Officer and Director, Retired, Melrose-Wakefield Hospital
Sanmina Corp.
Reginald E. Cormier Leonard Lapidus
Vice President, Treasurer and *Mathias B. Bedell United States Government Official
Chief Financial Officer Retired, Bedell Brothers Insurance
Agency, Inc. *Stephen E. Marshall
Robert S. Cummings President, C.H. Cleaves Insurance
Secretary *Gerard H. Brandi Agency, Inc.
Chairman, President and
Donna H. West Chief Executive Officer, +Arthur W. McPherson
Assistant Secretary MASSBANK Corp. Certified Financial Planner
Allan S. Bufferd Nancy L. Pettinelli
Treasurer, Executive Director,
Massachusetts Institute of Technology Visiting Nurse Association
+Peter W. Carr +*Herbert G. Schurian
Retired, Guilford Transportation Certified Public Accountant
Industries
*Dr. Donald B. Stackhouse
Alexander S. Costello Dentist
Editorial Page Editor,
Lowell Sun Publishing Co., Inc. *Member, Executive Committee
+Member, Audit Committee
OFFICERS AND DIRECTORS
MASSBANK
OFFICERS
Gerard H. Brandi Gregory W. Bowe Ana M. Foster Alice B. Sweeney
Chairman, President and Assistant Vice President Compliance and Assistant Comptroller
Chief Executive Officer Security Officer
Ernest G. Campbell, Jr. Richard A. Tatarczuk
Donald R. Washburn Collections Officer Gerard F. Frechette Assistant Vice President
Senior Vice President, Lending Loan Officer and Comptroller
Marianne J. Carpenter
Donna H. West Assistant Treasurer Rachael E. Garneau Francis J. Walsh
Senior Vice President, Assistant Treasurer Operations Officer
Community Banking Charles F. Coupe
Information Officer Margo E. Higgins Margaret E. White
Reginald E. Cormier Assistant Vice President Assistant Treasurer
Vice President, Treasurer Janet L. Daniels and Human Resources Officer
and Chief Financial Officer Assistant Vice President Patricia A. Witts
Aunali Dohadwala Brian W. Hurley Assistant Treasurer
David F. Carroll Auditor Assistant Vice President
Vice President, Operations Michael J. Woods
Karen J. Downs Kenneth A. Masson Assistant Vice President
Thomas J. Queeney Assistant Treasurer Assistant Vice President
Vice President and BOARD OF DIRECTORS AND
Senior Trust Officer Karen L. Flammia Mindy S. Peloquin EXECUTIVE COMMITTEE
Assistant Vice President Assistant Treasurer
Marilyn H. Abbott Mathias B. Bedell
Assistant Treasurer Melissa J. Flanagan Renald A. Robillard Gerard H. Brandi, Chairman
Assistant Treasurer Assistant Treasurer Robert S. Cummings, Clerk
Andrea S. Bradford Stephen E. Marshall
Assistant Vice President Richard J. Flannigan Lisa A. Sawyer Herbert G. Schurian
Vice President, Trust Assistant Treasurer Dr. Donald B. Stackhouse
Donna H. West
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