SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to____________
Commission File Number 0-15137
MASSBANK Corp.
(Exact name of registrant as specified in its charter)
Delaware 04-2930382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 HAVEN STREET
Reading, Massachusetts 01867
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (617) 662-0100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's classes of common stock,
as of the latest practicable date is:
Class: Common stock $1.00 per share.
Outstanding at April 30, 1996: 2,727,003 shares.
<PAGE>
MASSBANK CORP. AND SUBSIDIARIES
FORM 10-Q FOR QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Income (unaudited)
for the three months ended March 31, 1996 and 1995 4
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1996 (unaudited)
and the year ended December 31, 1995 5
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1996 and 1995 6 - 7
Condensed Notes to the Consolidated Financial Statements 8 - 11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities 20
ITEM 3. Defaults Upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<CAPTION>
March 31, December 31,
1996 1995
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 8,643 $ 8,150
Short-term investments (Note 3) 81,465 117,505
______________________________________________________________________________
Total cash and cash equivalents 90,108 125,655
Term federal funds sold 5,000 5,000
Interest-bearing deposits in banks 1,667 941
Securities held to maturity, at amortized cost (Note 4) 172 402
Securities available for sale, at market value (Note 4) 460,367 456,101
Trading securities, at market value 41,567 6,819
Loans: (Notes 5 and 6)
Mortgage loans 222,250 220,603
Other loans 27,685 28,582
Less: allowance for possible loan losses (2,504) (2,529)
______________________________________________________________________________
Net loans 247,431 246,656
Premises and equipment 4,156 4,226
Real estate acquired through foreclosure 276 255
Accrued interest receivable 6,779 7,280
Other assets 1,399 1,207
______________________________________________________________________________
Total assets $858,922 $854,542
Liabilities and Stockholders' Equity:
Deposits:
Demand and NOW $ 65,544 $ 66,413
Savings 360,003 356,598
Time certificates of deposit 341,191 332,057
Deposit acquisition premium, net of amortization (1,354) (1,411)
______________________________________________________________________________
Total deposits 765,384 753,657
Escrow deposits of borrowers 1,098 992
Employee stock ownership plan liability (Note 7) 1,093 1,093
Accrued and deferred income taxes payable 1,013 4,760
Other liabilities 3,081 3,223
______________________________________________________________________________
Total liabilities 771,669 763,725
Stockholders' Equity:
Preferred stock, par value $1.00 per share;
2,000,000 shares authorized, none issued -- --
Common stock, par value $1.00 per share;
10,000,000 shares authorized, 5,453,327 and
5,424,671 shares issued, respectively 5,453 5,425
Additional paid-in capital 57,339 56,842
Retained earnings 60,399 58,773
______________________________________________________________________________
123,191 121,040
Treasury stock at cost, 2,719,765 and
2,683,065 shares, respectively (37,595) (36,370)
Net unrealized gains on securities
available for sale, net of tax effect 2,750 7,240
Common stock acquired by ESOP (Note 7) (1,093) (1,093)
______________________________________________________________________________
Total stockholders' equity 87,253 90,817
______________________________________________________________________________
Total liabilities and stockholders' equity $858,922 $854,542
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three months ended
March 31,
(In thousands except share data) 1996 1995
______________________________________________________________________________
<S> <C> <C>
Interest and dividend income:
Mortgage Loans $ 4,199 $ 4,218
Other loans 646 668
Mortgage-backed securities 3,930 3,088
Securities available for sale 3,327 4,002
Trading securities 200 1,090
Federal funds sold 1,579 775
Other investments 243 7
______________________________________________________________________________
Total interest and dividend income 14,124 13,848
______________________________________________________________________________
Interest expense:
Deposits 8,009 7,188
______________________________________________________________________________
Total interest expense 8,009 7,188
______________________________________________________________________________
Net interest income 6,115 6,660
Provision for possible loan losses 30 70
______________________________________________________________________________
Net interest income after provision for
possible loan losses 6,085 6,590
______________________________________________________________________________
Non-interest income:
Deposit account service fees 218 227
Gains (losses) on securities, net 207 4
Other 192 197
______________________________________________________________________________
Total non-interest income 617 428
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,772 1,816
Occupancy and equipment 517 508
Data processing 153 152
Professional services 109 113
Deposit insurance 3 439
Other 502 493
______________________________________________________________________________
Total non-interest expense 3,056 3,521
______________________________________________________________________________
Income before income taxes 3,646 3,497
Income tax expense 1,423 1,371
______________________________________________________________________________
Net income $ 2,223 $ 2,126
______________________________________________________________________________
Weighted average common shares outstanding:
Primary 2,783,426 2,797,212
Fully diluted 2,784,454 2,797,856
______________________________________________________________________________
Earnings per share (in dollars):
Primary $ 0.80 $ 0.76
Fully diluted 0.80 0.76
______________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1996 (unaudited)
and the Year Ended December 31, 1995
(In thousands except share data)
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ON SECURITIES COMMON
ADDITIONAL AVAILABLE FOR STOCK
COMMON PAID-IN RETAINED TREASURY SALE, NET OF ACQUIRED
STOCK CAPITAL EARNINGS STOCK TAX EFFECT BY ESOP TOTAL
________ __________ _________ __________ __________ ________ ________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 5,352 $55,609 $51,995 $(33,288) $(3,915) $(1,249) $74,504
Net income -- -- 8,759 -- -- -- 8,759
Cash dividends declared
($0.73 per share) -- -- (1,981) -- -- -- ( 1,981)
Net decrease in liability
to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 51 -- -- -- -- 51
Purchase of treasury stock -- -- -- (3,082) -- -- (3,082)
Exercise of stock options
and related tax benefits 73 1,182 -- -- -- -- 1,255
Change in net unrealized gains
(losses) on securities available
for sale, net of tax effect -- -- -- -- 11,155 -- 11,155
____________________________________________________________________________________________________________________
Balance at December 31, 1995 5,425 56,842 58,773 (36,370) 7,240 (1,093) 90,817
Net Income -- -- 2,223 -- -- -- 2,223
Cash dividends declared
($0.22 per share) -- -- (597) -- -- -- (597)
Purchase of treasury stock -- -- -- (1,225) -- -- (1,225)
Exercise of stock options
and related tax benefits 28 497 -- -- -- -- 525
Change in net unrealized gains
(losses) on securities available
for sale, net of tax effect -- -- -- -- (4,490) -- (4,490)
_____________________________________________________________________________________________________________________
Balance at March 31, 1996 $ 5,453 $57,339 $60,399 $(37,595) $ 2,750 $(1,093) $87,253
_____________________________________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended
March 31,
1995 1994
____ ____
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,223 $ 2,126
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 107 121
Amortization of deposit acquisition premium 57 58
Amortization of loan valuation premium 16 16
Decrease in accrued interest receivable 501 956
Decrease in other liabilities (142) (3,031)
Decrease in accrued and deferred income taxes payable (560) (642)
Accretion of discounts on securities, net of
amortization of premiums (238) (277)
Net trading securities activity (34,896) 50,562
(Gains) losses on securities available for sale (355) 395
(Gains) losses on trading securities 148 (399)
Increase (decrease) in deferred mortgage loan
origination fees, net of amortization 34 (26)
Decrease in deferred income tax asset, net 25 342
Increase in other assets (192) (521)
Loans originated for sale (45) --
Loans sold 163 --
Provision for possible loan losses 30 70
Provision for losses and writedowns on real estate
acquired through foreclosure 8 13
Increase in escrow deposits of borrowers 106 283
______________________________________________________________________________
Net cash provided by (used in) operating
activities (33,010) 50,046
______________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds -- (25,000)
Purchases of bank certificates of deposit (726) --
Proceeds from sales of investment securities
available for sale 11,662 23,757
Proceeds from maturities of investment securities
held to maturity and available for sale 36,225 10,083
Purchases of securities available for sale (10,478) (32,850)
Purchases of mortgage-backed securities (56,137) (3,918)
Principal repayments of mortgage-backed securities 7,578 4,135
Principal repayments of tax-exempt bonds 5 4
Loans originated (12,365) (4,330)
Loan principal payments received 11,363 8,146
Purchases of premises & equipment (37) (54)
Proceeds from sale of real estate acquired
through foreclosure -- 26
Net advances on real estate acquired through
foreclosure -- (7)
______________________________________________________________________________
Net cash (used in) investing activities (12,910) (20,008)
______________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
____ ____
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits 11,670 (3,955)
Payments to acquire treasury stock (1,225) (119)
Issuance of common stock under stock option plan 329 86
Tax benefit resulting from stock options exercised 196 24
Dividends paid on common stock (597) (479)
______________________________________________________________________________
Net cash provided by (used in) financing activities 10,373 (4,443)
______________________________________________________________________________
Net increase (decrease) in cash and
cash equivalents (35,547) 25,595
Cash and cash equivalents at beginning of period 125,655 32,161
______________________________________________________________________________
Cash and cash equivalents at end of period $ 90,108 $ 57,756
______________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $ 8,005 $ 7,188
Cash paid during the period for taxes, net of refunds 1,762 1,648
Non-cash transactions:
SFAS 115:
Increase (decrease) in stockholders' equity (4,490) 3,183
Decrease in deferred tax assets -- 2,415
Decrease in deferred tax liabilities (3,212) --
Transfers from loans to real estate acquired
through foreclosure 29 272
Transfers from other assets to securities
available for sale -- 66
______________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
Disclosure of accounting policy:
For purposes of reporting cash flows, cash and cash equivalents consist of
cash and due from banks, federal funds sold and term federal funds sold
with original maturities of less than 90 days.
</TABLE>
<PAGE>
MASSBANK CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial condition and results of operations of MASSBANK Corp. (the
"Company") essentially reflect the operations of its subsidiary, MASSBANK
(the "Bank"). All significant intercompany balances and transactions
have been eliminated in consolidation.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, and in the opinion of
management, include all adjustments of a normal recurring nature necessary for
the fair presentation of the financial condition of the Company as of
March 31, 1996 and December 31, 1995, operating results for the three months
ended March 31, 1996 and 1995, and cash flows for the three months ended
March 31, 1996 and 1995. The results of operations for any interim period are
not necessarily indicative of the results to be expected for the entire year.
Certain amounts in the prior years' consolidated financial statements
have been reclassified to permit comparison with the current fiscal year.
The information in this report should be read in conjunction with the
financial statements and related notes included in the Annual Report on Form
10-K for the year ended December 31, 1995.
(2) Earnings Per Common Share
The computation of earnings per common share for the three months ended
March 31, 1996 and 1995 is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the period.
Stock options, when dilutive are included as common stock equivalents using
the Treasury stock method.
<TABLE>
(3) Short-Term Investments
Short-term investments consist of the following:
<CAPTION>
____________________________________________________________________________________
At At
(In thousands) March 31, 1996 December 31, 1995
____________________________________________________________________________________
<S> <C> <C>
Federal funds sold (overnight) $ 56,991 $100,245
Term federal funds sold (with original
maturities of 90 days or less) -- 10,000
Money market funds 24,474 7,260
____________________________________________________________________________________
Total short-term investments $ 81,465 $117,505
____________________________________________________________________________________
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
</TABLE>
<TABLE>
(4) Investment Securities
The amortized cost and estimated market value of investment securities
are as follows:
<CAPTION>
__________________________________________________________________________________________
Gross Gross
(In thousands) At March 31, 1996 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________________________________________________________________________________________
<S> <C> <C> <C> <C>
Securities held to maturity:
Other bonds and obligations $ 172 $ -- $ -- $ 172
__________________________________________________________________________________________
Total securities held to maturity 172 -- -- 172
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations 171,867 2,290 (40) 174,117
U.S. Government agency obligations 12,896 94 (101) 12,889
Other bonds and obligations 1,997 6 (1) 2,002
__________________________________________________________________________________________
Total 186,760 2,390 (142) 189,008
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 78,929 1,098 (645) 79,382
Federal Home Loan Mortgage
Corporation 168,684 942 (2,636) 166,990
Federal National Mortgage
Association 11,921 463 -- 12,384
Other 624 37 -- 661
__________________________________________________________________________________________
Total mortgage-backed securities 260,158 2,540 (3,281) 259,417
__________________________________________________________________________________________
Total debt securities 446,918 4,930 (3,423) 448,425
__________________________________________________________________________________________
Equity securities 8,688 3,260 (6) 11,942
__________________________________________________________________________________________
Total securities available for sale 455,606 $ 8,190 $ (3,429) $460,367
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 4,761
__________________________________________________________________________________________
Total securities available
for sale, net 460,367
__________________________________________________________________________________________
Total investment securities, net $460,539
__________________________________________________________________________________________
</TABLE>
<TABLE>
(4) Investment Securities (continued)
<CAPTION>
__________________________________________________________________________________________
Gross Gross
(In thousands) At December 31, 1995 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________________________________________________________________________________________
<S> <C> <C> <C> <C>
Securities held to maturity:
Other bonds and obligations $ 402 $ -- $ -- $ 402
__________________________________________________________________________________________
Total securities held to maturity 402 -- -- 402
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations 207,771 4,387 (43) 212,115
U.S. Government agency obligations 13,994 178 -- 14,172
Other bonds and obligations 1,996 10 (2) 2,004
__________________________________________________________________________________________
Total 223,761 4,575 (45) 228,291
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 81,411 2,160 (19) 83,552
Federal Home Loan Mortgage
Corporation 116,500 2,339 (100) 118,739
Federal National Mortgage
Association 12,886 574 -- 13,460
Other 726 43 -- 769
__________________________________________________________________________________________
Total mortgage-backed securities 211,523 5,116 (119) 216,520
__________________________________________________________________________________________
Total debt securities 435,284 9,691 (164) 444,811
__________________________________________________________________________________________
Equity securities 8,354 2,961 (25) 11,290
__________________________________________________________________________________________
Total securities available for sale 443,638 $ 12,652 $ (189) $456,101
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 12,463
__________________________________________________________________________________________
Total securities available
for sale, net 456,101
__________________________________________________________________________________________
Total investment securities, net $456,503
__________________________________________________________________________________________
</TABLE>
<TABLE>
(5) Loans
The composition of the Bank's loan portfolio is summarized as follows:
<CAPTION>
_______________________________________________________________________________________
At At
(In thousands March 31, 1996 December 31, 1995
_______________________________________________________________________________________
<S> <C> <C>
Mortgage loans:
Residential $214,783 $212,652
Commercial 6,527 6,975
Construction 1,530 1,516
_______________________________________________________________________________________
222,840 221,143
Add: Premium on loans 372 388
Less: deferred mortgage loan origination fees (962) (928)
_______________________________________________________________________________________
Total mortgage loans 222,250 220,603
Other loans:
Consumer:
Installment 1,849 1,988
Guaranteed education 10,378 10,420
Other secured 1,845 2,012
Home equity lines of credit 12,671 13,144
Unsecured 265 265
_______________________________________________________________________________________
Total consumer loans 27,008 27,829
Commercial 677 753
_______________________________________________________________________________________
Total other loans 27,685 28,582
_______________________________________________________________________________________
Total loans $249,935 $249,185
_______________________________________________________________________________________
</TABLE>
(6) Commitments
At March 31, 1996, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$9,046,000 and commitments under existing home equity lines of credit andother
loans of approximately $20,076,000 which are not reflected on the consolidated
balance sheet. In addition, as of March 31, 1996, the Company had a
performance standby letter of credit conveyed to others in the amount
of $1,093,000 which is also not reflected on the consolidated balance sheet.
(7) Employee Stock Ownership Plan
Effective May 28, 1986, the Company established an employee stock
ownership plan ("ESOP"). 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
Company, the obligation is reflected as a liability of the Company and a
reduction of shareholders' equity on the consolidated balance sheet. As of
March 31, 1996 and December 31, 1995, such outstanding liabilities totaled
$1,093,000.
<PAGE>
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1996
General
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this report.
MASSBANK Corp.'s (the "Company's") financial condition and results of
operations essentially reflect the operations of its subsidiary, MASSBANK
(the "Bank") and the Bank's wholly-owned subsidiaries: Readibank Properties,
Inc., Readibank Equipment Corporation, Melbank Investment Corporation and
Readibank Investment Corporation.
The Company's 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 has consistently maintained positive
net interest income. Net income is also affected by the provision for
possible loan losses and by the level of non-interest income (including gains
or losses on securities), non-interest expenses and income taxes. Each of
these major elements of consolidated net income is discussed in succeeding
paragraphs.
FINANCIAL CONDITION
The Company's total assets increased by $4.4 million from $854.5 million
at December 31, 1995 to $858.9 million at March 31, 1996. Funding for the
asset growth was essentially provided by the growth in deposits.
The Bank's total deposits increased by $11.7 million during the recent
quarter, reaching $765.4 million by quarters end. Total savings and time
certificates of deposit increased while demand and NOW account deposits
declined slightly.
Stockholders' equity at March 31, 1996 equalled $87.3 million
representing a book value of $31.92 per share, a decrease from $90.8 million
representing a book value of $33.13 per share at December 31, 1995. This
decrease in stockholders' equity resulted primarily from unrealized depreciation
in the market value of the Bank's securities available for sale portfolio due
to the volatility of the financial markets in the recent quarter.
Average earning assets for the first quarter of 1996 were $840.1
million, up from $816.8 million in the first quarter of 1995. Average interest
bearing liabilities totaled $757.2 million for the three months ended
March 31, 1996 compared to $755.3 million for the three months ended March 31,
1995.
Loans
The Bank's loan portfolio increased slightly during the first three months
of 1996 from $249.2 million at December 31, 1995 to $249.9 million at March 31,
1996. Loan originations during this period exceeded the level of loan
amortization and payoffs in the Bank's portfolio. Loan originations in the
first three months of 1996 increased to $12.4 million from $4.3 million in the
first three months of 1995, due primarily to an increase in loan demand. The
decline in residential mortgage loan rates since the first quarter of 1995 has
stimulated loan demand resulting in increased loan originations for the Bank.
<PAGE>
Investments
MASSBANK's total investments consisting of investment securities, term
federal funds sold, interest-bearing deposits in banks and other short-term
investments increased from $586.8 million at December 31, 1995 to $590.2
million at March 31, 1996. The majority of these investments are in federal
funds sold, shorter-term U.S. Treasury and government agency obligations, and
fifteen year mortgage-backed securities. Nearly all of the Bank's investment
securities are classified as available for sale or trading securities.
During the first quarter of 1996, the Bank increased its portfolio of
mortgage-backed securities by $42.9 million, from $216.5 million at
December 31, 1995 to $259.4 million at March 31, 1996, while reducing its
portfolio of U.S. Treasury and government agency securities by $39.3 million.
The increase in higher yielding longer term mortgage-backed securities will
help to improve the yield on the Bank's earning assets. In addition, the
Bank's trading securities portfolio increased by $34.7 million in the recent
quarter due to the purchase of short-term U.S. Treasury bills. This increase
was offset by a comparable reduction in the Bank's short-term investments
(primarily federal funds sold).
Deposits
Deposit accounts of all types have historically 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. Management attempts to manage its deposits through
selective pricing.
MASSBANK's total deposits increased by $11.7 million in the first three
months of 1996, from $753.7 million at December 31, 1995 to $765.4 million at
March 31, 1996.
ASSET QUALITY
Net loans represented 28.8% of total assets at March 31, 1996 as compared
to 28.9% of total assets at December 31, 1995. The Bank's securities and other
short-term investments, representing 68.7% of total assets at March 31, 1996,
consist primarily of U.S. Treasury and government agency obligations, high
quality mortgage-backed securities, federal funds sold and other short-term
investments. Investments in marketable equity securities and mutual funds
totaled approximately $18.6 million at the end of the recent quarter. At
March 31, 1996, the Bank's loan portfolio consisted of residential mortgages of
$215.7 million, commercial mortgages of $6.5 million, consumer loans of $27.0
million and commercial loans of approximately $0.7 million. Non-performing
assets were $2.9 million at March 31, 1996 representing 0.33% of total assets.
This compares to $2.7 million, or 0.31% of total assets, at December 31, 1995.
At March 31, 1996, the Bank's allowance for possible loan losses was $2.5
million, representing 96.8% of non-performing loans and 1.0% of total loans.
The Bank believes that its allowance for possible loan losses is adequate to
cover the risks inherent in the loan portfolio under current conditions.
<PAGE>
Results of Operations for the Three Months Ended
March 31, 1996 Compared to the Corresponding Period in 1995
General
For the quarter ended March 31, 1996, MASSBANK Corp. reported consolidated
net income of $2,223,000 or $0.80 per share, compared with consolidated net
income of $2,126,000 or $0.76 per share for the same quarter of 1995. Earnings
results for the first quarter of 1996 were favorably impacted by significantly
lower deposit insurance costs, a modest reduction in other non-interest
expenses, higher securities gains and a lower provision for possible loan
losses. These improvements were partially offset by a decrease in the
Company's net interest margin.
Net Interest Income
Net interest income before provision for possible loan losses totaled
$6,115,000 in the first quarter of 1996 compared to $6,660,000 in the
comparable quarter of 1995. As detailed in the average balance sheets on the
following pages, this is the result of a decline in the Company's net interest
margin and interest rate spread. The interest rate spread was 2.49% for the
first quarter of 1996 compared to 2.94% for the same quarter of 1995. The net
interest margin for the three months ended March 31, 1996 and 1995 was 2.93%
and 3.28%, respectively.
Interest and Dividend Income
Interest and dividend income from loans and investments increased by
$276,000 or 2.0% to $14,124,000 for the three months ended March 31, 1996 from
$13,848,000 for the same period in 1995. This increase is primarily
attributable to an increase in the Company's average earning assets partially
offset by a decrease in yield on average earning assets.
The average total earning assets of the Company increased to $840.1
million in the first quarter of 1996 from $816.8 million for the corresponding
quarter of 1995.
The yield on the Company's average earning assets for the first quarter of
1996 decreased by 6 basis points to 6.74% from 6.80% for the same quarter in
1995. As can be seen from the average balance sheets on the following pages,
the decrease in yield on average assets is due in part to a significant decline
in short term market rates. The yield on federal funds sold decreased from
5.87% in the first quarter of 1995 to 5.39% in the first quarter of 1996. The
yield on the Company's average earning assets was also negatively affected by a
decrease in yield on mortgage loans and mortgage-backed securities, primarily
the result of new (lower yielding) volume added to the Bank's portfolios during
a period of declining mortgage loan rates.
Interest Expense
Total interest expense increased 11.4% to $8,009,000 for the three months
ended March 31, 1996 from $7,188,000 for the three months ended March 31, 1995.
This increase was due principally to an increase of 39 basis points in the
Company's average cost of funds from 3.86% in the first quarter of 1995 to
4.25% in the first quarter of 1996. Average deposits and borrowed funds
increased to $757.2 million in the recent quarter from $755.3 million a year
earlier. The Bank has maintained flat regular savings account deposit rates
during the 1994-1996 period while selectively increasing rates on certificates
of deposit. This strategy has helped to minimize the effect of rising interest
rates on the Company's net interest margin. The strategy has also helped to
encourage a shift from savings to time certificates of deposit during this
period. During the last twelve months, the Bank's total savings deposits,
including money market accounts, declined $46.1 million, from $406.1 million
at March 31, 1995 to $360.0 million at March 31, 1996, while its certificates of
deposit increased $54.2 million, from $287.0 million at March 31, 1995 to $341.2
million at March 31, 1996.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
Three Months Ended
March 31, 1996 March 31, 1995
______________ ______________
(1) Interest Average (1) Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
__________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning assets:
Federal funds sold $117,766 $ 1,579 5.39% $ 53,537 $ 775 5.87%
Short-term investments (4) 18,003 240 5.36 -- -- --
Investment securities 212,569 3,366 6.33 261,547 4,041 6.18
Mortgage-backed securities 228,215 3,930 6.89 172,185 3,088 7.17
Trading securities 14,321 200 5.62 80,723 1,090 5.43
Mortgage loans (2) 221,016 4,199 7.60 218,187 4,218 7.73
Other loans (2) 28,172 646 9.18 30,646 668 8.79
__________________________________________________ ________________
Total earning assets 840,062 $14,160 6.74% 816,825 $13,880 6.80%
__________________________________________________________________________________________
Allowance for possible
loan losses (2,539) (2,575)
__________________________________________________________________________________________
Total earning assets
less allowance for
possible loan losses 837,523 814,250
Other assets 18,717 22,870
__________________________________________________________________________________________
Total assets $856,240 $837,120
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS - Continued
Three Months Ended
March 31, 1996 March 31, 1995
______________ ______________
(1) Interest Average (1) Interest Average
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
__________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Liabilities:
Deposits:
Demand and NOW $ 64,355 $ 155 0.97% $ 64,927 $ 164 1.03%
Savings 357,018 3,015 3.39 430,186 3,512 3.31
Time certificates of deposit 335,830 4,839 5.80 260,220 3,512 5.47
__________________________________________________ ________________
Total deposits 757,203 8,009 4.25 755,333 7,188 3.86
Other liabilities 7,722 4,852
__________________________________________________________________________________________
Total liabilities 764,925 760,185
__________________________________________________________________________________________
Stockholders' Equity 91,315 76,935
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $856,240 $837,120
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,151 6,692
Less adjustment of tax-exempt
interest income 36 32
__________________________________________________________________________________________
Net interest income $ 6,115 $ 6,660
__________________________________________________________________________________________
Interest rate spread 2.49% 2.94%
__________________________________________________________________________________________
Net interest margin (3) 2.93% 3.28%
__________________________________________________________________________________________
(1) Includes the effects of SFAS No. 115.
(2) Loans on non-accrual status are included in the average balance.
(3) Annualized net interest income (tax equivalent basis) before provision
for possible loan losses divided by average interest-earning assets.
(4) Short-term investments consist of interest-bearing deposits in banks and
investments in money market funds.
</TABLE>
<PAGE>
Provision for Possible Loan Losses
Possible losses on loans are provided for under the allowance method of
accounting. The allowance is increased by provisions charged to operations
based on management's assessment of many factors including the risk
characteristics of the portfolio, underlying collateral, current and
anticipated economic conditions that may affect the borrowers ability to pay,
and trends in loan delinquencies and charge-offs. Realized losses, net of
recoveries, are charged directly to the allowance. While management uses the
information available in establishing the allowance for losses, future
adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible
loan losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
As a result of management's assessment and analysis, the Bank provided
$30,000 for potential loan losses during the first quarter of 1996 compared to
$70,000 for the same quarter in 1995. Loan charge-offs net of recoveries,
were $55,000 and $39,000 for the respective periods. Non-performing assets
increased to $2,862,000 as of March 31, 1996 from $2,683,000 as of
December 31, 1995. At March 31, 1996 the balance of the allowance for
possible loan losses was $2,504,000, compared to $2,529,000 at the end of
1995. This reserve for loan losses remains strong at 96.8% of total non-
performing loans.
Non-Performing Assets
March 31, December 31, March 31,
(In thousands) 1996 1995 1995
______________________________________________________________________________
Non-Performing Assets:
Non-accrual loans $ 2,586 $ 2,428 $ 1,223
Real estate acquired through foreclosure 276 255 370
______________________________________________________________________________
Total non-performing assets $ 2,862 $ 2,683 $ 1,593
______________________________________________________________________________
Allowance for possible loan losses $ 2,504 $ 2,529 $ 2,597
Allowance as percent of
non-accrual loans 96.8% 104.2% 212.3%
Non-accrual loans as percent
of total loans 1.03% 0.97% 0.50%
Non-performing assets as percent
of total assets 0.33% 0.31% 0.19%
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan", and SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" effective January 1, 1995. However, the Bank did not have any
impaired loans as of March 31, 1996.
<PAGE>
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
or losses on securities and other non-interest income.
Non-interest income for the recent quarter was $617,000, up from $428,000
a year ago. The increase is principally due to net gains on securities of
$207,000 recorded in the first quarter of 1996 compared to net securities
gains of $4,000 recorded in the comparable quarter of 1995.
Non-Interest Expense
Non-interest expenses for the three months ended March 31, 1996 decreased
to $3,056,000 from $3,521,000 for the corresponding period in 1995.
Non-interest expenses in the recent quarter were favorably affected by a
significantly lower deposit insurance expense and a modest reduction in other
expenses. The significant decrease in deposit insurance expense results from
a reduction in the Federal Deposit Insurance Corporation ("FDIC") deposit
insurance rates for well capitalized banks from $0.23 per hundred dollars of
deposits paid in the first quarter of 1995 to an annual minimum of $2 thousand
paid in the first quarter of 1996.
Income Tax Expense
The Company and its subsidiaries file consolidated federal income tax
returns on an October 31, year-end. The Parent Company is subject to a State
of Delaware Franchise Tax and a State of Massachusetts Bank Excise Tax and the
Bank's subsidiaries are subject to a State of Massachusetts Corporate Excise
Tax. Provisions for deferred income taxes are made as a result of timing
differences between financial and income tax methods of accounting.
The provision for federal and state income taxes increased to $1,423,000
for the three months ended March 31, 1996 from $1,371,000 for the same period
in 1995. This increase is due to higher income before taxes partially offset
by a modest decrease in the Company's combined effective income tax rate
from 39.2% for the first quarter of 1995 to 39.0% for the first quarter of
1996.
<PAGE>
Liquidity and Capital Resources
The Bank must maintain a sufficient amount of cash and assets which can
readily be converted into cash in order to meet cash outflow from normal
depositor requirements and loan demands. The Bank's primary sources of funds
are deposits, loan amortization and prepayments, sales or maturities of
investment securities and income on earning assets. In addition to loan
payments and maturing investment securities, which are relatively predictable
sources of funds, the Bank maintains a high percentage of its assets invested
in overnight federal funds sold, which can be immediately converted into cash
and United States Treasury and Government agency securities, which can be sold
or pledged to raise funds. At March 31, 1996 the Bank had $57.0 million or
6.6% of total assets and $221.9 million or 25.8% of total assets invested
respectively in overnight federal funds sold and United States Treasury and
Government agency obligations.
The Bank is an FDIC insured institution subject to the FDIC regulatory
capital requirements. The FDIC regulations require all FDIC insured
institutions to maintain minimum levels of Tier 1 capital. Highly rated banks
(i.e., those with a composite rating of 1 under the CAMEL rating system) are
required to maintain Tier 1 capital of at least 3% of their total assets. All
other banks are required to have Tier 1 capital of 4% to 5%. The FDIC has
authority to impose higher requirements for individual banks. The Bank is
also required to maintain a minimum level of risk-based capital. Under the
new risk-based capital standards, FDIC insured institutions generally are
expected to meet a minimum total qualifying capital to risk-weighted assets
ratio of 8.00%. At March 31, 1996, the Bank had ratios of Tier 1 capital to
total assets of 9.65% and qualifying capital to risk-weighted assets of 35.17%
The Company had ratios of Tier 1 capital to total assets of 9.73% and total
qualifying capital to risk-weighted assets of 35.44% at March 31, 1996.
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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their
business. As of March 31, 1996, none of these actions individually
or in the aggregate is believed by management to be material to the
financial condition of MASSBANK Corp. or the Bank.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. 11.1: Statement regarding computation of
per share earnings.
b. Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSBANK Corp. & Subsidiaries
______________________________
(Registrant)
Date May 13, 1996 /s/Gerard H. Brandi
____________ ______________________
(Signature)
Gerard H. Brandi
President and CEO
Date May 13, 1996 /s/Reginald E. Cormier
____________ ______________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO
<TABLE>
EXHIBIT 11.1
MASSBANK CORP.
Earnings Per Share
The following is a calculation of earnings per share for the three months
ended March 31, 1996 and 1995.
<CAPTION>
Three Months Ended
Calculation of Primary March 31,
Earnings Per Share 1996 1995
______________________________ __________ __________
<S> <C> <C>
Average common shares outstanding 2,749,005 2,784,633
Less: Unallocated Employee Stock Ownership
Plan (ESOP) shares not committed
to be released (46,200) (52,800)
Shares assumed to be repurchased
under treasury stock method
for stock options 80,621 65,379
__________ __________
Total Shares 2,783,426 2,797,212
__________ __________
Net Income $2,223,000 $2,126,000
__________ __________
Per Share Amount $ 0.80 $ 0.76
__________ __________
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Calculation of Fully Diluted March 31,
Earnings Per Share 1996 1995
______________________________ __________ __________
<S> <C> <C>
Average common shares outstanding 2,749,005 2,784,633
Less: Unallocated Employee Stock Ownership
Plan (ESOP) shares not committed
to be released (46,200) (52,800)
Shares assumed to be repurchased
under treasury stock method
for stock options 81,649 66,023
__________ __________
Total Shares 2,784,454 2,797,856
__________ __________
Net Income $2,223,000 $2,126,000
__________ __________
Per Share Amount $ 0.80 $ 0.76
__________ __________
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000799166
<NAME> MASSBANK CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,643
<INT-BEARING-DEPOSITS> 1,667
<FED-FUNDS-SOLD> 61,991
<TRADING-ASSETS> 41,567
<INVESTMENTS-HELD-FOR-SALE> 460,367
<INVESTMENTS-CARRYING> 172
<INVESTMENTS-MARKET> 172
<LOANS> 249,935
<ALLOWANCE> (2,504)
<TOTAL-ASSETS> 858,922
<DEPOSITS> 765,384
<SHORT-TERM> 1,098
<LIABILITIES-OTHER> 4,094
<LONG-TERM> 1,093
<COMMON> 5,453
0
0
<OTHER-SE> 81,800
<TOTAL-LIABILITIES-AND-EQUITY> 858,922
<INTEREST-LOAN> 4,845
<INTEREST-INVEST> 7,457
<INTEREST-OTHER> 1,822
<INTEREST-TOTAL> 14,124
<INTEREST-DEPOSIT> 8,009
<INTEREST-EXPENSE> 8,009
<INTEREST-INCOME-NET> 6,115
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 207
<EXPENSE-OTHER> 3,056
<INCOME-PRETAX> 3,646
<INCOME-PRE-EXTRAORDINARY> 3,646
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,223
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 2.93
<LOANS-NON> 2,586
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,586
<ALLOWANCE-OPEN> 2,529
<CHARGE-OFFS> (59)
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 2,504
<ALLOWANCE-DOMESTIC> 2,362
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 142
</TABLE>
