<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from______________to____________
Commission File Number 0-15137
MASSBANK Corp.
(Exact name of registrant as specified in its charter)
Delaware 04-2930382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 HAVEN STREET
Reading, Massachusetts 01867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 662-0100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.____
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price for the registrant's common stock on
March 14, 1997 as reported by NASDAQ, was $105,055,984.
As of March 14, 1997, there were 2,685,714 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1996 Annual Report to Stockholders are
incorporated by reference in Parts I, II, III and IV of this Form 10-K. Portions
of the Proxy Statement for the 1997 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
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Note regarding forward-looking statements.
The discussions set forth below and elsewhere herein contain certain
statements that may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. A number of important factors could
cause actual results to differ materially from those in the forward-looking
statements. Those factors include fluctuations in interest rates, inflation,
government regulations and economic conditions and competition in the geographic
and business areas in which the Company conducts its operations.
PART I
Item 1. Business
Business of MASSBANK Corp.
General
MASSBANK Corp. (the "Company") is a general business corporation
incorporated under the laws of the State of Delaware on August 11, 1986.
MASSBANK Corp. was organized for the purpose of becoming the holding company for
MASSBANK (the "Bank"). The Company is a one-bank holding company registered with
the Federal Reserve Board under the Bank Holding Company Act of 1956, as
amended. As of and since December 2, 1986, the effective date of the
reorganization whereby MASSBANK Corp. became the holding company for the Bank,
the Bank has been a wholly-owned subsidiary of MASSBANK Corp. The only office of
MASSBANK Corp., and its principal place of business, is located at the main
office of the Bank at 123 Haven Street, Reading, Massachusetts 01867.
MASSBANK Corp. currently has no material assets other than its investment
in the Bank. The Company's primary business, therefore, is managing its
investment in the stock of the Bank. MASSBANK Corp. is classified by the
Commonwealth of Massachusetts as a securities corporation for tax purposes which
restricts its business to buying, selling, dealing in, or holding securities on
its own behalf. In the future, MASSBANK Corp. may become an operating company or
acquire banks or companies engaged in bank-related activities.
MASSBANK Corp.'s principal sources of revenues on an unconsolidated basis,
which are used for the payment of dividends to stockholders and other purposes,
are dividends from MASSBANK and, to a lesser extent, interest income received
from its interest-bearing bank deposits. MASSBANK Corp.'s assets on an
unconsolidated basis at December 31, 1996 were represented by its investment in
the Bank of $91.8 million and other assets of $1.4 million. The Company's
liabilities consisted of loan indebtedness of $0.9 million and other liabilities
of less than $0.1 million. The proceeds of the loan were used to fund stock
purchases through the Employee Stock Ownership Plan ("ESOP"). See Note 16 to the
Consolidated Financial Statements for parent company only financial information.
At December 31, 1996 MASSBANK Corp. on a consolidated basis had total assets of
$888.2 million, deposits of $788.4 million, and stockholders' equity of $92.2
million which represents 10.4% of total assets. Book value per share at December
31, 1996 was $34.34.
The Company does not own or lease any real or personal property. Instead it
intends to utilize during the immediate future the premises, equipment and
furniture of the Bank without the direct payment of rental fees to the Bank.
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Competition
The primary business of MASSBANK Corp. currently is the ongoing business of
the Bank. Therefore, the competitive conditions faced by MASSBANK Corp.
currently are the same as those faced by the Bank. See "Business of MASSBANK -
Competition." In addition, many banks and financial institutions have formed
holding companies. It is likely that these holding companies will attempt to
acquire commercial banks, thrift institutions or companies engaged in
bank-related activities. MASSBANK Corp. would face competition in undertaking
any such acquisitions and in operating any such entity subsequent to its
acquisition.
Employees
MASSBANK Corp. does not employ any persons; its management also serves as
management of, and is paid by, the Bank. See "Item 10 - Directors and Executive
Officers of the Registrant." MASSBANK Corp. utilizes the support staff of the
Bank from time to time and does not pay any separate salaries or expenses in
connection therewith.
Dividends
MASSBANK Corp. paid total cash dividends of $0.92 per share in 1996
compared to $0.73 per share in 1995 and $0.60 per share in 1994. The Company's
dividend payout ratios (cash dividends paid divided by net income) for 1996,
1995 and 1994 were 26%, 23% and 21%, respectively.
Stock Repurchase Program
In July 1996, MASSBANK Corp. announced that its Board of Directors had
approved the repurchase of an additional 150,000 shares of its outstanding
common stock. Repurchases are expected to be made in the open market or in
private transactions over the next year. At December 31, 1996, the Company had
repurchased 11,346 of the 150,000 shares authorized by the Board.
Preferred Stock Purchase Rights
In January 1990, the Board of Directors declared a dividend distribution of
one Preferred Stock Purchase Right for each outstanding share of MASSBANK Corp.
common stock. These Rights, which expire in January 2000, entitle their holders
to purchase from the Company one one-hundreth of a share (a "unit") of Series A
Junior Participating Cumulative Preferred Stock, par value $1.00 per share
("preferred stock") at a cash exercise price of $70.00 per unit, subject to
adjustment. The Rights will trade separately from the common stock and will
become exercisable when a person or group has acquired 15% or more of the
outstanding common stock, upon a tender offer that would result in a person or
group acquiring 15% or more of the outstanding common stock, or upon the
declaration by the Board of Directors that any person holding 10% or more of the
outstanding shares of common stock is an "adverse person".
In the event a person or group acquires 15% or more of the outstanding
common stock or the Board of Directors declares a person an "adverse person",
each Right would entitle its holder (except if the holder is a person or group
described above) to receive upon exercise sufficient units of preferred stock to
equal a value of two times the exercise price of the Right. In the event the
Company is acquired in a merger or other business combination transaction or if
50% or more of the Company's assets or earning power is sold, each holder may
receive upon exercise common stock of the acquiring company having a market
value equal to two times the exercise price of the Right.
The Rights are redeemable in whole, but not in part, by the Board of
Directors at a price of $.01 1/3 per Right any time before a person or group
acquires 15% or more of the outstanding common stock or the Board of Directors
declares a person an "adverse person".
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<PAGE> 4
Business of MASSBANK
General
MASSBANK is a Massachusetts-chartered savings bank founded in 1872 as the
Melrose Savings Bank. In 1983, the Reading Savings Bank was merged into the
Melrose Savings Bank and the name of the resulting institution was changed to
MASSBANK for Savings. In 1986, the Bank converted from mutual to stock form of
ownership. In 1996, the name of the bank was changed from "MASSBANK for Savings"
to "MASSBANK".
The Bank is primarily engaged in the business of attracting deposits from
the general public through its fourteen full service banking offices in Reading,
Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford, Dracut
and Lowell, and originating residential and commercial real estate mortgages,
construction, and a variety of consumer loans. The Bank also invests a
significant portion of its funds in U.S. Treasury and Government agency
securities, mortgage-backed securities, federal funds sold, and other authorized
investments. The Bank's earnings depend largely upon net interest income, which
is the difference between the interest and dividend income derived by the Bank
from its loans and investments and the interest paid by the Bank on its deposits
and borrowed funds.
The Bank's deposits are insured to applicable limits by the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC") and
excess deposit accounts are insured by the Depositors Insurance Fund ("DIF"), a
private industry-sponsored deposit insurer.
The Bank recognizes that loan and investment opportunities change over time
and that yields derived from such opportunities can vary significantly even when
the risks associated with those opportunities are comparable. By developing a
relatively liquid loan and investment portfolio, the Bank has attempted to
position itself so as to be able to take advantage of these changing
opportunities. Consequently, the Bank expects that the relative mix of its loan
and investment portfolios will change over time in response to changing market
conditions.
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Acquisitions
On February 26, 1997, MASSBANK signed a definitive merger agreement to
purchase the Glendale Co-operative Bank ("Glendale") of Everett,
Massachusetts. Under the agreement, MASSBANK would acquire all of the
outstanding shares of Glendale at a price of $28.00 per share.
MASSBANK and Glendale simultaneously entered into a separate Stock Option
Agreement granting MASSBANK an option to purchase up to 19.9% of Glendale's
outstanding common stock at a price of $22.00 per share if any third party
should commence a tender or exchange offer for 25% or more of Glendale's common
stock and under certain other circumstances prior to consummation of the merger.
The transaction is valued at $7.38 million, assuming all of Glendale's 16,200
outstanding stock options are exercised prior to completion of the acquisition.
The transaction is subject to approval by Glendale's shareholders, various
regulatory agencies and satisfaction of certain financial contingencies. Among
other conditions, Glendale's closing costs may not exceed a specified amount and
the Agreement requires Glendale to have tangible Stockholders' equity of a
specified amount on the closing date. It is anticipated that the transaction
will close in the third quarter of 1997. The transaction will be accounted for
as a purchase.
Glendale Co-operative Bank is a Massachusetts chartered co-operative bank
founded in 1928 which operates from a single office in the city of Everett. At
January 31, 1997, Glendale reported total assets of $36.9 million, total
deposits of $30.8 million and total equity of $6.0 million.
In February 1992, the Bank acquired approximately $336 million in federally
insured deposits and other liabilities and certain assets of The Central Savings
Bank of Lowell, Massachusetts from the FDIC for a bid price of $2.2 million. Net
loans acquired totaled $147.9 million. The Bank also acquired Central Savings'
trust department and safe deposit operations.
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Market Area
The Bank is headquartered in Reading, Massachusetts, which is located
approximately 15 miles north of Boston. The Bank's market area includes a
significant portion of eastern Massachusetts and is served by a network of 14
branch offices located on a broad arc stretching from Melrose and Medford in the
south, Dracut in the north, and Westford in the west.
The Bank's general market area consists of the municipalities in which it
operates banking offices and all of the contiguous cities and towns.
The Bank currently operates banking offices in the municipalities of
Chelmsford, Dracut, Lowell, Medford, Melrose, Reading, Stoneham, Tewksbury,
Westford and Wilmington.
Lending Activities
The Bank's net loan portfolio totaled $247.4 million at December 31, 1996.
<TABLE>
The following table sets forth information concerning the Bank's loan portfolio
by type of loan at the dates shown:
<CAPTION>
- -------------------------------------------------------------------------------------------
(In thousands) At December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
Conventional $216,832 $209,408 $207,772 $204,096 $201,331
FHA and VA 2,515 3,244 4,158 5,166 6,985
Commercial 4,121 6,975 8,155 9,654 10,878
Construction 1,388 1,516 603 474 355
- -------------------------------------------------------------------------------------------
Total mortgage loans 224,856 221,143 220,688 219,390 219,549
Add: premium on loans 325 388 452 813 912
Less: deferred mortgage loan
origination fees (1,042) (928) (871) (856) (529)
- -------------------------------------------------------------------------------------------
Mortgage loans, net 224,139 220,603 220,269 219,347 219,932
- -------------------------------------------------------------------------------------------
Other loans:
Consumer:
Installment 1,967 1,988 1,972 2,474 4,259
Guaranteed education 9,729 10,420 10,152 9,131 8,237
Other secured 1,611 2,012 2,598 1,735 2,406
Home equity lines of credit 11,316 13,144 14,674 15,744 18,440
Unsecured 271 265 269 277 333
- -------------------------------------------------------------------------------------------
Total consumer loans 24,894 27,829 29,665 29,361 33,675
Commercial 628 753 882 338 149
- -------------------------------------------------------------------------------------------
Total other loans 25,522 28,582 30,547 29,699 33,824
- -------------------------------------------------------------------------------------------
Total loans 249,661 249,185 250,816 249,046 253,756
Less: Allowance for loan losses (2,237) (2,529) (2,566) (2,261) (2,056)
- -------------------------------------------------------------------------------------------
Net loans $247,424 $246,656 $248,250 $246,785 $251,700
- -------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
The following table shows the maturity distribution and interest rate
sensitivity of the Bank's loan portfolio at December 31, 1996:
<CAPTION>
Maturity/Scheduled Payments (1)
Within One to Five to After
(In thousands) one year five years ten years ten years Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $ 831 $5,484 $47,906 $164,426 $218,647
Commercial & construction 1,571 1,051 1,761 1,109 5,492
- -------------------------------------------------------------------------------------------
Total mortgage loans 2,402 6,535 49,667 165,535 224,139
Other loans 2,059 3,215 8,605 11,643 25,522
- -------------------------------------------------------------------------------------------
Total loans $4,461 $9,750 $58,272 $177,178 $249,661
- -------------------------------------------------------------------------------------------
<FN>
(1) Loan amounts are accumulated as if the entire balance came due on the last
contractual payment date. Accordingly, the amounts do not reflect proceeds from
contractual loan amortization or anticipated prepayments.
</TABLE>
<TABLE>
The following table shows the amounts, included in the table above, which
are due after one year and which have fixed or adjustable interest rates:
<CAPTION>
Total Due After One Year
Fixed Adjustable
(In thousands) Rate Rate Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage loans:
Residential $169,136 $48,680 $217,816
Commercial & construction 819 3,102 3,921
- -------------------------------------------------------------------------------------------
Total mortgage loans 169,955 51,782 221,737
Other loans 2,419 21,044 23,463
- -------------------------------------------------------------------------------------------
Total loans $172,374 $72,826 $245,200
- -------------------------------------------------------------------------------------------
</TABLE>
Mortgage Lending. The Bank believes that the repayment periods of long-
term first mortgage loans, the general resistance of the public to variable rate
mortgage instruments and the highly competitive nature of the mortgage industry
require a prudent approach to mortgage lending. Consequently, as part of its
policy of generally attempting to match the maturities of its assets and its
liabilities, the Bank, over several years, has kept its mortgage loan portfolio
to a level at which the Bank believed there was an acceptable risk- to-reward
ratio in light of opportunities in the marketplace and the Bank's long-term
objectives. The Bank's net loan portfolio represented approximately 27.9% and
28.9% of the Company's total assets at December 31, 1996, and 1995,
respectively. The Bank realizes that this low level of loans with respect to
assets in relation to the securities portfolio results in a reduction in yield;
however, the Bank believes that this reduction would be more than offset in risk
and loss associated with lending during periods of economic decline. In today's
economic climate, the Bank would prefer a more even mix of loans and securities.
However, there remains a tremendous amount of competition for mortgages in the
Bank's area, and developing a quality loan portfolio takes time. The Bank
anticipates that its loan portfolio will grow slowly over the next few years.
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Mortgage Lending (continued)
Loan originations come from a number of sources, including referrals from
real estate brokers, walk-in customers, purchasers of property owned by existing
customers and refinancing for existing customers. In addition to actively
soliciting loan referrals, the Bank conducts an advertising and promotion
program, directed both toward the general public and real estate professionals
who might refer potential borrowers.
Substantially all of the real estate loans originated by the Bank during
1996 were secured by real estate located in the Bank's primary lending area,
reflecting the Bank's commitment to serve the credit needs of the local
communities in which it operates banking offices.
The Bank makes both conventional fixed and adjustable-rate loans on one-
to-four family residential properties for a term of ten to thirty years. The
Bank retains the 10, 12, 15 or 20 year fixed rate mortgages and adjustable rate
mortgages it originates for its own portfolio. All long-term (25 or 30 year)
fixed rate residential mortgages are generally sold in the secondary market.
Adjustable-rate mortgage loans ("ARMs") have rates that are re-set at either 1,
3, 5 or 10 year intervals and provide a margin over various mortgage indices.
In the last few years, the Bank has also instituted new loan programs which
have been well received by customers. The first program features a 5/1 and 7/1
year ARM product with an initial fixed rate for 5 or 7 years and a 1 year
adjustable rate thereafter. A special First Time Home Buyers Program has also
been instituted featuring a discounted 7/1 ARM. This program is designed for
first-time home buyers meeting certain income and property location
restrictions. In late 1996, the Bank introduced the "Home Town Advantage"
mortgage program which is beginning to produce some good results. This new
program offers homebuyers a (0.125) percent discount on their mortgage rate if
they purchase residential property located in one of the communities where the
bank operates a banking office.
At December 31, 1996, 1-4 family residential mortgage loans totaled $218.6
million, or 87.6% of the total loan portfolio, compared to $212.1 million, or
85.1% of the total loan portfolio, at December 31, 1995. Residential mortgage
loan originations amounted to $41.9 million during 1996, an increase of 37.8%
from $30.4 million in 1995. Origination volumes are sensitive to interest rates
and are affected by the interest rate environment. The higher interest rates
existing during most of 1995 significantly curtailed loan originations activity
for that year. In 1996, loan originations were stronger due to a more favorable
interest rate environment.
The Bank also originates mortgage loans secured by commercial or investment
property such as multifamily housing, strip shopping centers, office buildings
and retail buildings. At December 31, 1996, commercial and multifamily real
estate mortgages and construction loans totaled approximately $5.5 million, or
2.2% of the total loan portfolio, compared to $8.5 million, or 3.4% of the total
loan portfolio, at December 31, 1995. In 1996, commercial and multifamily real
estate mortgage loan originations amounted to $0.5 million. There were no such
real estate mortgages originated in 1995.
The total amount of first mortgage loans held by the Bank at December 31,
1996 was $224.1 million as indicated in the maturity distribution table
appearing on the previous page. Of this amount, $53.3 million was subject to
interest rate adjustments. The remaining $170.8 million in fixed rate mortgage
loans represents 19.2% of the Company's total assets.
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Mortgage Lending (continued)
Fees received for originating loans and related direct incremental loan
origination costs are offset and the resulting net amount is deferred and
amortized over the life of the related loans using the level-yield method.
The Bank also receives fees and charges relating to existing loans,
primarily late charges and prepayment penalties.
Other Loans. The Bank makes a variety of consumer loans and had a consumer
loan portfolio of approximately $24.9 million at December 31, 1996 representing
10.0% of the Bank's total loan portfolio. Of this amount $9.7 million or 3.9% of
the total loan portfolio are education loans made under the Massachusetts Higher
Education Assistance Corporation. The Bank may sell education loans in the
future.
The balance of the Bank's consumer loan portfolio consists of home equity
lines of credit and installment consumer credit contracts such as automobile
loans, home improvement loans and other secured and unsecured financings. These
loans totaled $15.2 million at December 31, 1996, representing 6.1% of the
Bank's total loan portfolio.
At December 31, 1996, the Bank had only $628 thousand in outstanding
loans to commercial enterprises not secured by real estate.
Loan Approval. The Bank's loan approval process for all loans generally
includes a review of an applicant's financial statements, credit history,
banking history and verification of employment. For mortgage loans, the Bank
generally obtains an independent appraisal of the subject property. The Bank has
a formal lending policy approved by the Board of Directors of the Bank which
delegates levels of loan approval authority to Bank personnel. All loans in
excess of established limits require approval of the Bank's Board of Directors.
The Bank issues commitments to prospective borrowers to make loans subject
to certain conditions for generally up to 60 days. The interest rate applicable
to the committed loans is usually the rate in effect at the time the application
fee is paid. At December 31, 1996, the Bank had issued commitments on
residential first mortgage loans totaling $4,264,000, and had commitments to
advance funds on construction loans and unused credit lines, including unused
portions of home equity lines of credit, of $332,000 and $19,546,000,
respectively.
Loan Delinquencies. It is the Bank's policy to manage its loan portfolio so
as to recognize problem loans at an early stage and thereby minimize loan
losses. Loans are considered delinquent when any payment of principal or
interest is 30 days or more past due. The Bank generally commences collection
procedures, however, when accounts are 15 days past due. It is the Bank's
practice to generally discontinue accrual of interest on all loans for which
payments are more than 90 days past due. Loans delinquent for 90 or more days,
as shown in the table on the following page, totaled $1,601,000 at December 31,
1996.
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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. Real
estate acquired through foreclosure totaled $503,000 as of year-end 1996.
Non-Performing Assets
<TABLE>
The following table shows the composition of non-performing assets at the
dates shown:
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands) At December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Mortgage loans:
Residential:
Conventional $1,468 $2,016 $1,496 $1,048 $1,075
FHA and VA 13 14 62 43 55
Commercial -- -- 152 -- 135
Consumer 120 398 388 178 241
- ------------------------------------------------------------------------------------------------
Total nonaccrual loans 1,601 2,428 2,098 1,269 1,506
- ------------------------------------------------------------------------------------------------
Real estate acquired through foreclosure:
Residential:
Conventional 503 255 129 699 545
Land development -- -- -- -- 360
- ------------------------------------------------------------------------------------------------
Total real estate acquired through
foreclosure 503 255 129 699 905
- ------------------------------------------------------------------------------------------------
Total non-performing assets $2,104 $2,683 $2,227 $1,968 $2,411
- ------------------------------------------------------------------------------------------------
Percent of non-performing loans to total loans 0.64% 0.97% 0.84% 0.51% 0.59%
Percent of non-performing assets to total assets 0.24% 0.31% 0.26% 0.23% 0.29%
</TABLE>
<TABLE>
The reduction in interest income associated with nonaccrual loans is as follows:
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands) Years Ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income that would have been
recorded under original terms $149 $204 $185 $105 $160
Interest income actually recorded 78 60 88 40 $ 80
- ------------------------------------------------------------------------------------------------
Reduction in interest income $ 71 $144 $ 97 $ 65 $ 80
- ------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 11
Allowance for Loan Losses.
The allowance for loan losses is increased by provisions charged to
operations based on management's assessment of many factors including the risk
characteristics of the portfolio, underlying collateral, current and anticipated
economic conditions that may affect the borrower's ability to pay, and trends in
loan delinquencies and charge-offs. Realized losses, net of recoveries, are
charged directly to the allowance. While management uses the information
available in establishing the allowance for 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.
<TABLE>
The following table sets forth the activity in the allowance for loan losses
during the years indicated:
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands) Years ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,529 $2,566 $2,261 $2,056 $ 375
Central Savings acquisition -- -- -- -- 1,100
Provision for loan losses 160 170 705 671 884
Charge-offs:
Residential real estate (480) (124) (339) (305) (262)
Commercial real estate -- -- -- (135) --
Consumer loans (25) (30) (24) (17) (20)
Other loans (37) (95) (63) (31) (24)
Recoveries:
Residential real estate 83 41 23 20 1
Consumer loans 7 1 3 2 2
- ------------------------------------------------------------------------------------------------
Net charge-offs (452) (207) (400) (466) (303)
- ------------------------------------------------------------------------------------------------
Balance at end of year $2,237 $2,529 $2,566 $2,261 $2,056
- ------------------------------------------------------------------------------------------------
Net loan charge offs as a percent of average
loans outstanding during the period 0.18% 0.08% 0.16% 0.19% 0.13%
Allowance for loan losses as a percent
of total loans outstanding at year-end 0.90% 1.01% 1.02% 0.91% 0.81%
Allowance for loan losses as a percent
of nonaccrual loans 139.7% 104.2% 122.3% 178.2% 136.5%
- ------------------------------------------------------------------------------------------------
</TABLE>
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Investment Activities
The Bank believes that investment opportunities in United States
Government, corporate and other securities are at times more attractive than the
opportunities present in the loan market. As compared to loans, these
investments of the Bank are generally shorter-term and hence more liquid, are
subject to lower risk of loss, and present an opportunity for appreciation. In
addition, these investments often permit the Bank to better match the maturities
of its assets and its liabilities.
The Bank's investment portfolio is managed by its officers in accordance
with an investment policy approved by the Bank's Board of Directors. The
objectives of that policy are to provide a level of liquidity, earnings and
diversification consistent with the exercise of prudent investment judgment. The
policy authorizes the senior management of the Bank to make and execute
investment decisions and requires that those persons report all investment
transactions to the Bank's Board of Directors at each of its regular meetings.
In addition, management is required to report all gains or losses on all
securities transactions at each meeting of the Bank's Board of Directors.
Purchases and sales of securities by the Bank are generally required to be made
on a competitive basis and all investments must be permitted by applicable law.
The Bank invests in a wide variety of securities and obligations,
including: Federal funds sold (which are sold only to institutions included on
the Bank's internally-prepared approved list of adequately capitalized
institutions); commercial paper and bankers' acceptances; United States Treasury
and Government agency obligations; United States agency guaranteed and other
mortgage-backed securities; investment grade corporate debt securities
(generally limited to those rated A or better by Standard & Poor's); mutual
funds; and equity securities traded on a national securities exchange or quoted
on the NASDAQ System.
At December 31, 1993, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 115 "Accounting for Certain Investments
in Debt and Equity Securities". Under this method, the Company records
investment securities available for sale at aggregate market value with the net
unrealized holding gains or losses reported, net of tax effect, as a separate
component of stockholders' equity until realized. As of December 31, 1996,
stockholders' equity included approximately $4.0 million, representing the net
unrealized gains on securities available for sale, less applicable income taxes.
Prior to December 31, 1993, the Company recorded its investment securities
available for sale at the lower of aggregate cost or market value with the net
unrealized losses reported in non-interest income as a component of "gains
(losses) on securities."
In the fourth quarter of 1995, the Company adopted the Financial Accounting
Standards Board guidelines, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," issued on
November 15, 1995. Under these guidelines, the Company was allowed a one-time
opportunity to reassess the appropriateness of its FASB 115 investment
classifications and reclassify securities from the held to maturity category to
the available for sale category, or vice versa. As a result of this reassessment
and after thoughtful consideration, the Company reclassified all of its
mortgage-backed securities from the held to maturity category to the available
for sale category in accordance with the FASB guidelines. The total amortized
cost of the securities reclassified was $202.8 million. These securities had
total unrealized gains of $3.7 million on the date they were reclassified.
12
<PAGE> 13
Investment Activities (continued)
Under the investment policy management determines the appropriate
classification of securities at the time of purchase. Those securities that the
Company has the intent and the ability to hold to maturity are classified as
securities held to maturity and are carried at amortized historical cost.
Those securities held for indefinite periods of time and not intended to be
held to maturity are classified as available for sale. Securities held for
indefinite periods of time include securities that management intends to use as
part of its asset/liability management strategy and that may be sold in response
to changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital and other similar factors. Income on debt securities
available for sale is accrued and included in interest and dividend income. The
specific identification method is used to determine realized gains and losses on
sales of securities available for sale which are also reported in non-interest
income under the caption "gains (losses) on securities." When a security suffers
a loss in value which is considered other than temporary, such loss is
recognized by a charge to earnings.
Investments classified as trading securities are stated at market with
unrealized gains or losses included in earnings. Income on debt trading
securities is accrued and included in interest and dividend income. All of the
Company's mortgage-backed securities are currently classified as available for
sale. Prior to the fourth quarter of 1995, mortgage-backed securities were
classified as securities held to maturity and stated at cost, which was adjusted
for amortization of premiums and accretion of discounts by crediting or charging
interest and dividend income over the life of the related securities using a
method which approximated the level yield method. At times of low loan demand,
short-term mortgage-backed securities may be used as substitutes for loans as
certain of their financial characteristics are very similar to short-term
mortgage loans.
At December 31, 1996, the Company's investments, which consists of
securities held to maturity, securities available for sale (including
mortgage-backed securities), trading securities, short-term investments, term
federal funds sold and interest-bearing deposits in banks totaled $622.6
million, representing 70.1% of the Company's total assets.
13
<PAGE> 14
<TABLE>
The following table sets forth the composition of the Company's investment
portfolio as of the dates indicated:
<CAPTION>
Investment Portfolio
- ------------------------------------------------------------------------------------------------
(In thousands) At December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds sold:
Overnight federal funds $109,902 $100,245 $ 22,551
Term federal funds 10,000 15,000 --
- ------------------------------------------------------------------------------------------------
Total federal funds sold 119,902 115,245 22,551
Money market funds 24,408 7,260 --
Interest-bearing deposits in bank 1,751 941 --
- ------------------------------------------------------------------------------------------------
Total federal funds sold and other
short-term investments $146,061 $123,446 $ 22,551
- ------------------------------------------------------------------------------------------------
Percent of total assets 16.4% 14.4% 2.7%
- ------------------------------------------------------------------------------------------------
(In thousands) At December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------
Securities held to maturity: (a)
Other bonds and obligations 160 $ 402 $ 567
Mortgage-backed securities -- -- 172,263
Other securities -- -- --
- ------------------------------------------------------------------------------------------------
Total securities held to maturity 160 402 172,830
Securities available for sale: (b)
U.S. Treasury obligations 140,706 212,115 242,787
U.S. Government agency obligations 7,877 14,172 6,043
Other bonds and obligations 1,000 2,004 1,914
Marketable equity securities 15,574 11,290 6,900
Mortgage-backed securities 306,595 216,520 --
- ------------------------------------------------------------------------------------------------
Total securities available for sale 471,752 456,101 257,644
Trading securities: (b)
U.S. Treasury obligations -- -- 112,166
Investments in mutual funds 4,672 6,819 3,444
- ------------------------------------------------------------------------------------------------
Total trading securities 4,672 6,819 115,610
- ------------------------------------------------------------------------------------------------
Total securities $476,584 $463,322 $546,084
- ------------------------------------------------------------------------------------------------
Percent of total assets 53.7% 54.2% 64.7%
- ------------------------------------------------------------------------------------------------
Total investments $622,645 $586,768 $568,635
Total investments as a percent of total assets 70.1% 68.7% 67.4%
- ------------------------------------------------------------------------------------------------
<FN>
(a) At amortized cost.
(b) At market value.
</TABLE>
14
<PAGE> 15
<TABLE>
The following tables present the carrying value of debt securities held to
maturity and available for sale at December 31, 1996 maturing within stated
periods with the weighted average interest yield from securities falling within
the range of maturities:
<CAPTION>
Debt Securities Held to Maturity
Other
bonds
and
(Dollars in thousands) obligations (1) Total
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Maturing after 5 years
but within 10 years
Amount $ 111 $ 111
Yield 9.15% 9.15%
Maturing after 10 years
but within 15 years
Amount 49 49
Yield 10.29% 10.29%
- -----------------------------------------------------------------------------------------
Total
Amount $ 160 $ 160
Yield 9.50% 9.50%
Average life in years 9.65 9.65
Debt Securities Available for Sale
<CAPTION>
U.S. Other Mortgage-
U. S. Government bonds backed
Treasury agency and securities (2)
(Dollars in thousands) obligations obligations obligations Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maturing within 1 year
Amount $ 55,820 $ -- $1,000 $ -- $ 56,820
Yield 6.92% 6.35% 6.91%
Maturing after 1
but within 5 years
Amount 80,390 6,899 -- 2,408 89,697
Yield 6.74% 6.47% 7.99% 6.75%
Maturing after 5
but within 10 years
Amount 2,987 1,000 -- 15,975 19,962
Yield 6.47% 6.76% 8.51% 8.12%
Maturing after 10
but within 15 years
Amount -- -- -- 287,364 287,364
Yield 6.92% 6.92%
- ------------------------------------------------------------------------------------------------
Total
Amount $139,197 $7,899 $1,000 $305,747 $453,843
Yield 6.80% 6.51% 6.35% 7.01% 6.94%
- ------------------------------------------------------------------------------------------------
Average life in years 1.65 3.81 0.04
Average contractual
maturity in years 12.84
</TABLE>
15
<PAGE> 16
(1) Yields on tax exempt obligations have been computed on a tax equivalent
basis.
(2) Mortgage-backed securities are shown at their contractual maturity, but
are expected to have shorter lives due to scheduled payments and
prepayments.
At December 31, 1996, the Company did not have an investment in any issuer
(other than securities of the U.S. government) in excess of 10% of stockholders
equity.
Asset/Liability Management
Due to the volatility of interest rates, managing interest rate risk is
important in determining the profitability of the Company.
Interest rate risk arises from the difference in aggregate balances and
repricing dates of interest-earning assets compared to interest-bearing
liabilities. These differences, or repricing "gaps", provide an indication of
the extent to which net interest income is vulnerable to interest rate
fluctuations in future periods.
The Company attempts to manage the net repricing gaps to maintain what it
believes to be the most appropriate balance between earnings and exposure to
interest rate fluctuations. It attempts to manage its interest rate gap
primarily by lengthening or shortening the maturity structure of the Company's
portfolio of securities and other investments.
The Company closely monitors its one year "gap" position. One year "gap" is
the difference between the amount of assets and liabilities repricing over the
next twelve months. An institution with more assets maturing in one year than
liabilities could experience a decline in net interest income if interest rates
declined. Conversely, an institution with more liabilities repricing in one year
than assets could experience a decline in net interest income if rates rose. At
December 31, 1996, the one-year cumulative gap position was negative at $36.5
million, or approximately 4.1% of total assets.
The table on the following page sets forth the Company's repricing "gaps"
both in terms of dollar volume and as a percentage of total assets.
16
<PAGE> 17
<TABLE>
The following table details the projected amounts of the Company's
interest-sensitive assets and liabilities at December 31, 1996 that are
scheduled or assumed to mature or reprice during the time periods indicated. All
earning assets shown are at amortized cost, exclusive of the effects of SFAS No.
115, with the exception of trading securities which are stated at market.
<CAPTION>
Interest Rate Sensitivity Gap Analysis - At December 31, 1996
0 - 3 3 - 6 6 - 12 1 - 3 Over 3
(In thousands) Months Months Months Years Years Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Mortgage loans (1) $ 9,040 $ 9,595 $ 22,281 $ 74,374 $108,849 $224,139
Other loans 21,637 35 1,432 805 1,613 25,522
- ---------------------------------------------------------------------------------------------
Total loans 30,677 9,630 23,713 75,179 110,462 249,661
Securities held to maturity 49 -- -- 111 -- 160
Securities available for sale:
mortgage-backed securities (2) 8,950 9,233 19,023 75,106 193,435 305,747
other 24,009 17,988 25,837 68,424 22,852 159,110
Trading securities 4,672 -- -- -- -- 4,672
Short term investments 134,310 -- -- -- -- 134,310
Term federal funds sold -- 10,000 -- -- -- 10,000
Interest bearing deposits in banks -- -- 1,008 743 -- 1,751
- ---------------------------------------------------------------------------------------------
Total interest sensitive assets 202,667 46,851 69,581 219,563 326,749 865,411
Non-interest earning assets -- -- -- -- 22,826 22,826
- ---------------------------------------------------------------------------------------------
Total Assets $202,667 $ 46,851 $ 69,581 $219,563 $349,575 $888,237
Interest sensitive liabilities:
NOW accounts (4) $ -- $ -- $ -- $ -- $ 45,352 $ 45,352
Smart Savings accounts 68,969 -- -- -- -- 68,969
Regular savings and
special notice accounts (3)(4) 5,000 5,000 10,000 32,000 212,865 264,865
Money market accounts 23,824 -- -- -- -- 23,824
Time certificates of deposit 89,757 67,602 84,180 124,587 3,013 369,139
Escrow deposits of borrowers 1,271 -- -- -- -- 1,271
- ---------------------------------------------------------------------------------------------
Total interest sensitive
liabilities 188,821 72,602 94,180 156,587 261,230 773,420
Non-interest bearing liabilities -- -- -- -- 22,567 22,567
Stockholders' equity -- -- -- -- 92,250 92,250
- ---------------------------------------------------------------------------------------------
Total liabilities and
Stockholder's equity $188,821 $ 72,602 $ 94,180 $156,587 $376,047 $888,237
Period Repricing Difference
(Period Gap) 13,846 (25,751) (24,599) 62,976 65,519 91,991
Cumulative Repricing Difference
(Cumulative Gap) 13,846 (11,905) (36,504) 26,472 91,991
Cumulative Gap as a
Percentage of Total Assets 1.6% -1.3% -4.1% 3.0% 10.4%
- ---------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
(1) Fixed rate mortgage loan amounts are accumulated as if the entire balance
came due on the last contractual payment date and adjustable rate mortgage
loan amounts are accumulated as if the entire balance came due on the
repricing date. Mortagage amortization, based on regularly scheduled
principal payments, is reflected along with an adjustment for prepayments,
which is based on historical prepayment information.
(2) The mortgage-backed securities allocation reflects expected cash flows,
including anticipated prepayments.
(3) Based on a historical analysis of runoff of regular savings and special
notice accounts (SNAs) at various levels at which short term rates exceed
savings rates. This analysis anticipates moderate increases in short-term
rates during 1997.
(4) Any future changes to the interest rates paid on these accounts is at the
sole discretion of management.
The interest rate sensitivity of the Company's assets and liabilities
illustrated in the table above would vary significantly if different assumptions
were used or if actual experience differed from that indicated by such
assumptions.
18
<PAGE> 19
Deposits and Other Sources of Funds
General. Deposits have been the primary source of funds of the Bank for
making investments and loans. In addition to deposits, the Bank's other major
sources of funds are derived from amortization and prepayment of loans and
mortgage-backed securities, from sales or maturities of securities, and from
operations. Deposit flows can vary significantly and are influenced by
prevailing interest rates, money market conditions, economic conditions and
competition. The Bank can respond to changing market conditions and competition
through the pricing of its deposit accounts. Management can control the level of
its deposits to a significant degree through its pricing policies. Another
important factor in attracting deposits is convenience. In addition to the
Bank's fourteen conveniently located banking offices, customers can access
accounts through the Bank's ATM network. The Bank is a member of the Transaxion
("TX"), New York Cash Exchange ("NYCE") and CIRRUS System, Inc. ("CIRRUS")
networks which allow access to ATMs in over 100,000 locations worldwide.
Deposits. A substantial amount of the Bank's deposits are derived from
customers who live or work within the Bank's market area. The Bank does not
solicit deposits through any outside agents. The Bank's deposits consist of
regular, silver and smart savings accounts, special notice accounts, NOW and
Super NOW accounts, business checking accounts, money market deposit accounts,
IRA and Keogh accounts, and term deposit accounts.
The Bank's deposits increased by $34.7 million or 4.6% during the twelve
months ended December 31, 1996, from $753.7 million at year end 1995 to $788.4
million at the end of 1996. These were favorable results considering the
performance of the stock market and mutual funds which were both fierce
competitors for the savers' dollars in 1996. The growth in deposits is primarily
attributable to an increase in the Bank's time certificates of deposit which
increased by $37.1 million during the past year. The Bank's strategy, in 1996,
was to attract more long term deposits from the general public. By selectively
increasing certain time certificate of deposit (CD) rates the Bank was
successful in increasing its CD deposits with maturities in excess of one year
by $29.8 million, representing approximately 86% of its total deposit growth in
1996.
Borrowed Funds. From time to time the Bank has obtained funds through
repurchase agreements with its customers and federal funds purchased. The Bank
also has the ability, although it has never exercised it, to borrow from the
Federal Reserve Bank and The Depositors Insurance Fund, Inc.
The Company did not have any borrowed funds in 1996 or 1995. Borrowed funds
averaged $159,000 during the year ended December 31, 1994. The highest month end
balance of the Company's total borrowings during the year ended December 31,
1994 was $228,000.
19
<PAGE> 20
DEPOSITS
<TABLE>
The following table shows the composition of the deposits as of the dates
indicated:
<CAPTION>
(In thousands) at December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
<S> <C> <C> <C> <C> <C> <C>
Demand and NOW
NOW $ 45,352 5.75% $ 51,197 6.79% $ 53,428 7.03%
Demand accounts
(non interest-bearing) 17,382 2.21 15,216 2.02 14,068 1.85
-------- ------ -------- ------ -------- ------
Total demand and NOW 62,734 7.96 66,413 8.81 67,496 8.88
Savings:
Regular savings and
special notice accounts 333,834 42.35 330,230 43.82 430,143 56.62
Money market accounts 23,824 3.02 26,368 3.50 28,258 3.72
-------- ------ -------- ------ -------- ------
Total savings 357,658 45.37 356,598 47.32 458,401 60.34
Time Certificates of deposit:
Fixed rate certificates 303,722 38.52 274,684 36.45 187,319 24.66
Variable rate certificates 65,417 8.30 57,373 7.61 48,102 6.33
-------- ------ -------- ------ -------- ------
Total time certificates
of deposit 369,139 46.82 332,057 44.06 235,421 30.99
Deposit acquisition premium,
net of amortization (1,181) (.15) (1,411) (.19) (1,642) (.21)
-------- ------ -------- ------ -------- ------
Total deposits $788,350 100.00% $753,657 100.00% $759,676 100.00%
</TABLE>
<TABLE>
In the following table the average amount of deposits and average rate is
shown for each of the years as indicated.
<CAPTION>
(In thousands) Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $ 47,977 1.20% $ 51,301 1.27% $ 52,884 1.29%
Demand (non interest-bearing)
accounts 15,992 -- 13,645 -- 13,166 --
Money market accounts 25,205 3.20 28,052 3.29 31,795 2.70
Regular savings and
special notice accounts 332,851 3.44 359,397 3.59 482,220 3.34
Time certificates of deposit 352,385 5.74 300,141 5.78 186,222 4.57
-------- ---- -------- ---- -------- ----
$774,410 4.27% $752,536 4.11% $766,287 3.41%
</TABLE>
20
<PAGE> 21
Investment Management and Trust Services
In 1992, the Bank acquired a trust division as part of its Central Savings
Bank acquisition. The Trust and Investment Services Division offers a variety of
investment, trust and estate planning services and also serves as Trustee,
Executor, and Executor's Agent for bank customers.
As of December 31, 1996 the Trust Division had approximately $26.5 million
(market value) of assets in custody and under management.
Competition
The Bank faces substantial competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from other
thrift institutions, commercial banks, credit unions and mortgage banking
companies. The Bank competes for loans principally on the basis of interest
rates and loan fees, the types of loans originated and the quality of services
provided to borrowers.
In attracting deposits, the Bank's primary competitors are other thrift
institutions, commercial banks, mutual funds and credit unions located in its
market area. The Bank's attraction and retention of deposits depend on its
ability to provide investment opportunities that satisfy the requirements of
customers with respect to rate of return, liquidity, risk and other factors. The
Bank attracts a significant amount of deposits through its branch offices
primarily from the communities in which those branch offices are located. The
Bank competes for these deposits by offering competitive rates, convenient
branches and ATM locations and convenient business hours.
21
<PAGE> 22
Supervision and Regulation
The Bank is in a heavily regulated industry. As a Massachusetts- chartered
savings bank whose deposits are insured by the FDIC and The Depositors Insurance
Fund, the Bank is subject to regulation, supervision and examination by federal
and state regulatory authorities, including, but not limited to the FDIC, the
Massachusetts Commissioner of Banks and The Depositors Insurance Fund. This
Federal and State regulation is for the benefit of borrowers, depositors and the
respective deposit insurance funds and is not for the benefit of the Bank, the
Company or its stockholders.
The Bank is subject to extensive federal and state statutes, regulations,
policies and standards regarding virtually all aspects of its operations,
including capital adequacy, reserves, liquidity, payment of dividends,
transactions with affiliates, loans to officers, directors, principal
shareholders and their related interests, mergers, acquisitions and changes in
controlling ownership, establishment, relocation and closure of branch banking
offices, community reinvestment, fair lending, fair credit reporting, real
estate settlement procedures, funds availability, disclosure to consumers and
financial accounting, reporting and recordkeeping. In the event the Bank did not
operate in accordance with FDIC statutes, regulations or policies, the FDIC has
authority to terminate insurance of the Bank's deposit accounts and the FDIC and
the Commissioner of Banks have authority to impose other sanctions for such
non-compliance. For a discussion of the Bank's capital adequacy, see Note 13 of
Notes to Consolidated Financial Statements appearing in the Company's 1996
Annual Report to Stockholders, which is incorporated herein by reference.
In addition, as a bank holding company, the Company is subject to
supervision, examination and regulation by the Board of Governors of the Federal
Reserve System and is subject to statutes, regulations and policies relating to,
among other things, mergers, acquisitions and changes in controlling ownerships,
non-bank activities and subsidiaries, capital adequacy, the payment of
dividends, the tying of the sale or pricing of products or services of bank and
nonbank subsidiaries, and the provision of financial and managerial support of
its subsidiary bank.
22
<PAGE> 23
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") made significant changes in federal laws governing depository
institutions and the FDIC. Among other changes, FDICIA requires federal bank
regulatory agencies to take "prompt corrective action" with respect to banks
that do not meet applicable regulatory capital requirements. In addition, FDICIA
prohibits state chartered banks from engaging, as principals, in activities such
as equity investments and insurance underwriting, which are not permissible for
national banks, unless the FDIC has determined that the activity would pose no
significant risk to the Bank Insurance Fund and the state bank is in compliance
with applicable capital standards. An insured state bank, such as MASSBANK, may
to the extent permitted by the FDIC, acquire and retain ownership of common or
preferred stock listed on a national securities exchange, provided that the
insured state bank made or maintained an investment in such securities during
the period beginning on September 30, 1990 and ending on November 26, 1991,
which MASSBANK did, and provided further that the aggregate amount of the
investment does not exceed 100 percent of the Bank's capital. At December 31,
1996, the Bank had marketable equity securities with a market value of
approximately $15.6 million, representing 17.1% of the Bank's equity capital. In
addition, FDICIA limits the aggregate amount a bank may lend to its directors,
executive officers and principal shareholders and their related interests,
prohibits depository institutions that are not well capitalized from accepting
brokered deposits without an express waiver from the FDIC, requires uniform
disclosures to consumers of the terms of bank deposit accounts, and requires
banks to give regulators and bank customers advance notice of branch closings.
FDICIA also establishes a system of risk-based deposit insurance assessments
that takes a bank's capital level and supervisory risk characteristics into
account in calculating the amount of its federal deposit insurance assessment.
FDICIA imposes new annual audit and reporting requirements on banking
organizations with more than $500 million in total assets. Finally, the FDICIA
requires the FDIC and the other Federal bank regulatory agencies to issue
regulatory standards to govern various aspects of bank operations including real
estate lending, executive compensation, loan documentation, credit underwriting,
interest rate risk exposure, and asset growth.
From time to time the U.S. Congress and the Massachusetts Legislature adopt
legislation and the Federal and State bank regulatory agencies issue regulations
and policies that may significantly affect the operations of the Bank and the
Company. No assurance can be given as to whether additional legislation will be
enacted or whether additional regulations or policies will be issued or as to
the effect any such legislation, regulations or policies may have on the Bank or
the Company.
23
<PAGE> 24
Employees
MASSBANK Corp. utilizes the support staff of the Bank from time to time
without the payment of any fees. No separate compensation is being paid to the
executive officers of MASSBANK Corp., all of whom are executive officers of the
Bank and receive compensation as such. As of December 31, 1996, the Bank had 149
full-time employees, including 29 officers, and 61 part-time employees. None of
the Bank's employees is represented by a collective bargaining group, and
management believes that its employee relations are good. The Bank provides its
employees with formal training in product knowledge, sales techniques, fair
lending, and motivation. In addition, each supervisor at the Bank receives
management training before assuming his or her supervisory duties and
periodically thereafter. The Bank maintains a comprehensive employee benefit
program for qualified employees that includes a qualified pension plan, an
Employee Stock Ownership Plan (ESOP), health and dental insurance, life and
long-term disability insurance and tuition assistance.
Subsidiaries
The Bank has four wholly-owned subsidiaries: Readibank Investment
Corporation, Melbank Investment Corporation, Readibank Equipment Corporation and
Readibank Properties, Inc.
Readibank Investment Corporation and Melbank Investment Corporation were
established for the purpose of managing portions of the Bank's investment
portfolio. Assets of Readibank Investment Corporation and Melbank Investment
Corporation totaled $38.3 million and $60.5 million, at December 31, 1996,
respectively.
Readibank Equipment Corporation is an office equipment and furniture lessor
whose sole lessee is the Bank. Assets of Readibank Equipment Corporation totaled
$218 thousand at December 31, 1996.
Readibank Properties, Inc. incorporated primarily for the purpose of real
estate development, had total assets of $636 thousand at December 31, 1996.
Executive Officers of the Registrant
The executive officers of the Company and the Bank and the age of each
officer as of February 28, 1997 are as follows:
Name Age Office
Gerard H. Brandi 48 Chairman of the Board of Directors,
President and Chief Executive
Officer of the Company and the Bank
Raymond A. Brearey 60 Vice President of the Bank
David F. Carroll 49 Vice President of the Bank
Reginald E. Cormier 49 Vice President, Treasurer and Chief
Financial Officer of the Company and
the Bank
Donald R. Washburn 53 Senior Vice President of the Bank
Donna H. West 51 Senior Vice President of the Bank
and Assistant Secretary of the
Company
24
<PAGE> 25
Gerard H. Brandi. Mr. Brandi has served in various capacities with MASSBANK
since he joined the Bank in 1975 as Vice President of the Lending Division. He
served as Senior Vice President from 1978 to 1981, Executive Vice President and
Senior Lending Officer from 1981 to 1983, and Executive Vice President and
Treasurer from 1983 to 1986. Mr. Brandi was named President of the Company and
the Bank in 1986, Chief Executive Officer in 1992 and Chairman in 1993.
Raymond A. Brearey. Mr. Brearey is Vice President and Senior Trust Officer
of the Bank. Prior to joining the Bank in 1992, Mr. Brearey was a Senior Trust
Officer of the Malden Trust Company in Malden, Massachusetts.
David F. Carroll. Mr. Carroll has been employed by the Bank since 1983 and
has been Vice President of Operations since 1984. He served as Vice President of
the Lending Division for a year before becoming Vice President of Operations.
Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in September,
1987 and has served in this capacity until his promotion to Vice President,
Treasurer and Chief Financial Officer in January, 1995.
Donald R. Washburn. Mr. Washburn joined the Bank in 1973 as a Loan Officer.
He became an Assistant Vice President in January, 1977 and a Vice President in
the Lending Division in June, 1980. Mr. Washburn served as Vice President of the
Operations Division from February, 1983 to January, 1984, as Vice President of
the Retail Banking Division from January, 1984 to January, 1986 and as Vice
President of the Lending Division from January, 1986 until his promotion to
Senior Vice President of the Lending Division in June, 1994.
Donna H. West. Mrs. West has been employed by the Bank since 1979 and has
served as Vice President of the Retail Banking Division since October, 1987.
Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West became a
Branch Manager in 1981, an Assistant Treasurer and Branch Manager in 1982, an
Assistant Treasurer and Regional Branch Administrator in 1984 and an Assistant
Vice President and Regional Branch Administrator in 1986. She served in this
capacity until her October, 1987 promotion to Vice President of the Retail
Banking Division. In June, 1994, Mrs. West was promoted to Senior Vice President
of the Retail Banking Division.
25
<PAGE> 26
Item 2. Properties
The main office of MASSBANK Corp. and MASSBANK is located at 123 Haven
Street, Reading, Massachusetts. Additionally, the Bank has thirteen branches and
three operations facilities. The Bank owns its main office, two operations
facilities and six of its branches. All of the remaining branches and other
facilities are leased under various leases. At December 31, 1996, management
believes that the Bank's existing facilities are adequate for the conduct of its
business.
<TABLE>
The following table sets forth certain information relating to the Bank's
existing facilities.
<CAPTION>
Owned Lease Renewal
or Expiration Option
Location Leased Date Through
<S> <C> <C> <C> <C>
MAIN OFFICE: 123 Haven Street, Reading, MA Owned ---- ----
BRANCH 476 Main Street, Melrose, MA Owned ---- ----
OFFICES: 27 Melrose Street, Towers Plaza,
Melrose, MA Leased 2004 2014
370 Main Street, Wilmington, MA Owned ---- ----
219 Lowell Street, Lucci's Plaza,
Wilmington, MA Leased 2006 ----
240 Main Street, Stoneham, MA Leased 1998 2003
4110 Mystic Valley Pkwy, Medford, MA Leased 2001 ----
296 Chelmsford Street, Chelmsford, MA Leased 1998 ----
17 North Road, Chelmsford, MA Leased 1999 (1)
45 Broadway Road, Dracut, MA Leased 2002 ----
50 Central Street, Lowell, MA Owned ---- ----
755 Lakeview Avenue, Lowell, MA Owned ---- ----
1800 Main Street, Tewksbury, MA Owned ---- ----
203 Littleton Road, Westford, MA Owned ---- ----
OPERATIONS
FACILITIES: 159 Haven Street, Reading, MA Owned ---- ----
169 Haven Street, Reading, MA Owned ---- ----
11 North Road, Chelmsford, MA Leased 1999 (1)
<FN>
(1) Bank has option to purchase in year 2000.
</TABLE>
Item 3. Legal Proceedings
From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their business. As
of December 31, 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 4. Submission of Matters to a Vote of Security Holders
None.
26
<PAGE> 27
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information contained under the caption "MASSBANK Corp. and
Subsidiaries Stockholder Data" in the Registrant's 1996 Annual Report to
Stockholders is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained under the caption "MASSBANK Corp. and
Subsidiaries - Selected Consolidated Financial Data" in the Registrant's 1996
Annual Report to Stockholders is incorporated herein by reference.
This selected consolidated financial data should be read in conjunction
with the consolidated statements and related notes thereto appearing in the
Registrant's 1996 Annual Report to Stockholders which are incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's consolidated financial statements and notes thereto,
together with the report of KPMG Peat Marwick LLP, contained in the Registrant's
1996 Annual Report to Stockholders are incorporated herein by reference. The
unaudited quarterly financial data set forth on page 49 of such Annual Report is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Independent Accountants on
Accounting and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information appearing under the caption "Election of Directors" and
"Compliance with Section 16(A) of the Exchange Act" in the Registrant's
definitive proxy statement relating to its 1997 Annual Meeting of Stockholders
is incorporated herein by reference. Information required by this item
concerning the Executive Officers of the Registrant is contained in Part I of
this Form 10-K.
Item 11. Executive Compensation
The information appearing under the caption "Executive Compensation" in the
Registrant's definitive proxy statement relating to its 1997 Annual Meeting of
Stockholders is incorporated herein by reference.
27
<PAGE> 28
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing under the captions "Election of Directors" and
"Principal Stockholders" in the Registrant's definitive proxy statement relating
to its 1997 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information contained in Note 5 of the Financial Statements under the
caption "Loans" in the Registrant's 1996 Annual Report to Stockholders is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
The following financial statements and financial statement schedules are
contained herein or are incorporated herein by reference:
<CAPTION>
(a)1. Financial Statements
Reference to 1996
Annual Report
to Stockholders
(Pages)
<S> <C>
Independent Auditors' Report 21
Consolidated balance sheets at December 31,
1996 and 1995 22
Consolidated statements of income for the three
years ended December 31, 1996 23
Consolidated statements of cash flows for the three
years ended December 31, 1996 24-25
Consolidated statements of changes in stockholders'
equity for the three years ended December 31,
1996 26
Notes to consolidated financial statements 27-49
</TABLE>
2. Financial Statement Schedules
All schedules are omitted as the required information is either not
applicable or is included in the consolidated financial statements or related
notes.
28
<PAGE> 29
3. Exhibits
Exhibit No. Description of Exhibit
3.1 Restated Certificate of Incorporation of the
Registrant - incorporated by reference to Exhibit
3.1 of the Registrant's Form S-4 Registration
Statement (Reg. No. 33-7916).
3.2 By-Laws of the Registrant - incorporated by reference
to Exhibit 3 of the Registrant's Form 10-Q for the
quarter ended September 30, 1991.
4.1 Shareholder Rights Agreement dated as of
January 16, 1990, between the Company and The First
National Bank of Boston, as Rights Agent - incorporated
herein by reference to the Exhibit to the Company's
Current Report on Form 8-K dated as of January 16, 1990.
10.1 MASSBANK Corp. 1986 Stock Option Plan, as amended -
incorporated by reference to Exhibit 28.1 to the
Registrant's Form S-8 Registration Statement
(Reg. No. 33-11949).
10.1.2 Amendment to MASSBANK Corp. 1986 Stock Option Plan dated
April 19, 1991 - incorporated by reference to Exhibit
10.1.2 to the Registrant's annual report on Form 10-K
for the year ended December 31, 1992.
10.1.3 MASSBANK Corp. 1994 Stock Incentive Plan - incorporated
by reference to Exhibit 10.1 to the Registrant's Form S-8
Registration Statement (Reg. No. 33-82110).
10.2 MASSBANK for Savings Employees' Stock Ownership Plan
and Trust Agreement - incorporated by reference to
Exhibit 10.2 of the Registrant's Form S-4 Registration
Statement (Reg. No. 33-7916).
10.2.1 Amendments to the MASSBANK for Savings Employee's Stock
Ownership Plan and Trust Agreement - incorporated by
reference to Exhibit 10.2.1 to the Registrant's annual
report on Form 10-K for the year ended December 31, 1993.
10.3 Form of Employment Agreement, as amended, with Gerard H.
Brandi - incorporated by reference to Exhibit 10.3 of
the Registrant's annual report on Form 10-K for the year
ended December 31, 1986 and Exhibit 10.3.1 of the
Registrant's annual report on Form 10-K for the year
ended December 31, 1989.
10.3.2 Amendment to the Employment Agreement with Gerard H.
Brandi - incorporated by reference to Exhibit 10.3.2 of
the Registrant's annual report on Form 10-K for the year
ended December 31, 1990.
10.3.3 Second amendment dated as of February 1, 1993 to the
Employment Agreement with Gerard H. Brandi - incorporated
by reference to Exhibit 10.3.3. to the Registrant's
annual report on Form 10-K for the year ended
December 31, 1992.
29
<PAGE> 30
Exhibit No. Description of Exhibit
10.3.4 Form of Employment Agreement with Raymond A. Brearey
dated June 22, 1992 - incorporated by reference to
Exhibit 10.3.4 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1992.
10.3.5 First amendment dated as of February 1, 1993 to the
Employment Agreement with Raymond A. Brearey -
incorporated by reference to Exhibit 10.3.5 to the
Registrant's annual report on Form 10-K for the year
ended December 31, 1992.
10.3.6 Second amendment dated as of February 1, 1993 to the
Employment Agreement with Raymond A. Brearey -
incorporated by reference to Exhibit 10.3.6 to the
Registrant's annual report on Form 10-K for the year
ended December 31, 1992.
10.3.7 Form of Employment Agreement with David F. Carroll dated
as of February 1, 1993 - incorporated by reference to
Exhibit 10.3.7 to the Registrant's annual report on Form
10-K for the year ended December 31, 1992.
10.3.8 Form of Employment Agreement with Reginald E. Cormier
dated as of February 1, 1993 - incorporated by reference
to Exhibit 10.3.8 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1992.
10.3.9 Form of Employment Agreement with Donald R. Washburn
dated as of February 1, 1993 - incorporated by reference
to Exhibit 10.3.9 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1992.
10.3.10 Form of Employment Agreement with Donna H. West dated
as of February 1, 1993 - incorporated by reference to
Exhibit 10.3.10 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1992.
10.3.11 Executive Severance Agreement with Gerard H. Brandi
dated as of January 18, 1994 - incorporated by reference
to exhibit 10.3.11 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1993.
10.3.12 Executive Severance Agreement with David F. Carroll
dated as of December 23, 1993 - incorporated by reference
to exhibit 10.3.12 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1993.
10.3.13 Executive Severance Agreement with Reginald E. Cormier
dated as of December 23, 1993 - incorporated by reference
to exhibit 10.3.13 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1993.
10.3.14 Executive Severance Agreement with Donald R. Washburn
dated as of December 23, 1993 - incorporated by reference
to exhibit 10.3.14 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1993.
30
<PAGE> 31
Exhibit No. Description of Exhibit
10.3.15 Executive Severance Agreement with Donna H. West dated
as of December 23, 1993 - incorporated by reference to
exhibit 10.3.15 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1993.
10.4 Form of Executive Supplemental Retirement Agreement, as
amended, with Gerard H. Brandi - incorporated by
reference to Exhibit 10.4 of Registrant's annual report
on Form 10-K for the year ended December 31, 1986.
10.4.1 Amendments to the Executive Supplemental Retirement
Agreement with Gerard H. Brandi are attached hereto as
Exhibit 10.4.1 to this Annual Report on Form 10-K.
11.1 Computation of Per Share Earnings - Computation of
primary and fully diluted earnings per share is
attached hereto as Exhibit 11.1 to this Annual Report
on Form 10-K.
12 Statement re: Computation of Ratios - Not applicable as
MASSBANK Corp. does not have any debt securities
registered under Section 12 of the Securities Exchange
Act of 1934.
13 1996 Annual Report to Stockholders - except for those
portions of the 1996 Annual Report to Stockholders which
are expressly incorporated by reference in this report,
such 1996 Annual Report to Stockholders is furnished for
the information of the SEC and is not to be deemed
"filed" with the SEC.
22 Subsidiaries of the Registrant - incorporated by
reference to Exhibit 22 of the Registrant's Form S-4
Registration Statement (Reg. No. 33-7916).
23 Consent of Independent Auditors.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during
the last quarter of the period covered by this
Form 10-K.
(c) Exhibits to this Form 10-K are attached or
incorporated by reference as stated in the
Index to Exhibits.
(d) Not applicable.
31
<PAGE> 32
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MASSBANK CORP.
/s/Gerard H. Brandi
-------------------
Gerard H. Brandi
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/Gerard H. Brandi Chairman, President,
- -------------------------- Chief Executive Officer and
Gerard H. Brandi Director March 24, 1997
--------------
/s/Reginald E. Cormier Vice President, Treasurer
- -------------------------- and Chief Financial Officer
Reginald E. Cormier (Principal Financial and
Accounting Officer) March 24, 1997
--------------
/s/Samuel Altschuler Director March 19, 1997
- -------------------------- --------------
Samuel Altschuler
/s/Mathias B. Bedell Director
- --------------------------
Mathias B. Bedell
/s/Allan S. Bufferd Director March 24, 1997
- -------------------------- --------------
Allan S. Bufferd
Director
- --------------------------
Peter W. Carr
/s/Alexander S. Costello Director March 24, 1997
- -------------------------- --------------
Alexander S. Costello
32
<PAGE> 33
/s/Robert S. Cummings Director March 20, 1997
- -------------------------- --------------
Robert S. Cummings
/s/Louise A. Hickey Director March 20, 1997
- -------------------------- --------------
Louise A. Hickey
Director
- --------------------------
Leonard Lapidus
/s/Stephen E. Marshall Director March 21, 1997
- -------------------------- --------------
Stephen E. Marshall
/s/Arthur W. McPherson Director March 19, 1997
- -------------------------- --------------
Arthur W. McPherson
/s/Herbert G. Schurian Director March 19, 1997
- -------------------------- --------------
Herbert G. Schurian
/s/Donald B. Stackhouse Director March 19, 1997
- -------------------------- --------------
Donald B. Stackhouse
33
<PAGE> 1
Exhibit 10.4.1
AMENDMENT NO. 1 TO EXECUTIVE SUPPLEMENTAL RETIREMENT AGREEMENT
--------------------------------------------------------------
REFERENCE is made to the Executive Supplemental Retirement Agreement (the
"Agreement") dated as of December 2, 1986 between MASSBANK for Savings (the
"Bank"), MASSBANK Corp. (the "Company") and Gerard H. Brandi (the "Executive").
WHEREAS, the Company and the Bank desire to retain the services of the
Executive, and the Executive desires to continue in the service of the Company
and the Bank; and
WHEREAS, the parties hereto have agreed to amend the Agreement in
accordance with the terms hereof.
NOW, THEREFORE, in consideration of services performed and to be performed
by the Executive as well as of the mutual promises and covenants contained
herein, it is agreed to amend the Agreement as of March 1, 1988 as follows:
1. Articles II and III of the Agreement are amended by deleting said
Articles in their entirety and inserting therefor the following:
ARTICLE II
2.1 VESTING. The Executive's supplemental retirement and death
benefits under Articles II and III hereof shall vest in accordance with the
following schedule: (a) 25% of such benefits were vested as of December 31,
1987, and (b) an additional 3% of such benefits shall become vested as of
the last day of each year thereafter if, and only if, the Executive was
employed by the Company or the Bank for such entire year. For example, if
the Executive continues as an employee of the Company or the Bank until
June 1, 1998, such benefits will be 55% vested on such date, and if the
Executive continues as an employee of the Company or the Bank until
<PAGE> 2
December 31, 2012, such benefits will be 100% vested on such date. The
Executive's supplemental retirement and death benefits hereunder shall
immediately cease to vest whenever the Executive ceases (for any reason
whatsoever) to be an employee of the Company and the Bank. Except as set
forth in Section 3.1(a) below, the Executive shall not be entitled to
receive at any time any unvested portion of any supplemental retirement or
death benefit.
2.2 SUPPLEMENTAL RETIREMENT BENEFITS. The Executive shall be entitled
to receive, commencing on the first day of the month next following the
later of his termination of employment with the Company and the Bank or his
65th birthday (the "Commencement Date") and continuing for one hundred
seventy-nine (179) consecutive months thereafter, supplemental retirement
benefits equal to the vested portion of his maximum monthly supplemental
retirement benefit. For purposes hereof, the Executive's maximum monthly
supplemental retirement benefit is $2,500. For example, if the Executive
ceased to be an employee of the Company and the Bank on June 1, 1998, he
would be entitled to receive, beginning on the first day of the month next
following his 65th birthday and continuing for 179 consecutive months
thereafter, a supplemental retirement benefit of $1,375 per month.
ARTICLE III
3.1 DEATH OF EXECUTIVE PRIOR TO COMMENCEMENT DATE. (a) In the event
the Executive dies while he is an employee of the Company or the Bank and
prior to the Commencement Date, his beneficiaries as determined under
Section 3.2 shall be entitled to receive, commencing on the first day of
the month next following the date of the Executive's death and continuing
for one hundred nineteen (119) consecutive months thereafter, death
benefits equal to $3,000 per month; provided, however, that no such death
benefit shall be payable if the Executive has made any untrue statement on
an application for a life insurance policy on his life which statement
causes the Company or the Bank, as the case may be, to fail to receive
proceeds under such policy upon his death. For example, if the Executive
died on June 1, 1998 while still an employee of the Company or the
2
<PAGE> 3
Bank, his beneficiaries would be entitled to receive on July 1, 1998 and
continuing for 119 consecutive months thereafter a death benefit of $3,000
per month.
(b) In the event the Executive dies after he has ceased (for any
reason whatsoever) to be an employee of the Company and the Bank and prior
to the Commencement Date, his beneficiaries as determined under Section 3.2
shall be entitled to receive, commencing on the first day of the month next
following the date of the Executive's death and continuing for one hundred
nineteen (119) consecutive months thereafter, death benefits equal to the
vested portion of $3,000 per month; provided, however, that no such death
benefit shall be payable if the Executive has made any untrue statement on
an application for a life insurance policy on his life which statement
causes the Company or the Bank, as the case may be, to fail to receive
proceeds under such policy upon his death. For example, if the Executive
ceased to be an employee of the Company and the Bank on June 1, 1998 and he
died on June 1, 2006, his beneficiaries would be entitled to receive on
July 1, 2006 and continuing for 119 consecutive months thereafter, death
benefits equal to $1,650 per month.
3.2 DEATH OF EXECUTIVE AFTER COMMENCEMENT DATE. In the event Executive
dies after the Commencement Date, but before the payment of all
supplemental retirement benefits to the Executive has been completed
pursuant to Article II, the Company and the Bank will continue to pay, in
lieu of any other death benefits, the unpaid balance of such payments for
the remainder of the applicable total 180-month period to such beneficiary
or beneficiaries as the Executive may designate in a written notice filed
with the Company or the Bank, or, if no such designation is filed, such
amounts shall be paid to the Executive's surviving spouse, or, if none, to
his estate. The Executive may change or revoke his beneficiary designation
from time to time by filing a written notice to that effect with the
Company or the Bank.
3
<PAGE> 4
2. As so amended hereby, the Agreement remains in full force and
effect and shall continue to be binding upon the parties thereto.
IN WITNESS WHEREOF, the undersigned have signed, or caused their duly
authorized officers to sign, this Amendment as of March 1, 1988.
MASSBANK FOR SAVINGS
By: /s/ John H. Wood, Chief Executive Officer
-----------------------------------------
MASSBANK CORP.
By: /s/ John H. Wood, Chief Executive Officer
-----------------------------------------
/s/ Gerard H. Brandi
------------------------
Gerard H. Brandi
4
<PAGE> 5
Exhibit 10.4.1
AMENDMENT NO. 2
TO
EXECUTIVE SUPPLEMENTAL RETIREMENT AGREEMENT
-------------------------------------------
REFERENCE is made to the Executive Supplemental Retirement Agreement (the
"Agreement") dated as of December 2, 1986 between MASSBANK for Savings (the
"Bank"), MASSBANK Corp. (the "Company") and Gerard H. Brandi (the "Executive"),
as amended by Amendment No. 1 thereto.
WHEREAS, the Company and the Bank desire to retain the services of the
Executive, and the Executive desires to continue in the service of the Company
and the Bank; and
WHEREAS, the parties hereto have agreed to amend the Agreement in
accordance with the terms hereof. NOW, THEREFORE, in consideration of services
performed and to be performed by the Executive as well as of the mutual promises
and covenants contained herein, it is agreed to amend the Agreement as follows:
1. Section 2.2 of the Agreement is hereby amended by deleting said Section
in its entirety and inserting therefor the following:
"2.2 SUPPLEMENTAL RETIREMENT BENEFITS. The Executive shall be entitled
to receive, commencing on the first day of the month next following his
termination of employment with the Company and the Bank (the "Commencement
Date") and continuing for one hundred seventy-nine (179) consecutive months
thereafter, supplemental retirement benefits equal to the vested portion of his
maximum monthly supplemental retirement benefit. For purposes hereof, the
Executive's maximum monthly supplemental retirement benefit is $2,500. For
example, if the Executive ceased to be an employee of the Company and the Bank
on June 15, 1998, he would be entitled to receive, beginning on July 1, 1998 and
continuing for 179 consecutive months thereafter, a supplemental retirement
benefit of $1,375 per month."
<PAGE> 6
I
2. Section 3.1(b) of the Agreement is hereby amended by deleting said
Section in its entirety and inserting therefor the following:
"(b) In the event the Executive dies after he has ceased (for any
reason whatsoever) to be an employee of the Company and the Bank and prior to
the Commencement Date, his beneficiaries as determined under Section 3.2 shall
be entitled to receive, commencing on the first day of the month next following
the date of the Executive's death and continuing for one hundred seventy-nine
(179) consecutive months thereafter, death benefits equal to the vested portion
of $2,500 per month. For example, if the Executive ceased to be an employee of
the Company and the Bank on June 15, 1998 and he died on June 20, 1998, his
beneficiaries would be entitled to receive on July 1, 1998 and continuing for
179 consecutive months thereafter, death benefits equal to $1,375 per month."
3. As so amended hereby, the Agreement remains in full force and effect and
shall continue to be binding upon the parties thereto.
IN WITNESS WHEREOF, the undersigned have signed, or caused their duly
authorized officers to sign, this Amendment this 28th day of April, 1994.
MASSBANK FOR SAVINGS
By: /s/ Reginald E. Cormier
------------------------
Treasurer
MASSBANK CORP.
By: /s/ Reginald E. Cormier
------------------------
Treasurer
/s/ Gerard H. Brandi
------------------------
Gerard H. Brandi
<PAGE> 7
Exhibit 10.4.1
AMENDMENT NO. 3
TO
EXECUTIVE SUPPLEMENTAL RETIREMENT AGREEMENT
-------------------------------------------
REFERENCE is made to the Executive Supplemental Retirement Agreement (the
"Agreement") dated as of December 2, 1986 among MASSBANK (the "Bank"), MASSBANK
Corp. (the "Corp.") and Gerard H. Brandi (the "Executive"), as amended by
Amendments No. 1 and No. 2 thereto.
WHEREAS, the Company and the Bank desire to retain the services of the
Executive, and the Executive desires to continue in the service of the Company
and the Bank; and WHEREAS, the parties hereto have agreed to amend the Agreement
in accordance with the terms hereof.
NOW, THEREFORE, in consideration of services performed and to be performed
by the Executive as well as of the mutual promises and covenants contained
herein, it is agreed to amend the Agreement as follows:
1. Section 2.1 of the Agreement is hereby amended by deleting said Section
in its entirety and substituting therefore the following:
"2.1 VESTING. The Executive's supplemental retirement and death
benefits under Articles II and III hereof shall vest in accordance with the
following schedules: (a) 25% of such benefits were vested as of December
31, 1987, (b) an additional 3% of such benefits shall become vested as of
the last day of each year thereafter, and (c) 100% of such shall become
vested as of December 11, 1996.
2. Section 2.2 of the Agreement is hereby amended by deleting the last
sentence of said Section.
3. Section 3.1(b) of the Agreement is hereby amended by deleting the last
sentence of said Section.
<PAGE> 8
Page 2
4. As so amended hereby, the Agreement remains in full force and effect and
shall continue to be binding upon the parties thereof.
IN WITNESS WHEREOF, the undersigned have signed, or caused their duly
authorized officers to sign, the Amendment this twenty-first (21st) day of
January 1997.
MASSBANK
By: /s/Reginald E. Cormier
---------------------------
Title: V.P.,Treasurer, and CFO
MASSBANK CORP.
By: /s/Reginald E. Cormier
---------------------------
Title: V.P.,Treasurer, and CFO
<PAGE> 1
Exhibit 11.1
MASSBANK CORP.
Earnings Per Share
<TABLE>
The following is a calculation of earnings per share for the years ended
December 31, 1996, 1995 and 1994.
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------
Calculation of Primary Earnings per Share (1) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Average common shares outstanding 2,712,577 2,755,789 2,862,981
Shares assumed to be repurchased under
treasury stock method for stock options 76,385 79,823 80,746
Less: Unallocated Employee Stock Ownership
Plan ("ESOP") shares not committed to
be released (2) (45,082) (51,679) ( 60,413)
---------- ---------- ----------
Total Shares 2,743,880 2,783,933 2,883,314
Net Income $9,427,000 $8,759,000 $8,185,000
---------- ---------- ----------
Per Share Amount $3.44 $3.15 $2.84
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Calculation of Fully Diluted Earnings per Share (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Average common shares outstanding 2,712,577 2,755,789 2,862,981
Shares assumed to be repurchased under
treasury stock method for stock options 78,521 101,985 82,790
Less: Unallocated Employee Stock Ownership
Plan ("ESOP") shares not committed
to be released (2) (45,082) (51,679) (60,413)
________ ________ _______
Total Shares 2,746,016 2,806,095 2,885,358
Net Income $9,427,000 $8,759,000 $8,185,000
---------- ---------- ----------
Per Share Amount $3.43 $3.12 $2.84
<FN>
(1) The prior years' shares outstanding and earnings per share amounts have been
restated to reflect the three-for-two stock split of September 9, 1994.
(2) The Company adopted the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 93-6 effective January 1, 1994.
</TABLE>
<PAGE> 1
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
Massbank Corp. and Subsidiaries
Selected Consolidated Financial Data
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(In thousands) At December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $888,237 $854,542 $843,647 $855,881 $839,103
Mortgage loans 224,139 220,603 220,269 219,347 219,932
Other loans 25,522 28,582 30,547 29,699 33,824
Allowance for loan losses 2,237 2,529 2,566 2,261 2,056
Investments(1) 622,645 586,768 568,635 589,666 564,422
Real estate acquired through foreclosure 503 255 129 699 905
Deposits 788,350 753,657 759,676 766,363 761,879
Stockholders' equity 92,250 90,817 74,504 80,075 71,062
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Years ended December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and dividend income $58,109 $56,611 $51,451 $51,541 $51,317
Interest expense 33,062 30,896 26,152 27,485 30,991
Net interest income 25,047 25,715 25,299 24,056 20,326
Provision for loan losses 160 170 705 671 884
Gains (losses) on securities, net 868 92 (533) 198 122
Other non-interest income 1,797 1,856 3,070 2,307 2,429
Non-interest expense 12,124 13,178 14,213 14,243 13,421
Income before income taxes 15,428 14,315 12,918 11,647 8,572
Income tax expense 6,001 5,556 4,733 4,711 3,895
Change in accounting principle (241)
Net income $ 9,427 $ 8,759 $ 8,185 $ 6,695 $ 4,677
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Yield on average interest-earning assets 6.84% 6.90% 6.22% 6.25% 6.88%
Cost of average interest-bearing liabilities 4.27 4.11 3.41 3.57 4.48
Interest rate spread 2.57 2.79 2.81 2.68 2.40
Net interest margin 2.96 3.15 3.07 2.93 2.73
Non-interest expense to average assets 1.40 1.57 1.67 1.68 1.75
Efficiency ratio(2) 43.5 47.4 50.8 53.3 58.3
Return on assets (net income/average assets) 1.08 1.04 0.96 0.79 0.61
Return on equity (net income/average
stockholders' equity) 10.65 10.65 10.62 8.98 6.79
Return on average realized equity(3) 11.01 10.81 10.62 8.98 6.79
Percent non-performing loans to total loans 0.64 0.97 0.84 0.51 0.59
Percent non-performing assets to total assets 0.24 0.31 0.26 0.23 0.29
Stockholders' equity to assets, at year-end 10.39 10.63 8.83 9.36 8.47
Book value per share, at year-end(4) $34.34 $33.13 $26.78 $27.28 $24.50
Earnings per share:(4)
Primary 3.44 3.15 2.84 2.23 1.59
Fully diluted 3.43 3.12 2.84 2.22 1.59
Cash dividends declared per share(4) 0.92 0.73 0.60 0.4533 0.3533
Dividend payout ratio 26% 23% 21% 20% 22%
- -------------------------------------------------------------------------------------------------------------------
<FN>
(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 3-for-2 split of the Company's common stock
effective September 9, 1994.
</TABLE>
<PAGE> 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.
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.
FINANCIAL CONDITION
The Company's total assets this past year increased by $33.7 million or
3.9% from $854.5 million at December 31, 1995 to $888.2 million at December 31,
1996. Most of this growth is attributable to an increase in deposits. Total
stockholders' equity was $92.2 million at December 31, 1996, up $1.4 million
from $90.8 million at December 31, 1995. The increase in stockholders' equity
resulted primarily from the Company's net income of $9.4 million in 1996 and the
issuance of common stock under the Company's stock option plan. These were
partially offset by a decrease in the net unrealized gains on investment
securities available for sale, net of tax effect, of $3.2 million, the payment
of $2.5 million in dividends to stockholders and the cost of the additional
shares of treasury stock repurchased during the year of $3.5 million. Record
earnings in 1996 and a strong capital position have permitted the Company to
continue to reward its shareholders through the payment of higher quarterly
dividends. The Company's Board of Directors has increased the quarterly cash
dividend paid to shareholders twice during 1996 and ten times during the last
five years. Cash dividends per share paid to shareholders during 1996 increased
26% over the prior year. The Company's book value per share at December 31, 1996
was $34.34, up from $33.13 at December 31, 1995.
The Bank's total loan portfolio experienced modest growth in 1996, up $0.5
million over the prior year to $249.7 million. Loan originations totaled $51.4
million in 1996, up $11.7 million or 29.5%, when compared to total loan
originations of $39.7 million in 1995. The level of loan amortization and
payoffs in the Bank's loan portfolio during 1996 almost equalled total loan
originations for the year allowing for very little growth in the portfolio. This
is due in part to the shorter term mortgages with relat ively high down payments
which the Bank originates. The normal principal amortization on these mortgages
far exceeds that of 30-year fixed rate mortgages.
Total investments consisting of investment securities and other short term
investments, including term federal funds sold and interest-bearing bank
deposits, increased from $586.8 million at December 31, 1995 to $622.6 million
at year end 1996. These investments are principally in federal funds sold,
short-term U.S. Treasury notes and government agency fifteen year
mortgage-backed securities. The majority of the Bank's investment securities,
$476.6 million at December 31, 1996, are classified as either available for sale
or trading securities. Investment securities available for sale and trading
securities provide liquidity, facilitate interest rate sensitivity management
and enhance the Bank's ability to respond to customers' needs should loan demand
increase and/or deposits decline. Mortgage-backed securities, at market value,
increased by $90.1 million in 1996 to $306.6 million at December 31, 1996.
Deposit accounts of all types have traditionally been the primary source of
funds for the Bank's lending and investment activities. The Bank's deposit flows
are influenced by prevailing interest rates, competition and other market
conditions. The Bank's management attempts to manage its deposits through
selective pricing and marketing. The Bank's deposits increased by $34.7 million
or 4.6% during the twelve months ended December 31, 1996, from $753.7 million at
year end 1995 to $788.4 million at the end of 1996. These were favorable results
considering the performance of the stock market and mutual funds which were both
fierce competitors for the savers' dollars in 1996. The growth in deposits is
primarily attributable to an increase in the Bank's time certificates of deposit
which increased by $37.1 million during the past year. The Bank's strategy, in
1996, was to attract more long term deposits from the general public. By
selectively increasing certain time certificate of deposit (CD) rates the Bank
was successful in increasing its CD deposits with maturities in excess of one
year by $29.8 million, representing approximately 86% of its total deposit
growth in 1996.
13
<PAGE> 3
ASSET QUALITY
Net loans represented 27.9% of total assets at December 31, 1996 compared to
28.9% of total assets at December 31, 1995. The Bank's investment securities and
other short-term investments, representing 70.0% of total assets at December 31,
1996, consisted primarily of U.S. Treasury notes, government agency
mortgage-backed securities and federal funds sold. At December 31, 1996, the
Bank's loan portfolio consisted of residential mortgages of $220.0 million,
commercial mortgages of $4.1 million, consumer loans of $24.9 million and
commercial loans of $0.6 million. Non-performing assets were $2.1 million at
December 31, 1996, representing 0.24% of total assets. This compares to $2.7
million, or 0.31% of total assets, at December 31, 1995. At year end 1996, the
Bank's allowance for loan losses was approximately $2.2 million, representing
139.7% of non-performing loans and 0.90% 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.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 1996 AND 1995
Massbank Corp. reported record net income for the year ended December 31, 1996
of $9.4 million or $3.44 per share compared to $8.8 million or $3.15 per share
for the year ended December 31, 1995. On a fully diluted basis, the Company
earned $3.43 per share in 1996, up 9.9% or $0.31 per share from the $3.12 in
fully diluted earnings per share reported in 1995.
This is the fourth consecutive year that the Company has achieved record
breaking results in net income, earnings per share and return on average
realized equity, and the sixth consecutive year of increase in the Company's
return on average assets. Return on average realized equity and return on
average assets improved to 11.01% and 1.08% in 1996 from 10.81% and 1.04% in
1995, respectively. The Company's improved financial performance in 1996 can be
attributed to several factors. Non-interest expenses were down again in 1996 due
to incremental improvements throughout the Bank and another substantial drop in
deposit insurance expense; securities gains increased significantly over 1995;
and the provision for loan losses decreased slightly. Offsetting these factors
were decreases in net interest income and other non-interest income.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis totaled $25.2
million for 1996, compared to $25.8 million for 1995. The decrease of $0.6
million was due principally to a decrease in net interest margin. The impact of
the lower net interest margin in 1996 was partially offset by an increase in the
Company's average earning assets from $822.0 million in 1995 to $852.3 million
in 1996. The Company's net interest margin in 1996 was 2.96%, 19 basis points
lower than the 3.15% of the prior year.
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 an FTE basis was $58.3 million for the year
ended December 31, 1996, compared to $56.7 million for the year ended
December 31, 1995. The weighted average yield on earning assets for the year
ended December 31, 1996 decreased to 6.84% from 6.90% for the year ended
December 31, 1995. The average total earning assets of the Company increased
to $852.3 million in 1996, up $30.3 million from $822.0 million in 1995.
Interest on loans decreased $0.1 million to $19.4 million for the year
ended December 31, 1996. The decrease in interest income earned on loans was due
principally to a decrease in yield. The yield on the Bank's loans declined 23
basis points to 7.70% for the year ended December 31, 1996 compared to 7.93% for
the year ended December 31, 1995. The reduction in yield was partially offset by
an increase of $6.1 million in average loan volume. The decline in market
interest rates in the first half of 1996 compared to 1995 generated more
residential loan growth for the Bank, but at lower yields. This, along with
floating rate loans and adjustable rate mortgage loans which repriced downward,
had the greatest impact on the Bank's loan yields over the past year.
Interest and dividend income (on an FTE basis) from investments consisting
of investment securities (including mortgage-backed securities), trading
securities, federal funds sold and other short-term investments increased by
$1.6 million to $38.8 million in 1996 from $37.2 million in 1995. This increase
resulted primarily from an increase of $24.2 million in average volume. Average
total investments were $600.3 million in 1996 compared to $576.1 million in
1995. The weighted average yield on investments was 6.47% in 1996 and 1995.
14
<PAGE> 4
INTEREST EXPENSE
Total interest expense increased 7.0% to $33.1 million for the year ended
December 31, 1996 from $30.9 million for the year ended December 31, 1995. This
increase is due to an increase in the Company's average cost of funds from 4.11%
in 1995 to 4.27% in 1996, coupled with an increase of $21.9 million in the
Company's average deposits, from $752.5 million in 1995 to $774.4 million in
1996. The growth in average deposits is attributable to an increase in time
certificates of deposit (CD). The average CD volume increased by $52.3 million
to $352.4 million in 1996, from $300.1 million in 1995. Partially offsetting
this increase was a reduction of $30.4 million in the average savings, and
demand and NOW deposit volume, from $452.4 in 1995 to $422.0 million in 1996.
The migration from lower cost savings deposits to higher cost (longer term) CDs,
combined with the growth in CDs in 1996, contributed significantly to the
Company's increased cost of funds in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1996 was $160 thousand compared to $170
thousand in 1995. In determining the amount to provide for loan losses, the key
factor is the adequacy of the allowance for loan losses. In making its decision,
management considers a number of factors, including the risk characteristics of
the portfolio, underlying collateral, current and anticipated economic
conditions, and trends in loan delinquencies and charge-offs. At December 31,
1996, the allowance for loan losses was $2.2 million representing 139.7% of
non-performing loans. The Bank's non-performing loans totaled $1.6 million at
December 31, 1996 compared to $2.4 million a year earlier. Net charge-offs
totaled $452 thousand in 1996 compared to $207 thousand in 1995. Management
believes that the allowance for loan losses is adequate to cover the risks
inherent in the loan portfolio under current conditions.
NON-INTEREST INCOME
Non-interest income consists of gains or losses on securities, deposit account
service fees, interest on tax settlements and other non-interest income.
Non-interest income increased to $2.7 million for the year ended December
31, 1996, from $1.9 million for the year ended December 31, 1995. This
improvement is due to a significant increase in securities gains, the results of
a strong stock market in 1996, partially offset by a slight decrease in all
other non-interest income.
Net gains on securities totaled $868 thousand in 1996 compared to $92
thousand in 1995. All other non-interest income decreased from $1.9 million in
1995 to $1.8 million in 1996 due primarily to non-recurring income recorded in
1995. In 1995, the Company recorded interest on tax settlements which it had
received from the IRS totaling $51 thousand.
NON-INTEREST EXPENSE
Non-interest expenses (i.e., operating expenses) decreased by $1.1 million or
8.0% to $12.1 million in 1996, from $13.2 million a year ago.
Salaries and employee benefits decreased by $45 thousand to $7.2 million in
1996 from $7.3 million in 1995. This improvement was due to a decrease in the
costs of employee retirement benefits partially offset by a modest increase in
salaries due to normal salary increases granted to employees.
Occupancy and equipment expense decreased by $14 thousand to approximately
$2.0 million in 1996 due mostly to a reduction in depreciation expense.
Data processing and professional services expenses were reduced by $74
thousand to $948 thousand in 1996, from approximately $1.0 million the previous
year.
Deposit insurance expense in 1996 took another substantial drop due to a
further reduction in Federal Deposit Insurance Corporation ("FDIC") deposit
insurance rates. FDIC deposit insurance rates were reduced to an annual minimum
of $2 thousand for 1996. As a result, total deposit insurance expense decreased
from $914 thousand in 1995 to $13 thousand in 1996. Deposit insurance expense
also includes an assessment from the Depositors Insurance Fund ("DIF") to insure
customer deposits in excess of the FDIC insurance limits.
All other expenses essentially stayed flat in 1996.
INCOME TAX EXPENSE
The Company recorded a tax expense of $6.0 million in 1996 compared to
approximately $5.5 million in 1995. The effective income tax rate for the year
ended December 31, 1996 was 38.9%, a modest increase from 38.8% in 1995. For
further information on income taxes, see Note 12 of Notes to Consolidated
Financial Statements.
15
<PAGE> 5
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 1995 AND 1994
Massbank Corp. reported record net income for the year ended December 31, 1995
of $8.8 million or $3.15 per share ($3.12 per share on a fully diluted basis)
compared to $8.2 million or $2.84 per share for the year ended December 31,
1994. Return on average assets and return on average realized equity improved to
1.04% and 10.81% in 1995, from 0.96% and 10.62% in 1994, respectively,
reflecting an improvement in net interest margin, a lower provision for loan
losses, and non-interest expense reductions resulting prima rily from a
significant decrease in deposit insurance expense in 1995. The Company's net
interest margin in 1995 was 3.15%, 8 basis points higher than the 3.07% in 1994.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis totaled $25.8
million for 1995, compared to $25.4 million for 1994. The modest increase of
$0.4 million was due principally to an improvement in net interest margin. The
impact of the wider margin in 1995 was partially offset by a decrease in the
Company's average earning assets from $829.7 million in 1994 to $822.0 million
in 1995. The Company's interest rate spread decreased slightly to 2.79% for 1995
from 2.81% for 1994.
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 an FTE basis was $56.7 million for the year
ended December 31, 1995, compared to $51.6 million for the year ended December
31, 1994. The weighted average yield on earning assets for the year ended
December 31, 1995 increased to 6.90% from 6.22% for the year ended December 31,
1994. The average total earning assets of the Company decreased to $822.0
million during 1995, down $7.7 million from $829.7 million in 1994.
Interest on loans decreased $0.1 million to $19.5 million for the year
ended December 31, 1995. The decrease in interest income earned on loans was due
principally to a decrease of $6.0 million in average loan balances in 1995
compared to the prior year. The reduction in average loan volume was partially
offset by an increase in yield on loans. The yield on loans improved 15 basis
points to 7.93% for 1995 compared to 7.78% for 1994. This improvement is due
primarily to consumer loans in the Bank's loan portfol io which float either
with the prime interest rate or three month U.S. treasury bill rate. These
interest rates were significantly higher during 1995 than during 1994.
Interest and dividend income (on an FTE basis) from investments consisting
of investment securities, including mortgage-backed securities, trading
securities, federal funds sold and other short-term investments increased by
$5.2 million to $37.2 million in 1995 from $32.0 million in 1994. This increase
resulted primarily from an improvement in weighted average yield on investments
from 5.54% in 1994 to 6.47% in 1995, partially offset by a decrease of $1.7
million in average investment balances.
INTEREST EXPENSE
Total interest expense increased 18.1% to $30.9 million for the year ended
December 31, 1995 from $26.2 million for the year ended December 31, 1994. This
increase was due principally to an increase of 70 basis points in the Company's
average cost of funds from 3.41% in 1994 to 4.11% in 1995, partially offset by
lower average deposit volume. Average deposits and borrowed funds declined to
$752.5 million in 1995, from $766.4 million a year earlier. The Bank maintained
flat regular savings account deposit rates in 1995 and 1994 while selectively
increasing rates on certificates of deposit. The strategy helped to encourage a
shift from savings to time certificates of deposit during this period. During
1995, the Bank's total savings deposits, including money market accounts,
declined $101.8 million, from $458.4 million at December 31, 1994 to $356.6
million at December 31, 1995, while its certificates of deposit increased $96.6
million, from $235.4 million at year end 1994 to $332.0 million at year end
1995.
16
<PAGE> 6
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1995 was $170 thousand compared to $705
thousand in 1994. 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,
1995, the allowance for loan losses was $2.5 million representing 104.2% of
non-performing loans. The Bank's non-performing loans totaled $2.4 million at
December 31, 1995 compared to $2.1 million a year earlier. Net charge-offs
totaled $207 thousand in 1995 compared to $400 thousand in 1994. 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, interest on tax settlements and other non-interest income.
Non-interest income decreased to $1.9 million for the year ended December
31, 1995, from $2.5 million for the year ended December 31, 1994. This decrease
was due to non-recurring income recorded in 1994. The Company, in 1994, recorded
interest on tax settlements which it had received from the IRS totaling
approximately $1.2 million. This compares to $51 thousand in interest on tax
settlements recorded in 1995. Partly offsetting this non-recurring income were
net gains on securities of $92 thousand versus net losses on securities of $533
thousand recorded in 1994. Deposit account service fees and all other
non-interest income decreased from $1.9 million in 1994 to $1.8 million in 1995.
NON-INTEREST EXPENSE
Non-interest expenses (i.e., operating expenses) decreased by $1.0 million or
7.3% to $13.2 million in 1995, from $14.2 million a year ago.
Salaries and employee benefits increased by $467 thousand or 6.9% to $7.3
million in 1995 from $6.8 million in 1994. This increase was due primarily to
higher salaries and retirement benefit costs.
Occupancy and equipment expense decreased by $50 thousand to approximately
$2.0 million in 1995 due mostly to a reduction in depreciation expense.
Data processing and professional services expenses were reduced 9.6% to
$1.0 million in 1995, from approximately $1.1 million the previous year.
In 1995, the FDIC reduced deposit insurance rates for well capitalized
banks from $0.23 to $0.04 per hundred dollars of deposits effective June 1,
1995. This significant reduction in rates reduced the Bank's total deposit
insurance expense by $874 thousand or 48.9% in 1995 to $0.9 million from $1.8
million a year ago. FDIC deposit insurance rates have been further reduced to
the annual minimum of $2 thousand for 1996.
During 1994, the Bank recorded a non-recurring charge to earnings of $282
thousand, the result of a write-down in loan valuation premium due to
significant prepayments of loans purchased from the FDIC in 1992. No such
write-down was required in 1995.
All other expenses decreased by $188 thousand to $2.0 million in 1995 from
$2.2 million in 1994.
INCOME TAX EXPENSE
The Company recorded a tax expense of approximately $5.5 million in 1995
compared to $4.7 million in 1994. The effective income tax rate for the year
ended December 31, 1995 was 38.8%, an increase from 36.6% in 1994. The Company's
effective income tax rate for 1994 was reduced due largely to a federal income
tax refund of $462 thousand recorded during the year. For further information on
income taxes, see Note 12 of Notes to Consolidated Financial Statements.
17
<PAGE> 7
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, 1996, the Bank had $109.9 million or 12.4% of total
assets and $148.6 million or 16.7% of total assets invested, respectively, in
overnight federal funds sold and United States obligations.
The Bank is a Federal Deposit Insurance Corporation insured institution
subject to the FDIC regulatory capital requirements. The FDIC regulations
require all FDIC insured institutions to maintain minimum levels of Tier I
capital. Highly rated banks (i.e., those with a composite rating of 1 under the
CAMEL rating system) are required to maintain a minimum leverage ratio of Tier I
capital to total average assets of at least 3.00%. An additional 100 to 200
basis points are required for all but these most highly rated institutions. The
Bank is also required to maintain a minimum level of risk-based capital. Under
the new risk-based capital standards, FDIC insured institutions must maintain a
Tier I capital to risk-weighted assets ratio of 4.00% and are gener ally
expected to meet a minimum total qualifying capital to risk-weighted assets
ratio of 8.00%. The new risk-based capital guidelines take into consideration
risk factors, as defined by the regulators, associated with various categories
of assets, both on and off the balance sheet. Under the guidelines, capital
strength is measured in two tiers which are used in conjunction with risk
adjusted assets to determine the risk-based capital ratios. Tier II capital
components include supplemental capital components such as qualifying allowance
for loan losses and qualifying subordinated debt. Tier I capital plus the Tier
II capital components is referred to as total qualifying capital.
The capital ratios of the Bank and the Company currently exceed the minimum
regulatory requirements. At December 31, 1996, the Bank had a leverage Tier I
capital to average assets ratio of 9.93%, a Tier I capital to risk-weighted
assets ratio of 32.88% and a total capital to risk-weighted assets ratio of
33.74%. The Company, on a consolidated basis, had ratios of leverage Tier I
capital to average assets of 10.09%, Tier I capital to risk-weighted assets of
33.41% and total capital to risk-weighted assets of 34.27% at December 31, 1996.
ASSET AND LIABILITY MANAGEMENT
The Bank's asset/liability management objective is to attempt to insulate the
balance sheet, and therefore the income statement, from excessive risk due to
changes in market interest rates. The Company's asset/liability management
policy, which is reviewed by the Board of Directors on an annual basis,
establishes limits for interest rate risk assumption to prevent the erosion of
earnings and capital in an adverse interest rate environment. The Company's
asset/liability management policy also states that it is the responsibility of
the Bank's Asset and Liability Committee to establish long-term strategies with
respect to interest rate risk and to monitor the exposure to interest rate risk
in relation to present and prospective market interest rates, economic
conditions, and balance sheet composition on an ongoing basis.
The asset/liability management process at Massbank seeks to ensure that the
risk to earnings fluctuations from changes in market interest rates is prudently
managed.
The Bank uses three key measurements to monitor interest rate risk: (1) the
interest rate-sensitivity "gap" analysis; (2) a "rate shock" to measure earnings
volatility due to an immediate increase or decrease in market interest rates of
up to 200 basis points; (3) simulations of net interest income under alternative
balance sheet and interest rate scenarios.
The Bank occasionally enters into interest rate swap agreements as hedges
against its interest rate exposure.
18
<PAGE> 8
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 TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occuring after December 31, 1996 and is to be
applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125," requires the deferral of implementation as
it relates to repurchase agreements, dollar-rolls, securities lending and
similar transactions until years beginning after December 31, 1997. Earlier or
retrospective applications of this Statement is not permitted. SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on an approach that focuses on control, whereby after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. The adoption of this
pronouncement is not expected to have a significant effect on the Company's
financial position or results of operations.
RATE/VOLUME ANALYSIS
<TABLE>
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.
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
(IN THOUSANDS) INCREASE (DECREASE) INCREASE (DECREASE)
YEARS ENDED DECEMBER 31, DUE TO DUE TO
- -------------------------------------------------------------------------------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Federal funds sold $ 265 $ (537) $ (272) $ 3,165 $ 908 $ 4,073
Short-term investments 986 (30) 956 273 19 292
Investment securities (3,580) 441 (3,139) (50) 1,619 1,569
Trading securities (2,043) (27) (2,070) (4,954) 1,867 (3,087)
Mortgage-backed securities 6,449 (342) 6,107 2,363 46 2,409
Mortgage loans 675 (420) 255 (477) 44 (433)
Other loans (263) (76) (339) 8 329 337
- -------------------------------------------------------------------------------------------------------------
Total interest and dividend income 2,489 (991) 1,498 328 4,832 5,160
- -------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Demand and NOW (10) (68) (78) (10) (23) (33)
Savings (1,006) 376 (630) (4,206) 153 (4,053)
Time certificates of deposit 2,995 (121) 2,874 6,163 2,668 8,831
Borrowed funds -- -- -- (1) -- (1)
- -------------------------------------------------------------------------------------------------------------
Total interest expense 1,979 187 2,166 1,946 2,798 4,744
- -------------------------------------------------------------------------------------------------------------
Net interest income $ 510 $(1,178) $ (668) $(1,618) $2,034 $ 416
=============================================================================================================
</TABLE>
19
<PAGE> 9
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
====================================================================================================================================
(In thousands) Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Federal funds sold $ 95,253 $ 5,084 5.34% $ 90,589 $ 5,356 5.91% $ 32,724 $ 1,283 3.92%
Short-term investments(2) 23,656 1,259 5.32 5,168 303 5.86 362 11 3.07
Investment securities 194,229 12,586 6.48 250,318 15,710 6.28 251,209 14,139 5.63
Mortgage-backed securities 277,409 19,353 6.98 184,976 13,246 7.16 152,026 10,837 7.13
Trading securities 9,719 563 5.79 45,012 2,633 5.85 141,479 5,720 4.04
Mortgage loans(1) 225,005 16,933 7.53 216,060 16,678 7.72 222,144 17,111 7.70
Other loans(1) 26,993 2,481 9.19 29,848 2,820 9.45 29,749 2,483 8.35
- ------------------------------------------------------ ------------------- -------------------
Total earning assets 852,264 58,259 6.84% 821,971 56,746 6.90% 829,693 51,584 6.22%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses 2,414 2,587 2,343
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets
less allowance for
loan losses 849,850 819,384 827,350
Other assets 19,194 20,765 22,442
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $869,044 $840,149 $849,792
====================================================================================================================================
<CAPTION>
LIABILITIES:
Deposits:
Demand and NOW $ 63,969 574 0.90% $ 64,946 652 1.00% $ 66,050 685 1.04%
Savings 358,056 12,268 3.43 387,449 12,898 3.33 514,015 16,951 3.30
Time certificates of deposit 352,385 20,220 5.74 300,141 17,346 5.78 186,222 8,515 4.57
- ------------------------------------------------------ ------------------- -------------------
Total deposits 774,410 33,062 4.27 752,536 30,896 4.11 766,287 26,151 3.41
Borrowed funds -- -- -- -- -- -- 159 1 0.69
- ------------------------------------------------------ ------------------- -------------------
Total deposits and
borrowed funds 774,410 33,062 4.27% 752,536 30,896 4.11% 766,446 26,152 3.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities 6,106 5,365 6,245
Total liabilities 780,516 757,901 772,691
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY: 88,528 82,248 77,101
Total liabilities and
stockholders' equity $869,044 $840,149 $849,792
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (tax-
equivalent basis) 25,197 25,850 25,432
Less adjustment of tax-
exempt interest income 150 135 133
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $25,047 $ 25,715 $ 25,299
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.57% 2.79% 2.81%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin(3) 2.96% 3.15% 3.07%
====================================================================================================================================
<FN>
(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.
</TABLE>
20
<PAGE> 10
Independent Auditors' Report
[LOGO KPMG] Peat Marwick LLP
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, 1996 and
1995, 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, 1996. 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, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 17, 1997
21
<PAGE> 11
MASSBANK CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands except share data) AT DECEMBER 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 6,612 $ 8,150
Short-term investments (Note 2) 134,310 117,505
- ---------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 140,922 125,655
- ---------------------------------------------------------------------------------------------------------------------------------
Term federal funds sold 10,000 5,000
Interest-bearing deposits in banks 1,751 941
Securities held to maturity, at amortized cost
(market value of $160 in 1996 and $402 in 1995) (Note 3) 160 402
Securities available for sale, at market value
(amortized cost of $464,857 in 1996 and $443,638 in 1995) (Note 3) 471,752 456,101
Trading securities, at market value (Note 4) 4,672 6,819
Loans (Notes 5, 7 and 11):
Mortgage loans 224,139 220,603
Other loans 25,522 28,582
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 249,661 249,185
Less: allowance for loan losses (Note 6) 2,237 2,529
- ---------------------------------------------------------------------------------------------------------------------------------
Net loans 247,424 246,656
- ---------------------------------------------------------------------------------------------------------------------------------
Premises and equipment (Note 9) 4,095 4,226
Real estate acquired through foreclosure (Note 7) 503 255
Accrued interest receivable 5,647 7,280
Other assets 1,311 1,207
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $888,237 $854,542
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Notes 10 and 11):
Demand and NOW $ 62,734 $ 66,413
Savings 357,658 356,598
Time certificates of deposit 369,139 332,057
Deposit acquisition premium, net of amortization (1,181) (1,411)
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 788,350 753,657
Escrow deposits of borrowers 1,271 992
Employee stock ownership plan liability (Note 14) 937 1,093
Accrued and deferred income taxes payable (Note 12) 2,594 4,760
Other liabilities 2,835 3,223
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 795,987 763,725
- ---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 8 and 9)
Stockholders' equity (Notes 12, 13, 14 and 15):
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, 5,476,125 and 5,424,671 shares issued, respectively 5,476 5,425
Additional paid-in capital 57,858 56,842
Retained earnings 65,756 58,773
- ---------------------------------------------------------------------------------------------------------------------------------
129,090 121,040
Treasury stock at cost, 2,789,411 and 2,683,065 shares, respectively (39,904) (36,370)
Net unrealized gains on securities available for sale, net of tax effect (Note 3) 4,001 7,240
Common stock acquired by ESOP (Note 14) (937) (1,093)
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 92,250 90,817
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $888,237 $854,542
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 12
MASSBANK CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands except share data) YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Mortgage loans $16,933 $16,678 $17,111
Other loans 2,481 2,820 2,483
Securities available for sale:
Mortgage-backed securities 19,353 13,246 10,837
Other securities 12,425 15,553 13,975
Trading securities 563 2,633 5,720
Federal funds sold 5,084 5,356 1,283
Other investments 1,270 325 42
- --------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 58,109 56,611 51,451
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
NOW 574 652 685
Savings 12,268 12,898 16,951
Time certificates of deposit 20,220 17,346 8,515
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense on deposits 33,062 30,896 26,151
Borrowed funds -- -- 1
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 33,062 30,896 26,152
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 25,047 25,715 25,299
PROVISION FOR LOAN LOSSES (Note 6) 160 170 705
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 24,887 25,545 24,594
- --------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Deposit account service fees 932 923 974
Gains (losses) on securities, net 868 92 (533)
Interest on tax settlements -- 51 1,188
Other 865 882 908
- --------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2,665 1,948 2,537
- --------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 7,215 7,260 6,793
Occupancy and equipment 1,977 1,991 2,041
Data processing 608 608 640
Professional services 340 414 490
Deposit insurance 13 914 1,788
Write-down in loan valuation premium -- -- 282
Other 1,971 1,991 2,179
- --------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 12,124 13,178 14,213
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 15,428 14,315 12,918
INCOME TAX EXPENSE (Note 12) 6,001 5,556 4,733
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,427 $ 8,759 $ 8,185
================================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Primary 2,743,880 2,783,933 2,883,314
Fully diluted 2,746,016 2,806,095 2,885,358
EARNINGS PER SHARE (in dollars):
Primary $ 3.44 $ 3.15 $ 2.84
Fully diluted 3.43 3.12 2.84
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 13
MASSBANK CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,427 $ 8,759 $ 8,185
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 441 462 520
Amortization of deposit acquisition premium 230 231 230
Amortization of loan valuation premium 64 64 361
Amortization of ESOP shares committed to be released 63 51 --
Charitable contribution of appreciated securities 5 -- --
(Increase) decrease in accrued interest receivable 1,633 (410) 36
Increase (decrease) in other liabilities (388) (2,924) 191
Decrease in current income taxes payable (75) (363) (1,379)
Accretion of discounts on securities, net of
amortization of premiums (1,052) (1,137) (729)
Net trading securities activity 2,065 109,289 26,718
(Gains) losses on securities available for sale (950) 407 (308)
(Gains) losses on trading securities 82 (499) 841
Increase in deferred mortgage loan origination fees, net of
amortization 114 57 15
Deferred income tax expense (benefit) 238 276 (183)
(Increase) decrease in other assets (74) (186) 270
Loans originated for sale (215) (455) (1,034)
Loans sold 378 455 1,285
Provision for loan losses 160 170 705
Provisions for losses and writedowns on real estate acquired
through foreclosure 32 25 49
(Gains) on sales of real estate acquired through foreclosure (26) -- (30)
(Gains) on sales of premises and equipment (2) -- --
Increase (decrease) in escrow deposits of borrowers 279 26 (64)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,429 114,298 35,679
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
24
<PAGE> 14
MASSBANK CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of term federal funds (10,000) (50,000) --
Proceeds from maturities of term federal funds 5,000 45,000 --
Purchases of bank certificates of deposit (810) (941) --
Proceeds from sales of investment securities available for sale 49,940 6,035 28,329
Proceeds from maturities of investment securities held to maturity
and available for sale 86,225 45,147 129,227
Purchases of investment securities available for sale (56,196) (57,789) (124,200)
Purchases of mortgage-backed securities (135,854) (61,092) (85,886)
Principal repayments of mortgage-backed securities 36,858 22,084 29,130
Principal repayments of tax-exempt bonds 17 18 17
Loans originated (51,152) (39,222) (46,672)
Loan principal payments received 49,118 40,116 43,656
Purchases of premises and equipment (310) (360) (459)
Proceeds from sale of premises and equipment 2 -- --
Proceeds from sale of real estate acquired through foreclosure 511 265 791
Net advances on real estate acquired through foreclosure -- (7) (22)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,651) (10,746) (26,089)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 34,463 (6,250) (6,917)
Net decrease in borrowed funds -- -- (73)
Payments to acquire treasury stock (3,534) (3,082) (5,063)
Issuance of common stock under stock option plan 738 891 840
Tax benefit resulting from stock options exercised 266 364 299
Cash dividends paid on common stock (2,459) (1,981) (1,692)
Tax benefit resulting from dividends paid on unallocated shares
held by the ESOP 15 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 29,489 (10,058) (12,606)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 15,267 93,494 (3,016)
Cash and cash equivalents at beginning of year 125,655 32,161 35,177
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 140,922 $125,655 $ 32,161
==================================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH TRANSACTIONS:
Cash paid during the year for interest $ 33,026 $ 30,984 $ 26,153
Cash paid during the year for taxes 5,557 5,230 4,828
NON-CASH TRANSACTIONS:
SFAS 115:
Increase (decrease) in stockholders' equity (3,239) 11,155 (8,067)
Increase (decrease) in deferred tax liabilities (2,329) 8,194 (6,123)
Securities reclassified from held to maturity to available for sale -- 202,800 --
Transfers from loans to real estate acquired through foreclosure 765 409 219
Transfers from other assets to securities available for sale -- 214 --
Purchase of securities incomplete (not settled) as of year end -- 138 2,992
Sales of securities incomplete (not settled) as of year end 30 -- --
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 15
MASSBANK CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ---------------------------------------------------------------------------------------------------------------------------------
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, 1993 $3,522 $56,300 $45,502 $(28,225) $ 4,152 $(1,176) $80,075
Net Income -- -- 8,185 -- -- -- 8,185
Cash dividends declared
($0.60 per share) -- -- (1,692) -- -- -- (1,692)
Net increase in liability to ESOP -- -- -- -- -- (73) (73)
Purchase of treasury stock -- -- -- (5,063) -- -- (5,063)
Exercise of stock options and
related tax benefits 54 1,085 -- -- -- -- 1,139
Transfer resulting from
three-for-two stock split 1,776 (1,776) -- -- -- -- --
Change in net unrealized
gains (losses) on securities
available for sale,
net of tax effect -- -- -- -- (8,067) -- (8,067)
- ---------------------------------------------------------------------------------------------------------------------------------
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 -- -- 9,427 -- -- -- 9,427
Cash dividends declared
($0.92 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
Change in net unrealized
gains (losses) on securities
available for sale,
net of tax effect -- -- -- -- (3,239) -- (3,239)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $5,476 $57,858 $65,756 $(39,904) $ 4,001 $ (937) $92,250
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 16
MASSBANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 fourteen
full service banking offices in Reading, Melrose, Stoneham, Wilmington,
Medford, Chelmsford, Tewksbury, Westford, Dracut and Lowell providing a
variety of deposit, lending and trust services. As a Massachusetts chartered
savings bank whose deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") and the Depositors Insurance Fund ("DIF"), the
activities of the Bank are subject to regulation, supervision and examination
by federal and state regulatory authorities, including, but not limited to
the FDIC, the Massachusetts Commissioner of Banks and the DIF. In addition,
as a bank holding company, the Company is subject to supervision, examination
and regulation by the Board of Governors of the Federal Reserve System.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: Massbank, Readibank Properties, Inc.,
Readibank Equipment Corporation, Readibank Investment Corporation and Melbank
Investment Corporation. 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 nancial 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 1994 and prior years have been restated to reflect the
Company's three-for-two stock split of September 9, 1994.
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, 1996, stockholders' equity included
approximately $4.0 million, representing the net unrealized gains on
securities available for sale, less applicable income taxes. Investment s
classified as trading securities are stated at market value with unrealized
gains and losses included in earnings.
All of the Company's mortgage-backed securities are currently
classified as available for sale. Prior to the fourth quarter of 1995,
mortgage-backed securities were classified as securities held to maturity and
stated at cost, which was adjusted for amortization of premiums and accretion
of discounts by crediting or charging interest and dividend income over the
life of the related securities using a method which approximated the level
yield method.
In the fourth quarter of 1995, the Company adopted the Financial
Accounting Standards Board ("FASB") guidelines, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," issued on November 15, 1995. Under these guidelines, the Company
was allowed a one-time opportunity to reassess the appropriateness of its
investment classifications and reclassify securities from the held to
maturity category to the available for sale category, or vice versa. As a
result of this reassessment and after thoughtful consideration, the Company
reclassified all of its mortgage-backed securities from the held to maturity
category to the available for sale category in accordance with the FASB
guidelines. The total amortized cost of the securities reclassified was
$202.8 million. These securities had total net unrealized gains of $3.7
million on the date they were reclassified.
Income on debt securities is accrued and included in interest and
dividend income. The specific identification method is used to determine
realized gains and losses on sales of securities available for sale which are
also reported in non-interest income under the caption "gains (losses) on
securities." When a security suffers a loss in value which is considered
other than temporary, such loss is recognized by a charge to earnings.
27
<PAGE> 17
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 d iscontinued. 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.
Effective January 1, 1995, 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 LoanIncome Recognition and Disclosures." These statements
establish accounting standards for measuring 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. SFAS No. 114
requires impairment to be 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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions
charged to operations based on management's assessment of many factors
including the risk characteristics of the portfolio, underlying
collateral, current and anticipated economic conditions that may
affect the borrower's ability to pay, and trends in loan delinquencies
and charge-offs. Realized losses, net of recoveries, are charged
directly to the allowance. While management uses the information
available in establishing the allowance for loan losses, future
adjustments to the allowance may be necessary if economic conditions
differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from
those of management.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises, equipment and leasehold impro vements 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.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
Effective January 1, 1997, the Company will adopt SFASNo. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996 and is to be applied prospectively. However, SFAS No. 127, "Deferral
of the Effective Date of Certain Provisions of SFAS No. 125," requires the
deferral of implementation as it relates to repurchase agreements,
dollar-rolls, securities lending and similar transactions until years
beginning after December 31, 1997. Earlier or retrospective applications of
this Statement is not permitted. SFASNo. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on an approach that
focuses on control, whereby after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of financial
assets that are sal es from transfers that are secured borrowings. The
adoption of this pronouncement is not expected to have a significant effect
on the Company's financial position or results of operations.
28
<PAGE> 18
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 ESOPloan.
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 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 fai r 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.
EARNINGS PER COMMON SHARE
The computation of earnings per common share is based on the weighted average
number of shares of common stock and common stock equivalents outstanding
during the year. Stock options, when dilutive, are included as common stock
equivalents using the treasury stock method.
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 3-for-2 split of the Company's common stock effective September 9, 1994.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents consist of
cash and due from banks, and short-term investments with original maturities
of less than 90 days.
As a nonmember of the Federal Reserve System, the Bank is required to
maintain certain reserve requirements of vault cash and/or deposits with the
Federal Reserve Bank of Boston. The amount of this reserve requirement,
included in "Cash and Due from Banks," was $3.2 million and $2.1 million at
December 31, 1996 and 1995, respectively.
INCOME TAXES
The Bank recognizes income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of the
Bank's assets and liabilities at enacted tax rates expected to be in effect
when the amounts related to such temporary differences are realized or
settled. The Bank's deferred tax asset is reviewed and adjustments to such
asset are recognized as deferred income tax expense or benefit based upon
management's judgment relating to the realizability of such asset. Based on
the Bank's historical and current pre-tax earnings, management believes it is
more likely than not that the Bank will realize its existing gross deferred
tax asset.
The Company and its subsidiaries file state and consolidated federal
income tax returns on an October 31 year-end.
29
<PAGE> 19
2. SHORT-TERM INVESTMENTS
<TABLE>
Short-term investments consist of the following:
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds sold (overnight) $109,902 $100,245
Term federal funds sold -- 10,000
Money market funds 24,408 7,260
---------------------------------------------------------------------------------------------------------------------------------
Total short-term investments $134,310 $117,505
=================================================================================================================================
</TABLE>
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
3. INVESTMENT SECURITIES
<TABLE>
The amortized cost and market value of investment securities follows:
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) AT DECEMBER 31, 1996 COST GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
Other bonds and obligations $ 160 $ -- $ -- $ 160
---------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 160 -- -- 160
---------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Debt securities:
U.S. Treasury obligations 139,197 1,509 -- 140,706
U.S. Government agency obligations 7,899 31 (53) 7,877
Other bonds and obligations 1,000 -- -- 1,000
---------------------------------------------------------------------------------------------------------------------------------
Total 148,096 1,540 (53) 149,583
---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage Association 69,903 987 (480) 70,410
Federal Home Loan Mortgage Corporation 226,130 1,878 (1,920) 226,088
Federal National Mortgage Association 9,261 356 -- 9,617
Other 453 27 -- 480
---------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 305,747 3,248 (2,400) 306,595
---------------------------------------------------------------------------------------------------------------------------------
Total debt securities 453,843 4,788 (2,453) 456,178
---------------------------------------------------------------------------------------------------------------------------------
Equity securities 11,014 4,624 (64) 15,574
---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 464,857 $9,412 $(2,517) $471,752
---------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains on securities
available for sale 6,895
---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale, net 471,752
---------------------------------------------------------------------------------------------------------------------------------
Total investment securities, net $471,912
=================================================================================================================================
</TABLE>
30
<PAGE> 20
3. INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) AT DECEMBER 31, 1996 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>
During the years ended December 31, 1996, 1995 and 1994, the Company realized
gains and losses on sales of securities available for sale as follows:
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995 1994
REALIZED REALIZED REALIZED
GAINS LOSSES GAINS LOSSES GAINS LOSSES
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury obligations $ 118 $(103) $ 4 $(889) $ -- $(382)
Mortgage-backed securities -- (166) -- -- -- --
Marketable equity securities 1,146 (45) 574 (96) 724 (34)
--------------------------------------------------------------------------------------------------------------------------------
Total realized gains (losses) $1,264 $(314) $578 $(985) $724 $(416)
================================================================================================================================
</TABLE>
Proceeds from sales of debt securities available for sale during 1996, 1995
and 1994 were $40.8 million, $41.9 million and $25.6 million , respectively.
Proceeds from sales of marketable equity securities available for sale during
1996, 1995 and 1994, were $9.1 million, $4.1 million and $2.7 million,
respectively.
There were no sales of investment securities held-to-maturity during
1996, 1995 and 1994.
31
<PAGE> 21
3. INVESTMENT SECURITIES (continued)
<TABLE>
The amortized cost and market value of debt securities held to maturity and
debt securities available for sale by contractual maturity are as follows:
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities held to maturity:
Other bonds and obligations:
Maturing within 1 year $ -- $ -- $ 225 $ 225
Maturing after 5 years but within 10 years 111 111 124 124
Maturing after 10 years but within 15 years 49 49 53 53
---------------------------------------------------------------------------------------------------------------------------------
Total debt securities held to maturity 160 160 402 402
=================================================================================================================================
Investment securities available for sale:
U.S. Treasury obligations:
Maturing within 1 year 55,820 56,120 75,948 76,251
Maturing after 1 year but within 5 years 80,390 81,566 128,838 132,716
Maturing after 5 years but within 10 years 2,987 3,020 2,985 3,148
---------------------------------------------------------------------------------------------------------------------------------
Total 139,197 140,706 207,771 212,115
---------------------------------------------------------------------------------------------------------------------------------
U.S. Government agency obligations:
Maturing within 1 year -- -- 6,995 7,103
Maturing after 1 year but within 5 years 6,899 6,904 6,999 7,069
Maturing after 5 years but within 10 years 1,000 973 -- --
---------------------------------------------------------------------------------------------------------------------------------
Total 7,899 7,877 13,994 14,172
---------------------------------------------------------------------------------------------------------------------------------
Other bonds and obligations:
Maturing within 1 year 1,000 1,000 999 997
Maturing after 1 year but within 5 years -- -- 997 1,007
---------------------------------------------------------------------------------------------------------------------------------
Total 1,000 1,000 1,996 2,004
---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Maturing after 1 year but within 5 years 2,408 2,458 38 38
Maturing after 5 years but within 10 years 15,975 16,544 21,967 22,846
Maturing after 10 years but within 15 years 287,364 287,593 189,518 193,636
---------------------------------------------------------------------------------------------------------------------------------
Total 305,747 306,595 211,523 216,520
---------------------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale 453,843 456,178 435,284 444,811
---------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains on debt securities
available for sale 2,335 -- 9,527 --
---------------------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale,
net carrying value $456,178 $456,178 $444,811 $444,811
=================================================================================================================================
</TABLE>
Mortgage-backed securities are shown at their contractual maturity but are
expected to have shorter average lives due to prepayments.
32
<PAGE> 22
4. TRADING SECURITIES
The amortized cost and market values of trading securities are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments in mutual funds $4,790 $4,672 $6,834 $6,819
- --------------------------------------------------------------------------------
Total trading securities $4,790 $4,672 $6,834 $6,819
- --------------------------------------------------------------------------------
</TABLE>
During the years ended December 31, 1996, 1995 and 1994, the Company realized
gains and losses on sales of trading securities as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Realized Realized Realized
Gains Losses Gains Losses Gains Losses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury obligations $-- $ -- $20 $ -- $3 $ (52)
Investments in mutual funds -- (44) -- (133) 6 (271)
Marketable equity securities 65 -- 4 -- - --
- --------------------------------------------------------------------------------
Total realized gains (losses) $65 $(44) $24 $(133) $9 $(323)
================================================================================
</TABLE>
Proceeds from sales of trading securities during 1996, 1995 and 1994 were $3.1
million, $26.5 million and $81.1 million, respectively. Unrealized gains or
(losses) included in income in 1996, 1995 and 1994 were $(103) thousand, $608
thousand and $(532) 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
<PAGE> 23
5. LOANS (continued)
The composition of the Bank's loan portfolio is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
Residential:
Conventional:
Fixed rate $ 168,000 $ 163,691
Variable rate 48,832 45,717
FHA and VA 2,515 3,244
Commercial 4,121 6,975
Construction 1,388 1,516
- --------------------------------------------------------------------------------
Total mortgage loans 224,856 221,143
Add: premium on loans 325 388
Less: deferred mortgage loan origination fees (1,042) (928)
- --------------------------------------------------------------------------------
Mortgage loans, net 224,139 220,603
- --------------------------------------------------------------------------------
Other loans:
Consumer:
Installment 1,967 1,988
Guaranteed education 9,729 10,420
Other secured 1,611 2,012
Home equity lines of credit 11,316 13,144
Unsecured 271 265
- --------------------------------------------------------------------------------
Total consumer loans 24,894 27,829
Commercial 628 753
- --------------------------------------------------------------------------------
Total other loans 25,522 28,582
- --------------------------------------------------------------------------------
Total loans $ 249,661 $ 249,185
- --------------------------------------------------------------------------------
</TABLE>
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, 1996 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1995 $ 2,810
Additions 142
Repayments (2,557)
- --------------------------------------------------------------------------------
Balance at December 31, 1996 $ 395
================================================================================
</TABLE>
34
<PAGE> 24
6. ALLOWANCE FOR LOAN LOSSES
<TABLE>
An analysis of the activity in the allowance for loan losses is as follows:
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,529 $ 2,566 $ 2,261
Provision for loan losses 160 170 705
Recoveries of loans previously charged-off 90 42 26
- --------------------------------------------------------------------------------
Total 2,779 2,778 2,992
- --------------------------------------------------------------------------------
Less charge-offs:
Mortgage loans (480) (124) (339)
Other loans (62) (125) (87)
- --------------------------------------------------------------------------------
Balance at end of year $ 2,237 $ 2,529 $ 2,566
================================================================================
</TABLE>
The following table shows the allocation of the allowance for loan losses by
category of loans at December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
(IN THOUSANDS) AT DECEMBER 31, 1996 1995 1994
Percentage Percentage Percentage
of Loans of Loans of Loans
Amount to Total Amount to Total Amount to Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $1,915 88% $2,101 86% $1,908 84%
Commercial 3 2 104 3 67 3
Consumer loans 119 10 237 11 134 12
Other loans 57 -- 61 -- 56 1
Unallocated 143 -- 26 -- 401 --
- -------------------------------------------------------------------------------------
Total $2,237 100% $2,529 100% $2,566 100%
=====================================================================================
</TABLE>
7. NON-PERFORMING ASSETS
<TABLE>
The following schedule summarizes non-performing assets at the dates shown:
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total nonaccrual loans $1,601 $2,428 $2,098
Total real estate acquired through foreclosure 503 255 129
- --------------------------------------------------------------------------------
Total non-performing assets $2,104 $2,683 $2,227
================================================================================
Percent of non-performing loans to total loans 0.64% 0.97% 0.84%
Percent of non-performing assets to total assets 0.24% 0.31% 0.26%
</TABLE>
<TABLE>
The reduction in interest income associated with nonaccrual loans is as follows:
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded under original terms $149 $204 $185
Interest income actually recorded 78 60 88
- ------------------------------------------------------------------------------------------------------
Reduction in interest income $ 71 $144 $ 97
======================================================================================================
</TABLE>
At December 31, 1996 and 1995, the Company had no impaired loans as defined in
SFAS114. Additionally, the Company had no impaired loans during 1996 and its
average recorded investment in impaired loans during the year ended December 31,
1995 was negligible.
35
<PAGE> 25
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 com mitments 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to originate residential mortgage loans $ 4,264 $ 3,466
Unadvanced portions of construction loans 332 444
Unused credit lines, including unused portions of equity lines of credit 19,546 20,714
====================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ESTIMATED
USEFUL LIFE
(IN THOUSANDS) AT DECEMBER 31, 1996 1995 (IN YEARS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Premises:
Land $1,168 $1,168 --
Buildings 3,395 3,395 15-45
Building and leasehold improvements 1,587 1,449 3-30
Equipment 3,093 2,921 3-20
- --------------------------------------------------------------------------------
9,243 8,933
Less: accumulated depreciation and amortization 5,148 4,707
- --------------------------------------------------------------------------------
Total premises and equipment, net $4,095 $4,226
================================================================================
</TABLE>
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,
1996, 1995 and 1994 amounted to $508 thousand, $494 thousand and $484 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, 1996, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDING DECEMBER 31, PAYMENTS
- --------------------------------------------------------------------------------
<S> <C>
1997 $ 511
1998 454
1999 374
2000 176
2001 176
Later years 240
- --------------------------------------------------------------------------------
Total $1,931
================================================================================
</TABLE>
36
<PAGE> 26
10. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------------------
Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand and NOW:
NOW accounts $ 45,352 1.16% $ 51,197 1.23%
Demand accounts 17,382 -- 15,216 --
- -----------------------------------------------------------------------------------------
Total demand and NOW 62,734 0.84 66,413 0.95
- -----------------------------------------------------------------------------------------
Savings:
Regular savings and special notice accounts 333,834 3.49 330,230 3.39
Money market accounts 23,824 3.12 26,368 3.28
- -----------------------------------------------------------------------------------------
Total savings 357,658 3.47 356,598 3.38
- -----------------------------------------------------------------------------------------
Time certificates:
Fixed rate certificates 303,722 5.52 274,684 5.80
Variable rate certificates 65,417 6.37 57,373 6.65
- -----------------------------------------------------------------------------------------
Total time certificates 369,139 5.67 332,057 5.95
- -----------------------------------------------------------------------------------------
Deposit acquisition premium, net of amortization (1,181) -- (1,411) --
- -----------------------------------------------------------------------------------------
Total deposits $788,350 4.29% $753,657 4.30%
=========================================================================================
</TABLE>
The maturity distribution and related rate structure of the Bank's time
certificates at December 31, 1996 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Average
Amount Interest Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Due within 3 months $ 89,757 5.44%
Due within 3-6 months 67,602 5.33
Due within 6-12 months 84,180 5.77
Due within 1-2 years 89,687 5.84
Due within 2-3 years 34,900 6.24
Due within 3-5 years 2,825 5.81
Thereafter 188 6.20
- --------------------------------------------------------------------------------
Total $369,139 5.67%
================================================================================
</TABLE>
At December 31, the Bank had individual time certificates of deposit over $100
thousand maturing as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Due within 3 months $18,834 $ 8,969
Due within 3-6 months 7,479 6,206
Due within 6-12 months 15,327 14,311
Due within 1-2 years 13,545 10,964
Due within 2-3 years 5,411 4,387
Due within 3-5 years 439 1,411
Thereafter -- 101
- --------------------------------------------------------------------------------
Total $61,035 $46,349
================================================================================
</TABLE>
37
<PAGE> 27
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires that the Bank disclose estimated fair
values for its financial instruments. Fair value estimates, methods, and
assumptions are set forth below for the Bank's financial instruments.
CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND ACCRUED INTEREST RECEIVABLE
The carrying amounts for these financial instruments approximate fair value
because they mature in 90 days or less.
INTEREST-BEARING DEPOSITS IN BANKS AND TERM FEDERAL FUNDS SOLD
The carrying amounts of the interest-bearing deposits in banks and term federal
funds sold reported in the balance sheet at December 31, 1996 and 1995
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. Refer to Notes 3 and 4 for the carrying value and estimated fair value
of investment securities at December 31, 1996 and 1995.
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.
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate:
Residential:
Adjustable $ 49,261 $ 49,240 $ 46,101 $ 46,632
Fixed 170,774 171,766 167,539 171,096
Commercial:
Adjustable 4,034 4,047 6,569 6,410
Fixed 70 75 394 400
Consumer and other 25,522 25,527 28,582 28,393
- --------------------------------------------------------------------------------
Total loans 249,661 250,655 249,185 252,931
Less: allowance for loan losses 2,237 -- 2,529 --
- --------------------------------------------------------------------------------
Net loans $247,424 $250,655 $246,656 $252,931
================================================================================
</TABLE>
38
<PAGE> 28
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
DEPOSIT LIABILITIES
Under Statement 107, the fair value of deposits with no stated maturity, such as
demand deposits, NOW accounts, regular savings and special notice accounts, and
money market accounts, is equal to the amount payable on demand as of December
31, 1996 and 1995. 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $ 17,382 $ 17,382 $ 15,216 $ 15,216
NOW accounts 45,352 45,352 51,197 51,197
Regular savings and special notice accounts 333,834 333,834 330,230 330,230
Money market accounts 23,824 23,824 26,368 26,368
Time certificates 369,139 371,368 332,057 334,641
Deposit acquisition premium, net of amortization (1,181) -- (1,411) --
- ------------------------------------------------------------------------------------------------
Total deposits 788,350 791,760 753,657 757,652
Escrow deposits of borrowers 1,271 1,271 992 992
- ------------------------------------------------------------------------------------------------
Total $ 789,621 $793,031 $ 754,649 $758,644
================================================================================================
</TABLE>
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, 1996 and 1995 to be immaterial. Unused credit lines,
including unused portions of equity lines of credit, are at floating interest
rates and therefore there is no fair value adjustment.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Bank's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Bank's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Bank has a trust department that
contributes net fee income annually. The trust department is not considered a
financial instrument, and its value has not been incorporated into the fair
value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax liabilities,
premises and equipment and goodwill. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in many of the
estimates.
39
<PAGE> 29
12. INCOME TAXES
Income tax payable (receivable) was allocated as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Current income tax payable (receivable):
Federal $ 633 $ 894
State 172 (14)
- --------------------------------------------------------------------------------
Total current income tax payable 805 880
- --------------------------------------------------------------------------------
Deferred income tax payable:
Federal 1,327 2,878
State 462 1,002
- --------------------------------------------------------------------------------
Total deferred income tax payable 1,789 3,880
- --------------------------------------------------------------------------------
Total income tax payable $2,594 $4,760
================================================================================
</TABLE>
Income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Federal $ 4,641 $ 4,209 $ 3,635
State 1,122 1,071 1,265
- --------------------------------------------------------------------------------
Total current tax expense 5,763 5,280 4,900
================================================================================
Deferred income tax expense (benefit):
Federal 194 183 (164)
State 53 115 (28)
Change in valuation reserve (9) (22) 25
- --------------------------------------------------------------------------------
Total deferred tax expense (benefit) 238 276 (167)
- --------------------------------------------------------------------------------
Total income tax expense $ 6,001 $ 5,556 $ 4,733
================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(IN THOUSANDS) Years ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" income tax expense at statutory rate $5,400 $5,010 $4,521
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit 764 771 804
Recognition of previously unrecognized tax benefits -- -- (462)
Dividends received deduction (94) (72) (71)
Other (60) (131) (84)
Change in valuation reserve (9) (22) 25
- -----------------------------------------------------------------------------------------
Income tax expense $6,001 $5,556 $4,733
- -----------------------------------------------------------------------------------------
Effective income tax rate 38.9% 38.8% 36.6%
- -----------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 30
12. INCOME TAXES (continued)
At December 31, 1996 and 1995, the Bank had gross deferred tax assets and gross
deferred tax liabilities as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan losses $ 248 $ 455
Deferred loan fees, net 256 405
Deferred compensation and pension cost 409 485
Depreciation 35 39
Purchase accounting 194 70
Other 45 37
- --------------------------------------------------------------------------------
Gross deferred tax asset 1,187 1,491
Valuation reserve (9) (18)
- --------------------------------------------------------------------------------
Net deferred tax asset 1,178 1,473
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Valuation of securities 2,894 5,223
Other unrealized securities gains 56 100
Other 17 30
- --------------------------------------------------------------------------------
Gross deferred tax liability 2,967 5,353
- --------------------------------------------------------------------------------
Net deferred tax liability $(1,789) $(3,880)
================================================================================
</TABLE>
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, 1996. The primary sources of
recovery of the gross federal deferred tax asset are federal income taxes paid
of $11.9 million in 1996, 1995 and 1994 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.
In August, 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and, as such,
the new rules will have no effect on net income or income tax expense.
The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continues to be subject
to provisions of present law that require recapture in the case of certain
excess distributions to shareholders. The tax effect of pre-1988 bad debt
reserves subject to recapture in the case of certain excess distributions is
approximately $7.3 million.
41
<PAGE> 31
13. 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, 1996.
The Bank is a Federal Deposit Insurance Corporation insured institution
subject to the FDIC regulatory capital requirements. The FDIC regulations
require all FDIC insured institutions to maintain minimum levels of Tier I
capital. Highly rated banks (i.e., those with a composite rating of 1 under the
CAMEL rating system) are required to maintain a minimum leverage ratio of Tier I
capital to total average assets of at least 3.00%. An additional 100 to 200
basis points are required for all but these most highly rated institutions. The
Bank is also required to maintain a minimum level of risk-based capital. Under
the new risk-based capital standards, FDIC insured institutions must maintain a
Tier I capital to risk-weighted assets ratio of 4.00% and are generally expected
to meet a minimum total qualifying capital to risk-weighted assets ratio of
8.00%. The new risk-based capital guidelines take into consideration risk
factors, as defined by the regulators, associated with various categories of
assets, both on and off the balance sheet. Under the guidelines, capital
strength is measured in two tiers which are used in conjunction with risk
adjusted assets to determine the risk-based capital ratios. Tier II capital
components include supplemental capital components such as qualifying allowance
for loan losses and qualifying subordinated debt. Tier I capital plus the Tier
II capital components is referred to as total qualifying capital.
The capital ratios of the Company and its principal subsidiary "Massbank"
set forth below currently exceed the minimum ratios for "well capitalized" banks
as defined by federal regulators.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR CAPITAL TO BE WELL
AT DECEMBER 31, 1996 ACTUAL ADEQUACY PURPOSES CAPITALIZED(1)
- --------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier I Capital (to Average Assets):
Massbank Corp. (consolidated) $87,068 10.09% $25,899 3.00% N/A --
Massbank (the "Bank") 85,688 9.93 25,899 3.00 $43,165 5.00%
Tier I Capital (to Risk-Weighted Assets):
Massbank Corp. (consolidated) 87,068 33.41 10,423 4.00 N/A --
Massbank (the "Bank") 85,688 32.88 10,423 4.00 15,634 6.00
Total Capital (to Risk-Weighted Assets):
Massbank Corp. (consolidated) 89,305 34.27 20,846 8.00 N/A --
Massbank (the "Bank") 87,925 33.74 20,846 8.00 26,057 10.00
========================================================================================================
</TABLE>
(1) This column presents the minimum amounts and ratios that a financial
institution must have to be categorized as adequately capitalized.
42
<PAGE> 32
14. 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, 1996, 1995 and 1994, the plan's latest valuation dates:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT OCTOBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested $3,636 $3,845 $3,436
Non-vested 25 55 79
- -------------------------------------------------------------------------------------------------
Total accumulated benefit obligation $3,661 $3,900 $3,515
=================================================================================================
Actuarial present value of projected benefit obligation for
service rendered to date $4,287 $4,622 $4,036
Plan assets at fair value 5,090 4,181 3,648
- -------------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets over projected benefit obligation $ 803 $ (441) $ (388)
=================================================================================================
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation were as follows:
<TABLE>
<S> <C> <C> <C>
Discount rate 7.50% 7.00% 7.50%
Rate of increase in compensation levels 4.50% 4.00% 5.50%
==================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT OCTOBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unrecognized net asset at October 31, being recognized over 21 years $ 232 $ 254 $ 275
Unrecognized net gains or (losses) 670 (412) (538)
Accrued pension cost (99) (283) (125)
- ------------------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets over projected benefit obligation $ 803 $(441) $(388)
======================================================================================================
</TABLE>
Net pension expense for the years ended December 31, included the following
components:
- --------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 309 $ 319 $ 228
Accrual of discount 308 303 270
Actual return on plan assets (632) (686) (219)
Net amortization and deferral 283 412 (80)
- --------------------------------------------------------------------------------
Net pension expense $ 268 $ 348 $ 199
================================================================================
Assumptions used to develop the net pension expense data were:
Discount rate 7.00% 7.50% 7.50%
Expected long-term rate of return on assets 8.00% 7.50% 7.50%
Rate of increase in compensation levels 4.00% 5.50% 5.50%
================================================================================
43
<PAGE> 33
14. EMPLOYEE BENEFITS (continued)
PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLAN
The Bank's Profit Sharing and Incentive Compensation Bonus Plan provides for the
payment of bonuses 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. Bonuses of $418 thousand, $413
thousand and $433 thousand were awarded under the plan in 1996, 1995 and 1994,
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,
1996 and 1995, such outstanding liabilities totaled $937 thousand and $1,093
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, 1996, the ESOP held
39,600 unallocated shares and 81,873 shares which have been allocated to
participants. The fair value of the unallocated shares at December 31, 1996
was $1,510 thousand.
Dividends on unallocated shares are used to offset a portion of the
interest paid on the ESOP loan. Dividends on allocated shares held by the ESOP
are allocated to plan participants proportionately based on the number of shares
in the participant's allocated account.
Total compensation and interest expense applicable to the ESOP amounted to
$314 thousand, $303 thousand and $206 thousand for the years ended December 31,
1996, 1995 and 1994, 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 $99
thousand, $94 thousand and $87 thousand in 1996, 1995 and 1994, respectively.
44
<PAGE> 34
14. EMPLOYEE BENEFITS (continued)
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. The maximum number of shares issued or currently
reserved for issuance under the plan, when adjusted for the three-for-two stock
split of the Company's common stock of September 9, 1994, is 517,500. However,
all but 3.5 of the shares available for issuance under the 1986 plan have been
granted as of December 31, 1996. 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 142,500 shares.
Both incentive stock options and non-qualified stock options may be granted
under the plans. As of December 31, 1996, there were 114,937.5 non-qualified
stock options and 145,437.5 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 plans 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.
A summary of the status of the Company's fixed stock option plan as of
December 31, 1996, 1995 and 1994, and changes during the years ended on those
dates is presented below:(1)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
FIXED OPTIONS Option Price Option Price Option Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 277,332 $18.13 317,366 $16.25 339,961.5 $14.47
Granted 34,500 31.20 33,250 23.38 49,500 22.95
Exercised (51,454) 14.32 (72,533) 12.28 (69,470.5) 12.10
Forfeited (3) 11.50 (751) 22.98 (2,625) 22.05
- ---------------------------------------------------------------------------------------------------
Outstanding at end of year 260,375 $20.61 277,332 $18.13 317,366 $16.25
===================================================================================================
Options exercisable at year-end 260,375 -- 277,332 -- 317,366 --
===================================================================================================
</TABLE>
The following table summarizes information about fixed stock options outstanding
and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996 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
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.17 to $14.33 68,125 4.3 years $11.65 68,125 $11.65
21.33 to $23.13 155,000 6.2 years 22.14 155,000 22.14
24.38 to $26.50 3,500 8.4 years 25.59 3,500 25.59
31.00 to $33.25 33,750 9.1 years 31.21 33,750 31.21
- ---------------------------------------------------------------------------------------------------------
$9.17 to $33.25 260,375 6.1 years $20.61 260,375 $20.61
=========================================================================================================
</TABLE>
(1) All share information presented has been adjusted to reflect the 3-for-2
split of the Company's common stock effective September 9, 1994.
45
<PAGE> 35
14. EMPLOYEE BENEFITS (continued)
<TABLE>
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 bee n recognized in the Consolidated
Statements of Income for 1996. 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 1996 and 1995:
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $9,427 $8,759
Pro forma 9,230 8,598
- -----------------------------------------------------------------------------------------------------------------
Primary earnings per share As reported $ 3.44 $ 3.15
Pro forma 3.37 3.09
- -----------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share As reported $ 3.43 $ 3.12
Pro forma 3.36 3.06
=================================================================================================================
Weighted average fair value $ 8.04 $ 6.93
Expected life 7.2 years 7.4 years
Risk-free interest rate 5.64% 7.66%
Expected volatility 23.0% 23.0%
Expected dividend yield 2.7% 2.7%
=================================================================================================================
</TABLE>
The pro forma effect on net income and earnings per share for 1996 and 1995
is not representative of the pro forma effect on net income and earnings
per share for future years because it does not reflect compensation cost
for options granted prior to January 1, 1995.
15. 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
$0.0113 per Right until ten days after a person becomes a 15% shareholder
of Massbank Corp. or until certain other triggering events have occurred.
46
<PAGE> 36
16. PARENT COMPANY FINANCIAL STATEMENTS
<TABLE>
The following are the condensed financial statements for Massbank Corp.
(the "Parent Company") only:
<CAPTION>
BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) AT DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash $ 20 $ 11
Interest-bearing deposits in banks 1,365 1,018
Investment in subsidiaries 91,807 90,998
Other assets 14 25
- --------------------------------------------------------------------------------------------------------------
Total assets $ 93,206 $ 92,052
==============================================================================================================
LIABILITIES:
Accrued income taxes payable $ -- $ 9
Employee stock ownership plan liability (Note 14) 937 1,093
Due to subsidiaries 3 123
Other liabilities 16 10
- --------------------------------------------------------------------------------------------------------------
Total liabilities 956 1,235
==============================================================================================================
STOCKHOLDERS' EQUITY (Notes 12, 13, 14 AND 15):
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, 5,476,125 and 5,424,671 shares issued, respectively 5,476 5,425
Additional paid-in capital 57,858 56,842
Retained earnings 65,756 58,773
- --------------------------------------------------------------------------------------------------------------
129,090 121,040
Treasury stock at cost, 2,789,411 and 2,683,065 shares, respectively (39,904) (36,370)
Net unrealized gains on securities available for sale, net of tax effect (Note 3) 4,001 7,240
Common stock acquired by ESOP (Note 14) (937) (1,093)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 92,250 90,817
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 93,206 $ 92,052
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Dividends received from subsidiaries $5,750 $4,400 $4,000
Interest and dividend income 20 22 34
- --------------------------------------------------------------------------------------------------------------
5,770 4,422 4,034
NON-INTEREST EXPENSE 103 95 102
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 5,667 4,327 3,932
INCOME TAX BENEFIT 14 130 13
- --------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 5,681 4,457 3,945
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 3,746 4,302 4,240
- --------------------------------------------------------------------------------------------------------------
Net income $9,427 $8,759 $8,185
==============================================================================================================
</TABLE>
The Parent Company only Statements of Changes in Stockholders' Equity are
identical to the consolidated statements and therefore are not presented here.
47
<PAGE> 37
16. Parent Company Financial Statements (continued)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,427 $ 8,759 $ 8,185
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (3,746) (4,302) (4,240)
Decrease (increase) in other assets 25 (25) --
(Decrease) increase in accrued income taxes payable (21) (80) 4
Deferred income tax benefit (2) -- --
(Decrease) increase in other liabilities 6 10 (10)
(Decrease) increase in amount due to subsidiaries (121) 121 (1)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,568 4,483 3,938
- ----------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments to acquire treasury stock (3,534) (3,082) (5,063)
Issuance of common stock under stock option plan 738 891 841
Tax benefit resulting from stock options exercised 28 8 7
Dividends paid on common stock (2,459) (1,981) (1,692)
Tax benefit resulting from dividends paid on unallocated
shares held by the ESOP 15 -- --
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,212) (4,164) (5,907)
- ----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 356 319 (1,969)
Cash and cash equivalents at beginning of year 1,029 710 2,679
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,385 $ 1,029 $ 710
==========================================================================================================
</TABLE>
During the years ended December 31, 1996, 1995 and 1994, the Company made cash
payments for income taxes of $23 thousand, $13 thousand and $17 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 $41 thousand, $28 thousand and $49 thousand
during the years ended December 31, 1996, 1995 and 1994, respectively.
48
<PAGE> 38
<TABLE>
17. TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $9,427 $8,759 $8,185 $6,695 $4,677 $2,250 $ 725 $2,668 $4,917 $5,521
Primary earnings per share(2) 3.44 3.15 2.84 2.23 1.59 0.78 0.22 0.66 1.14 1.14
Cash dividends declared per share(2) 0.92 0.73 0.60 0.45 1/3 0.35 1/3 0.30 1/3 0.28 1/3 0.28 0.25 1/3 0.22
Book value per share, at year end(2) 34.34 33.13 26.78 27.28 24.50 23.38 21.60 20.21 18.95 17.65
Return on average assets 1.08% 1.04% 0.96% 0.79% 0.61% 0.60% 0.23% 0.86% 1.56% 1.69%
Return on average realized equity(1) 11.01% 10.81% 10.62% 8.98% 6.79% 3.39% 1.03% 3.38% 6.20% 6.79%
==================================================================================================================================
<FN>
(1) Excludes average net unrealized gains or losses on securities available for sale.
(2) All share information presented has been adjusted to reflect the 3-for-2
split of the Company's common stock effective September 9, 1994.
</TABLE>
<TABLE>
18. QUARTERLY DATA (UNAUDITED)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT 4th 3rd 2nd 1st 4th 3rd 2nd 1st
PER SHARE DATA) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $14,828 $14,767 $14,390 $14,124 $14,299 $14,244 $14,220 $13,848
Interest expense 8,473 8,441 8,139 8,009 8,095 7,933 7,680 7,188
- ------------------------------------------------------------------------------------------------------------------
Net interest income 6,355 6,326 6,251 6,115 6,204 6,311 6,540 6,660
Provision for loan losses 10 85 35 30 30 30 40 70
- ------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,345 6,241 6,216 6,085 6,174 6,281 6,500 6,590
Non-interest income 621 703 724 617 535 376 609 428
Non-interest expense 3,117 2,921 3,030 3,056 3,060 3,040 3,557 3,521
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,849 4,023 3,910 3,646 3,649 3,617 3,552 3,497
Income tax expense 1,459 1,579 1,540 1,423 1,402 1,400 1,383 1,371
- ------------------------------------------------------------------------------------------------------------------
Net income $ 2,390 $ 2,444 $ 2,370 $ 2,223 $ 2,247 $ 2,217 $ 2,169 $ 2,126
==================================================================================================================
Earnings per share (in dollars):(1)
Primary $ 0.88 $ 0.90 $ 0.86 $ 0.80 $ 0.81 $ 0.80 $ 0.78 $ 0.76
Fully diluted 0.87 0.90 0.86 0.80 0.81 0.80 0.78 0.76
- ------------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding:(1)
Primary 2,722 2,716 2,754 2,783 2,776 2,774 2,789 2,797
Fully diluted 2,729 2,717 2,754 2,784 2,778 2,781 2,794 2,798
==================================================================================================================
<FN>
(1) Computation of earnings per share is further described in Note 1.
</TABLE>
49
<PAGE> 39
MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA
YEARS ENDED DECEMBER 31, 1996 AND 1995
Massbank Corp.'s common stock is currently traded on the Nasdaq Stock Market
under the symbol "MASB." At December 31, 1996 there were 2,686,714 shares
outstanding and 998 shareholders of record. Shareholders of record do not
reflect the number of persons or entities who hold their stock in nominee or
"street" name.
<TABLE>
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.
- -------------------------------------------------------------------------------
<CAPTION>
PRICE PER SHARE
--------------- CASH
DIVIDENDS
HIGH LOW DECLARED
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Fourth Quarter 38 3/4 33 1/8 $0.24
Third Quarter 34 1/4 32 1/2 0.24
Second Quarter 33 3/4 32 3/4 0.22
First Quarter 34 1/2 31 0.22
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------
Fourth Quarter 32 1/2 30 3/4 $0.19
Third Quarter 32 1/4 26 1/4 0.19
Second Quarter 27 1/2 23 1/2 0.17 1/2
First Quarter 25 22 1/4 0.17 1/2
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
CORPORATE INFORMATION
<S> <C> <C>
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 99 High Street
(617) 662-0100 1996 Form 10-K. Written requests Boston, MA 02110
FAX (617) 942-1022 should be addressed to:
Shareholder Services
Savings and Mortgage MASSBANK Corp. Legal Counsel
24-Hour-Rate Lines 159 Haven Street Goodwin, Procter & Hoar
(617) 662-0154 Reading, MA 01867 Exchange Place
(508) 446-9285 Boston, MA 02109
Notice of Shareholders' Meeting Dividend Reinvestment and
Stock Purchase Plan Reports on Effectiveness
The Annual Meeting of the Shareholders may obtain a brochure of Internal Control Structure
Shareholders of MASSBANK Corp. containing a detailed description of Over Financial Reporting
will be held at 10:00 a.m. the plan by writing to: Shareholders may obtain without
on Tuesday, April 22, 1997 at the Shareholder Services charge a copy of Management's
Tara Ferncroft Conference Resort MASSBANK Corp. and the Independent Auditors'
50 Ferncroft Road 159 Haven Street 1996 Reports on the Effectiveness
Danvers, MA 01923 Reading, MA 01867 of the Company's Internal Control
Structure Over Financial Reporting.
Written requests should be
Transfer Agent addressed to:
Boston EquiServe Shareholder Services
Shareholder Services MASSBANK Corp.
P.O. Box 644 159 Haven Street
Boston, MA 02102-0644 Reading, MA 01867
</TABLE>
50
<PAGE> 40
<TABLE>
OFFICERS AND DIRECTORS
MASSBANK CORP.
<CAPTION>
OFFICERS BOARD OF DIRECTORS
<S> <C> <C>
Gerard H. Brandi Samuel Altschuler *Robert S. Cummings
Chairman, President and President, Altron Incorporated Partner, Peabody and Brown
Chief Executive Officer
*Mathias B. Bedell Louise A. Hickey
Reginald E. Cormier Retired, Bedell Brothers Insurance Retired, Melrose-Wakefield Hospital
Vice President, Treasurer and Agency, Inc.
Chief Financial Officer Leonard Lapidus
*Gerard H. Brandi Retired, Depositors Insurance Fund
Robert S. Cummings Chairman, President and
Secretary Chief Executive Officer, *Stephen E. Marshall
Massbank Corp. President, C.H. Cleaves Insurance
Donna H. West Agency, Inc.
Assistant Secretary Allan S. Bufferd
Deputy Treasurer and Arthur W. McPherson
Director of Investments Certified Financial Planner
Massachusetts Institute of Technology
*Herbert G. Schurian
+Peter W. Carr Certified Public Accountant
Retired, Guilford Transportation
Industries *Dr. Donald B. Stackhouse
Dentist
Alexander S. Costello
President, Lowell Sun Publishing Co., Inc. *Member, Executive Committee
Member, Audit Committee
</TABLE>
<TABLE>
OFFICERS AND DIRECTORS
MASSBANK
<CAPTION>
OFFICERS
<S> <C> <C> <C>
Gerard H. Brandi Gregory W. Bowe Gerard F. Frechette Alice B. Sweeney
Chairman, President and Assistant Vice President Loan Officer Assistant Comptroller
Chief Executive Officer
Ernest G. Campbell, Jr. Rachael E. Garneau Richard A. Tatarczuk
Donald R. Washburn Collections Officer Assistant Treasurer Assistant Vice President
Senior Vice President, Lending and Comptroller
Charles F. Coupe Margo E. Higgins
Donna H. West Information Officer Assistant Vice President Evangeline C. Westgate
Senior Vice President, Retail Banking and Human Resources Assistant Treasurer
Janet L. Daniels Officer
Raymond A. Brearey Assistant Vice President Patricia A. Witts
Vice President, Administration Brian W. Hurley Assistant Treasurer
Senior Trust Officer Aunali Dohadwala Assistant Vice President
Auditor Michael J. Woods
David F. Carroll Kenneth A. Masson Assistant Vice President
Vice President, Operations Karen J. Downs Assistant Vice President
Assistant Treasurer BOARD OF DIRECTORS
Reginald E. Cormier Robyn L. Nadeau AND EXECUTIVE COMMITTEE
Vice President, Treasurer Karen L. Flammia Assistant Treasurer
and Chief Financial Officer Assistant Vice President Mathias B. Bedell
Mindy S. Peloquin Gerard H. Brandi, Chairman
Marilyn H. Abbott Melissa J. Flanagan Assistant Treasurer Robert S. Cummings, Clerk
Assistant Treasurer Assistant Treasurer Stephen E. Marshall
Thomas J. Queeney Herbert G. Schurian
Andrea S. Bradford Ana M. Foster Assistant Vice President Dr. Donald B. Stackhouse
Assistant Vice President Compliance and Donna H. West
Security Officer Renald A. Robillard
Assistant Treasurer
</TABLE>
51
<PAGE> 41
MASSBANK BRANCH OFFICES d/b/a
Massbank of Reading* Massbank of Melrose
123 Haven Street 476 Main Street
Reading, MA 01867 Melrose, MA 02176
(617) 942-8188 (617) 662-0100
27 Melrose Street
Massbank of Chelmsford Towers Plaza
Melrose, MA 02176
296 Chelmsford Street (617) 662-0165
Eastgate Plaza
Chelmsford, MA 01824
(508) 256-3751 Massbank of Stoneham
17 North Road 240 Main Street
Chelmsford, MA 01824 Stoneham, MA 02180
(508) 256-3733 (617) 662-0177
Massbank of Dracut Massbank of Tewksbury
45 Broadway Road 1800 Main Street
Dracut, MA 01826 Tewksbury, MA 01876
(508) 441-0040 (508) 851-0300
Massbank of Lowell Massbank of Westford
50 Central Street 203 Littleton Road
Lowell, MA 01852 Westford, MA 01886
(508) 458-3400 (508) 692-3467
755 Lakeview Avenue
Lowell, MA 01850 Massbank of Wilmington
(508) 458-3437
370 Main Street
Wilmington, MA 01887
Massbank of Medford (508) 658-4000
4110 Mystic Valley Parkway 219 Lowell Street
Wellington Circle Plaza Lucci's Plaza
Medford, MA 02155 Wilmington, MA 01887
(617) 395-4899 (508) 658-5775
*Main Office
52
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
The Board of Directors
MASSBANK Corp.
We consent to incorporation by reference in the Registration Statements (No.
33-11949 and No. 33-82110) on Form S-8 of MASSBANK Corp. of our report dated
January 17, 1997, relating to the consolidated balance sheets of MASSBANK Corp.
and subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report appears
in the December 31, 1996 annual report on Form 10-K of MASSBANK Corp.
/s/KPMG Peat Marwick LLP
Boston, Massachusetts
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000799166
<NAME> MASSBANK CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,612
<INT-BEARING-DEPOSITS> 1,751
<FED-FUNDS-SOLD> 119,902
<TRADING-ASSETS> 4,672
<INVESTMENTS-HELD-FOR-SALE> 471,752
<INVESTMENTS-CARRYING> 160
<INVESTMENTS-MARKET> 160
<LOANS> 249,661
<ALLOWANCE> (2,237)
<TOTAL-ASSETS> 888,237
<DEPOSITS> 788,350
<SHORT-TERM> 1,271
<LIABILITIES-OTHER> 5,429
<LONG-TERM> 937
5,476
0
<COMMON> 0
<OTHER-SE> 86,774
<TOTAL-LIABILITIES-AND-EQUITY> 888,237
<INTEREST-LOAN> 19,414
<INTEREST-INVEST> 32,341
<INTEREST-OTHER> 6,354
<INTEREST-TOTAL> 58,109
<INTEREST-DEPOSIT> 33,062
<INTEREST-EXPENSE> 33,062
<INTEREST-INCOME-NET> 25,047
<LOAN-LOSSES> 160
<SECURITIES-GAINS> 868
<EXPENSE-OTHER> 12,124
<INCOME-PRETAX> 15,428
<INCOME-PRE-EXTRAORDINARY> 15,428
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,001
<EPS-PRIMARY> 3.44
<EPS-DILUTED> 3.43
<YIELD-ACTUAL> 2.96
<LOANS-NON> 1,601
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,601
<ALLOWANCE-OPEN> 2,529
<CHARGE-OFFS> (542)
<RECOVERIES> 90
<ALLOWANCE-CLOSE> 2,237
<ALLOWANCE-DOMESTIC> 2,094
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 143
</TABLE>
