SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to____________
Commission File Number 0-15137
MASSBANK Corp.
(Exact name of registrant as specified in its charter)
Delaware 04-2930382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 HAVEN STREET
Reading, Massachusetts 01867
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (781) 662-0100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's classes of common stock,
as of the latest practicable date is:
Class: Common stock $1.00 per share.
Outstanding at October 31, 1997: 3,571,578 shares.
<PAGE>
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 (unaudited) and December 31, 1996 3
Consolidated Statements of Income (unaudited)
for the three months ended September 30, 1997 and 1996 4
and for the nine months ended September 30, 1997 and 1996 5
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1997 (unaudited)
and the year ended December 31, 1996 6
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1997 and 1996 7 - 8
Condensed Notes to the Consolidated Financial Statements 9 - 10
Average Consolidated Balance Sheets
for the three months ended September 30, 1997 and 1996
and the nine months ended September 30, 1997 and 1996 11 - 14
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 31
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 32
ITEM 2. Changes in Securities 32
ITEM 3. Defaults Upon Senior Securities 32
ITEM 4. Submission of Matters to a Vote of Security Holders 32
ITEM 5. Other Information 32
ITEM 6. Exhibits and Reports on Form 8-K 32
Signature Page 33
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<CAPTION>
September 30, December 31,
1997 1996
____ ____
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 5,160 $ 6,612
Short-term investments (Note 4) 141,361 134,310
______________________________________________________________________________
Total cash and cash equivalents 146,521 140,922
Term federal funds sold -- 10,000
Interest-bearing deposits in banks 2,554 1,751
Securities held to maturity, at amortized cost
(market value of $377 in 1997 and $160 in 1996) 377 160
Securities available for sale, at market value
(amortized cost of $477,243 in 1997 and $464,857
in 1996) 490,967 471,752
Trading securities, at market value 12,510 4,672
Loans: (Note 5)
Mortgage loans 244,257 224,139
Other loans 24,281 25,522
Less: allowance for loan losses (2,254) (2,237)
______________________________________________________________________________
Net loans 266,284 247,424
Premises and equipment 4,475 4,095
Real estate acquired through foreclosure 290 503
Accrued interest receivable 5,479 5,647
Goodwill 1,511 --
Other assets 1,789 1,311
______________________________________________________________________________
Total assets $932,757 $888,237
Liabilities and Stockholders' Equity:
Deposits $820,934 $788,350
Escrow deposits of borrowers 1,608 1,271
Employee stock ownership plan liability 937 937
Accrued income taxes payable 488 805
Deferred income taxes payable, net 4,253 1,789
Other liabilities 3,967 2,835
______________________________________________________________________________
Total liabilities 832,187 795,987
Stockholders' Equity:
Preferred stock, par value $1.00 per share;
2,000,000 shares authorized, none issued -- --
Common stock, par value $1.00 per share;
10,000,000 shares authorized, 7,321,600 and
5,473,375 shares issued, respectively 7,322 5,476
Additional paid-in capital 58,361 57,858
Retained earnings 69,174 65,756
______________________________________________________________________________
134,857 129,090
Treasury stock at cost, 3,761,022 and
2,789,411 shares, respectively (41,351) (39,904)
Net unrealized gains on securities
available for sale, net of tax effect 8,001 4,001
Common stock acquired by ESOP ( 937) ( 937)
______________________________________________________________________________
Total stockholders' equity 100,570 92,250
______________________________________________________________________________
Total liabilities and stockholders' equity $932,757 $888,237
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three months ended
September 30,
(In thousands except share data) 1997 1996
________________________________________________________________________________
<S> <C> <C>
Interest and dividend income:
Mortgage Loans $ 4,535 $ 4,295
Other loans 557 629
Securities available for sale:
Mortgage-backed securities 5,625 5,341
Other securities 2,536 3,053
Trading securities 182 95
Federal funds sold 1,625 1,011
Other investments 400 343
________________________________________________________________________________
Total interest and dividend income 15,460 14,767
________________________________________________________________________________
Interest expense:
Deposits 8,937 8,441
________________________________________________________________________________
Total interest expense 8,937 8,441
________________________________________________________________________________
Net interest income 6,523 6,326
Provision for loan losses 45 85
________________________________________________________________________________
Net interest income after provision for loan losses 6,478 6,241
________________________________________________________________________________
Non-interest income:
Deposit account service fees 242 243
Gains on securities, net 423 262
Other 221 198
________________________________________________________________________________
Total non-interest income 886 703
________________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,983 1,779
Occupancy and equipment 527 472
Data processing 71 149
Professional services 81 70
Merger and acquisition related expense 16 --
Advertising and marketing 39 64
Amortization of intangibles 68 58
Contributions 6 8
Other 400 321
________________________________________________________________________________
Total non-interest expense 3,191 2,921
________________________________________________________________________________
Income before income taxes 4,173 4,023
Income tax expense 1,584 1,579
________________________________________________________________________________
Net income $ 2,589 $ 2,444
________________________________________________________________________________
Weighted average common shares outstanding:
Primary 3,670,581 3,621,485
Fully diluted 3,690,257 3,622,312
________________________________________________________________________________
Earnings per share (in dollars):
Primary $ 0.70 $ 0.67
Fully diluted 0.70 0.67
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Nine months ended
September 30,
(In thousands except share data) 1997 1996
________________________________________________________________________________
<S> <C> <C>
Interest and dividend income:
Mortgage Loans $13,092 $12,767
Other loans 1,677 1,894
Securities available for sale:
Mortgage-backed securities 16,637 14,011
Other securities 7,882 9,534
Trading securities 518 490
Federal funds sold 4,330 3,663
Other investments 1,101 922
________________________________________________________________________________
Total interest and dividend income 45,237 43,281
________________________________________________________________________________
Interest expense:
Deposits 25,841 24,589
________________________________________________________________________________
Total interest expense 25,841 24,589
________________________________________________________________________________
Net interest income 19,396 18,692
Provision for loan losses 165 150
________________________________________________________________________________
Net interest income after provision for loan losses 19,231 18,542
________________________________________________________________________________
Non-interest income:
Deposit account service fees 690 699
Gains on securities, net 1,501 680
Other 725 665
________________________________________________________________________________
Total non-interest income 2,916 2,044
________________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 5,807 5,343
Occupancy and equipment 1,546 1,473
Data processing 372 454
Professional services 308 276
Merger and acquisition related expense 156 --
Advertising and marketing 131 179
Amortization of intangibles 183 173
Contributions 662 42
Other 1,145 1,067
________________________________________________________________________________
Total non-interest expense 10,310 9,007
________________________________________________________________________________
Income before income taxes 11,837 11,579
Income tax expense 4,326 4,542
________________________________________________________________________________
Net income $ 7,511 $ 7,037
________________________________________________________________________________
Weighted average common shares outstanding:
Primary 3,656,771 3,668,273
Fully diluted 3,669,966 3,669,007
________________________________________________________________________________
Earnings per share (in dollars):
Primary $ 2.05 $ 1.92
Fully diluted 2.05 1.92
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 1997 (unaudited)
and the Year Ended December 31, 1996
(In thousands except share data)
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ON SECURITIES COMMON
ADDITIONAL AVAILABLE FOR STOCK
COMMON PAID-IN RETAINED TREASURY SALE, NET OF ACQUIRED
STOCK CAPITAL EARNINGS STOCK TAX EFFECT BY ESOP TOTAL
________ __________ _________ __________ __________ _________ ________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 5,425 $56,842 $58,773 $(36,370) $ 7,240 $(1,093) $ 90,817
Net income -- -- 9,427 -- -- -- 9,427
Cash dividends declared and paid
($0.69 per share) -- -- (2,459) -- -- -- (2,459)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP 15 15
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 63 -- -- -- -- 63
Purchase of treasury stock -- -- -- (3,534) -- -- (3,534)
Exercise of stock options
and related tax benefits 51 953 -- -- -- -- 1,004
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
Net Income -- -- 7,511 -- -- -- 7,511
Cash dividends declared and paid
($0.645 per share) -- -- (2,278) -- -- -- (2,278)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 16 -- -- -- 16
Amortization of ESOP shares
committed to be released -- 131 -- -- -- -- 131
Purchase of treasury stock -- -- -- (1,447) -- -- (1,447)
Exercise of stock options
and related tax benefits 15 372 -- -- -- -- 387
Transfer resulting from four-for-three
stock split 1,831 -- (1,831) -- -- -- --
Change in net unrealized gains
(losses) on securities available
for sale, net of tax effect -- -- -- -- 4,000 -- 4,000
___________________________________________________________________________________________________________________________
Balance at September 30, 1997 $ 7,322 $58,361 $69,174 $(41,351) $ 8,001 $ (937) $100,570
___________________________________________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
____ ____
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,511 $ 7,037
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 390 325
Amortization of deposit acquisition premium 173 173
Accretion of discounts on deposits - Glendale acquisition (9) --
Amortization of loan valuation premium 48 47
Amortization of goodwill 19 --
Amortization of ESOP shares committed to be released 131 --
Contribution of appreciated securities to MASSBANK
Charitable Foundation 622 --
Decrease in accrued interest receivable 168 1,513
Increase in other liabilities 1,132 897
Increase (decrease) in current income taxes payable (318) 223
Accretion of discounts on securities, net of amortization
of premiums (859) (777)
Net trading securities activity (7,734) 2,059
Gains on securities available for sale (1,398) (802)
(Gains) losses on trading securities (104) 122
Increase in deferred mortgage loan
origination fees, net of amortization 126 102
Deferred income tax expense (benefit) (364) 214
Increase in other assets (315) (135)
Loans originated for sale (335) (215)
Loans sold 335 308
Provision for loan losses 165 150
Provision for losses and writedowns on real estate
acquired through foreclosure -- 42
Gains on sales of real estate acquired through foreclosure (16) (25)
Gains on sales of premises and equipment (1) --
Increase in escrow deposits of borrowers 337 230
__________________________________________________________________________________________
Net cash provided by (used) operating activities (296) 11,488
__________________________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds (5,000) --
Proceeds from maturities of term federal funds 15,000 5,000
Purchases of interest bearing bank deposits (803) (782)
Proceeds from sales of investment securities available for sale 33,086 31,877
Proceeds from maturities of investment securities
held to maturity and available for sale 41,250 73,225
Purchases of investment securities held to
maturity and available for sale (54,914) (53,209)
Purchases of mortgage-backed securities (43,601) (126,868)
Securities available for sale acquired - Glendale acquisition (5,268) --
Mortgage-backed securities acquired - Glendale acquisition (10,890) --
Principal repayments of mortgage-backed securities 29,191 27,404
Principal repayments of tax exempt bonds and other
debt securities 14 13
Loans originated (39,952) (40,923)
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
____ ____
(In thousands)
<S> <C> <C>
Cash flows from investing activities: (Continued)
Loan principal payments received 34,375 38,123
Loans acquired, net - Glendale acquisition (13,997) --
Purchases of premises & equipment (447) (192)
Premises and equipment acquired - Glendale acquisition (331) --
Goodwill - Glendale acquisition (1,530) --
Proceeds from sales of real estate acquired through foreclosure 633 476
Proceeds from sale of premises and equipment 9 --
Net advances on real estate acquired through foreclosure (28) --
__________________________________________________________________________________________
Net cash used in investing activities (23,203) (45,856)
__________________________________________________________________________________________
Cash flows from financing activities:
Net increase in deposits 2,700 29,569
Deposits acquired, net of acquisition discount -
Glendale acquisition 29,720 --
Payments to acquire treasury stock (1,447) (3,534)
Issuance of common stock under stock option plan 284 695
Tax benefit resulting from stock options exercised 103 252
Dividends paid on common stock (2,278) (1,824)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 16 --
__________________________________________________________________________________________
Net cash provided by financing activities 29,098 25,158
__________________________________________________________________________________________
Net increase (decrease) in cash and
cash equivalents 5,599 (9,210)
Cash and cash equivalents at beginning of period 140,922 125,655
_________________________________________________________________________________________
Cash and cash equivalents at end of period $146,521 $116,445
_________________________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $25,828 $24,566
Cash paid during the period for taxes, net of refunds 4,446 3,852
Sales of securities incomplete (not settled) at
beginning of period which settled during the period 30 --
Non-cash transactions:
SFAS 115:
Increase (decrease) in stockholders' equity 4,000 (5,971)
Increase (decrease) in deferred tax liabilities 2,829 (4,255)
Transfers from loans to real estate acquired through foreclosure 376 654
Purchases of securities incomplete (not settled) at end of period -- 993
Sales of securities incomplete (not settled) at end of period 192 271
Cost of securities contributed to MASSBANK Charitable Foundation 2 --
_________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
</PAGE>
<PAGE>
MASSBANK CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial condition and results of operations of MASSBANK Corp. (the
"Company") essentially reflect the operations of its subsidiary, MASSBANK (the
"Bank"). All significant intercompany balances and transactions have been
eliminated in consolidation.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, and in the opinion of management,
include all adjustments of a normal recurring nature necessary for the fair
presentation of the financial condition of the Company as of September 30, 1997
and December 31, 1996, and its operating results for the three and nine months
ended September 30, 1997 and 1996. The results of operations for any interim
period are not necessarily indicative of the results to be expected for the
entire year.
Certain amounts in the prior year's consolidated financial statements
have been reclassified to permit comparison with the current fiscal year. The
Company's per share information reported for the current and prior year has
been restated to reflect the four-for-three stock split of the Company's common
stock which was effected in the form of a stock dividend on September 15, 1997.
The information in this report should be read in conjunction with the
financial statements and related notes included in the Annual Report on Form
10-K for the year ended December 31, 1996.
(2) Earnings Per Common Share
The computation of earnings per common share for the three and nine months
ended September 30, 1997 and 1996 is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Stock options, when dilutive are included as common stock equivalents
using the Treasury stock method.
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.
(3) 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.
(4) Short-Term Investments
Short-term investments consist of the following:
<TABLE>
<CAPTION>
________________________________________________________________________________
At At
(In thousands) September 30, 1997 December 31, 1996
________________________________________________________________________________
<S> <C> <C>
Federal funds sold (overnight) $117,180 $109,902
Money market funds 24,181 24,408
________________________________________________________________________________
Total short-term investments $141,361 $134,310
________________________________________________________________________________
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
</TABLE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) Commitments
At September 30, 1997, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$4,464,000 and commitments under existing home equity lines of credit and other
loans of approximately $17,754,000 which are not reflected on the consolidated
balance sheet. In addition, as of September 30, 1997, the Company had a
performance standby letter of credit conveyed to others in the amount
of $937,000 which is also not reflected on the consolidated balance sheet.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
Three Months Ended
September 30,
1997 1996
______________ ______________
Interest Average Interest Average
Average Income Yield/ Average Income Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning assets:
Federal funds sold $116,775 $ 1,625 5.52% $ 76,020 $ 1,011 5.29%
Short-term investments (2) 27,219 395 5.75 25,591 340 5.27
Investment securities 165,324 2,580 6.24 190,210 3,096 6.51
Mortgage-backed securities 323,672 5,625 6.95 303,879 5,341 7.03
Trading securities 12,461 182 5.84 6,057 95 6.24
Mortgage loans (1) 240,639 4,535 7.54 227,613 4,295 7.55
Other loans (1) 24,643 557 8.99 26,658 629 9.39
__________________________________________________ ________________
Total earning assets 910,733 $15,499 6.79% 856,028 $14,807 6.90%
Allowance for loan losses 2,281 2,359
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 908,452 853,669
Other assets 19,654 19,304
__________________________________________________________________________________________
Total assets $928,106 $872,973
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS - Continued
Three Months Ended
September 30,
1997 1996
______________ ______________
Interest Average Interest Average
Average Income Yield/ Average Income Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Liabilities:
Deposits:
Demand and NOW $ 66,951 $ 137 0.81% $ 63,253 $ 141 0.89%
Savings 356,728 3,068 3.41 358,798 3,103 3.44
Time certificates of deposit 398,118 5,732 5.71 359,568 5,197 5.75
__________________________________________________ ________________
Total deposits 821,797 8,937 4.31 781,620 8,441 4.30
Other liabilities 8,007 6,024
__________________________________________________________________________________________
Total liabilities 829,804 787,644
Stockholders' Equity 98,302 85,329
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $928,106 $872,973
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,562 6,366
Less adjustment of tax-exempt
interest income 39 40
__________________________________________________________________________________________
Net interest income $ 6,523 $ 6,326
__________________________________________________________________________________________
Interest rate spread 2.48% 2.60%
__________________________________________________________________________________________
Net interest margin (3) 2.88% 2.97%
__________________________________________________________________________________________
(1) Loans on non-accrual 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>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
Nine Months Ended
September 30,
1997 1996
______________ ______________
Interest Average Interest Average
Average Income Yield/ Average Income Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning assets:
Federal funds sold $106,315 $ 4,330 5.45% $ 91,525 $ 3,663 5.35%
Short-term investments (2) 26,318 1,088 5.53 22,892 914 5.32
Investment securities 168,981 8,010 6.32 200,186 9,654 6.43
Mortgage-backed securities 318,106 16,637 6.97 267,784 14,011 6.98
Trading securities 11,875 518 5.85 11,409 490 5.73
Mortgage loans (1) 232,039 13,092 7.52 225,351 12,767 7.55
Other loans (1) 24,823 1,677 9.02 27,364 1,894 9.22
__________________________________________________ ________________
Total earning assets 888,457 $45,352 6.80% 846,511 $43,393 6.83%
Allowance for loan losses 2,235 2,451
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 886,222 844,060
Other assets 18,810 19,483
__________________________________________________________________________________________
Total assets $905,032 $863,543
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS - Continued
Nine Months Ended
September 30,
1997 1996
______________ ______________
Interest Average Interest Average
Average Income Yield/ Average Income Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
(4) (4) (4) (4)
__________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Liabilities:
Deposits:
Demand and NOW $ 64,994 $ 398 0.82% $ 64,118 $ 440 0.92%
Savings 355,256 9,165 3.45 358,236 9,156 3.41
Time certificates of deposit 383,239 16,278 5.68 347,565 14,993 5.76
__________________________________________________ ________________
Total deposits 803,489 25,841 4.30 769,919 24,589 4.27
Other liabilities 6,667 6,080
__________________________________________________________________________________________
Total liabilities 810,156 775,999
Stockholders' Equity 94,876 87,544
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $905,032 $863,543
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 19,511 18,804
Less adjustment of tax-exempt
interest income 115 112
__________________________________________________________________________________________
Net interest income $19,396 $18,692
__________________________________________________________________________________________
Interest rate spread 2.50% 2.56%
__________________________________________________________________________________________
Net interest margin (3) 2.93% 2.96%
__________________________________________________________________________________________
(1) Loans on non-accrual 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>
<PAGE>
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1997
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.
Results of Operations for the three months ended September 30, 1997
GENERAL
For the quarter ended September 30, 1997, MASSBANK Corp. reported
consolidated net income of $2,589,000 or $0.70 per share compared to $2,444,000
or $0.67 per share for the same quarter of 1996. The current and prior year
per share amounts reflect the four-for-three stock split of the Company's
common stock which was effected in the form of a stock dividend on September 15,
1997.
The Company's positive earnings performance in the recent quarter reflects
an improvement in net interest income due to continued growth in the
Company's average earning assets. Average earning assets for the third quarter
of 1997, as shown in the tables appearing on pages 11 and 12 of this Form 10-Q,
increased to $910.7 million, up $54.7 million from the corresponding quarter in
1996. The increase is partly attributable to the acquisition of the Glendale
Co-operative Bank on July 21, 1997. Net interest income for the recent quarter
was $6,523,000, up $197,000 over the same quarter last year.
Results for the quarter ended September 30, 1997 were also influenced by
the following:
(a) The third quarter provision for loan losses was $45,000 compared
to $85,000 in the prior year's third quarter.
(b) Non-interest income in the third quarter totalled $886,000, an
increase of $183,000 or 26% from the same period in 1996.
(c) Non-interest expense in the third quarter of 1997 totalled
$3,191,000 compared to $2,921,000 during the third quarter
of 1996.
<PAGE>
Net Interest Income
Net interest income was $6.523 million for the third quarter of 1997 as
compared to $6.326 million for the same period in 1996. This increase resulted
from the growth in the Company's interest-earning assets partially offset by
a decrease in net interest margin. The net interest margin for the three
months ended September 30, 1997 and 1996 was 2.88% and 2.97%, respectively.
The Company's interest rate spread decreased to 2.48% for the third
quarter of 1997, from 2.54% in the prior quarter. This compares to a net
interest spread of 2.60% for the third quarter of 1996. The yield on the
Company's average earning assets in the third quarter of 1997 decreased by
11 basis points to 6.79% from 6.90% in the corresponding quarter of 1996.
The Company's average cost of funds in the recent quarter increased 1 basis
point, from 4.30% to 4.31%, when compared to the same quarter last year.
Provision 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.
The provision for loan losses for the third quarter of 1997 was $45,000
versus $85,000 for the comparable period in 1996. This decrease was due to the
lower level of non-accrual loans and loan charge-offs which the Bank has
experienced in 1997 compared to 1996. Net charge-offs for the third quarter
of 1997 amounted to $131,000 compared to $156,000 in the same quarter of last
year.
The reserve coverage as a percentage of the Bank's non-accrual loans showed
improvement in the recent quarter. At September 30, 1997, MASSBANK's allowance
for loan losses totalled $2.254 million representing 194% of non-accrual loans
compared to $2.349 million representing 122% of non-accrual loans at the end of
the third quarter in 1996.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
on securities and other non-interest income.
Non-interest income for the third quarter of 1997 totalled $886,000, up
$183,000 or approximately 26% from the $703,000 reported in the corresponding
quarter last year. This growth is primarily attributable to an increase in
net securities gains. The Company has benefited from the stock market's
favorable performance through September 30, 1997. The Company's equity
portfolio has yielded substantial realized and unrealized gains. Net
unrealized gains in the equity securities portfolio totalled $8.1 million at
September 30, 1997. The Company reported net securities gains of $423,000 for
the recent quarter compared to $262,000 for the same quarter last year.
<PAGE>
Non-Interest Expense
Non-interest expenses increased by $270,000, or 9.2% to $3,191,000 in the
third quarter of 1997 from $2,921,000 in the third quarter of 1996.
Salaries and employee benefits, the largest component of non-interest
expense, increased $204,000 or 11.5% from $1,779,000 in the third quarter of
1996 to $1,983,000 in the recent quarter. This increase is due principally to
salary increases and an increase in the Company's employee stock ownership plan
(ESOP) and directors deferred compensation plan expense. The expense related
to these plans is tied closely to the market value of the Company's common
stock. The market value of the Company's common stock during the recent quarter
increased from $35.8125 per share at June 30, 1997 to $47.50 per share at
September 30, 1997. This increased the expense for both plans combined by
$130,000 for the recent quarter compared to the same quarter last year. These
increases were partially offset by a reduction in employee retirement and
health and dental insurance expenses.
Occupancy and equipment expenses increased from $472,000 in the third
quarter of 1996 to $527,000 in the third quarter of 1997. The increase is due
largely to increases in heat, light and power expenses and higher depreciation
expense resulting from building and leasehold improvements and the Bank's
recent investment in new computer systems.
Data processing expenses decreased from $149,000 for the quarter ended
September 30, 1996 to $71,000 for the quarter ended September 30, 1997. In the
recent quarter, the Bank transferred its data processing to a different data
center. The decrease in data processing expenses reflects one half of the
$150,000 in total credits which the Bank negotiated as part of its initial
contract with the new data center. The balance of the credits will be reflected
in the fourth quarter 1997.
Professional fees increased from $70,000 in the third quarter 1996 to
$81,000 in the recent quarter. This was due, in large part, to an increase in
tax and audit service fees.
Merger and acquisition related expenses incurred in connection with the
acquisition of the Glendale Co-operative Bank totalled $16,000 in the third
quarter of 1997. On February 26, 1997, MASSBANK, (the "Bank") announced that
it had signed a definitive merger agreement under which it would acquire all
of the outstanding shares of Glendale Co-operative Bank ("Glendale") of
Everett, Massachusetts. The acquisition was completed on July 21, 1997. The
transaction was accounted for as a purchase.
Advertising and marketing, amortization of intangibles, bank contributions
and other expenses combined totalled $513,000 in the recent quarter versus
$451,000 for the same quarter a year ago. The increase is due to increases in
deposit insurance premiums of $26,000, amortization of intangibles of $10,000
and a net increase of $26,000 for all other expenses.
Income Tax Expense
The Company, the Bank and its subsidiaries file consolidated federal
income tax returns on an October 31, year-end. The Parent Company is subject
to a State of Delaware Franchise Tax and a State of Massachusetts Bank Excise
Tax and the Bank's subsidiaries are subject to a State of Massachusetts
Corporate Excise Tax.
<PAGE>
Income Tax Expense (Continued)
The provision for federal and state income taxes increased to $1,584,000
for the nine months ended September 30, 1997 from $1,579,000 for the same
period in 1996. The Company's combined effective income tax rate for the
third quarter of 1997 is 38.0% as compared to 39.2% for the same quarter a
year ago.
Results of Operations for the nine months ended September 30, 1997
General
For the nine months ended September 30, 1997, the Company reported
consolidated net income of $7,511,000 or $2.05 per share, up from
$7,037,000 or $1.92 per share earned in the first nine months of 1996.
The Company's financial performance in the first nine months of 1997
reflects an improvement in net interest income due to continued growth in the
Company's average earning assets. Average earning assets for the first nine
months of 1997, as shown in the tables appearing on pages 13 and 14 of this
Form 10-Q, increased to $888.5 million, up $41.9 million from the corresponding
period in 1996. Net interest income for the nine months ended September 30,
1997 was $19,396,000 up $704,000 when compared to the same period in 1996.
The Company's earnings results for the nine months ended September 30, 1997
were also impacted by the following:
(a) The provision for loan losses for the nine months ended
September 30, 1997 was $165,000 compared to $150,000 for
the same period last year.
(b) Non-interest income for the first nine months of 1997
totalled $2,916,000, an increase of $872,000 or 43% from
the same period in 1996.
(c) Non-interest expense for the nine months ended September 30,
1997 totalled $10,310,000 compared to $9,007,000 for the same
period in 1996.
(d) MASSBANK contributed appreciated stock to the MASSBANK
Charitable Foundation, a tax exempt private foundation,
which it established and endowed in the second quarter
1997. By contributing appreciated stock the Bank obtained
a tax benefit of approximately $260,000.
Net Interest Income
Net interest income was $19.396 million for the nine months ended
September 30, 1997 up $704,000 from $18.692 million for the same period in 1996.
This increase resulted from the growth in the Company's interest-earning assets
partially offset by a decrease in net interest margin. The net interest
margin for the nine months ended September 30, 1997 and 1996 was 2.93% and
2.96%, respectively.
The Company's interest rate spread decreased to 2.50% for the first nine
months of 1997, from 2.56% in the first nine months of last year. The yield
on the Company's average earning assets in the first nine months of 1997
decreased by 3 basis points to 6.80% from 6.83% in the corresponding period
of 1996. The Company's average cost of funds in the first nine months of 1997
increased 3 basis points from 4.27% to 4.30%, when compared to the same period
in 1996.
<PAGE>
Net Interest Income (Continued)
The provision for loan losses for the first nine months of 1997 was
$165,000 versus $150,000 for the comparable period in 1996. For the nine
months ended September 30, 1997, loan charge-offs net of recoveries declined
to $253,000 from $330,000 for the same period last year.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains on
securities and other non-interest income.
Non-interest income for the first nine months of 1997 totalled $2,916,000,
up $872,000 or approximately 43% from the $2,044,000 reported in the
corresponding period last year. This increase is principally due to net gains
on securities of $1,501,000 reported for the nine months ended September 30,
1997 versus $680,000 reported for the same period in 1996. The Company has
benefited from the stock market's favorable performance through September 30,
1997. The Company's equity portfolio has yielded substantial realized and
unrealized gains. Net unrealized gains in the equity portfolio totalled $8.1
million at September 30, 1997.
Non-Interest Expense
Non-interest expenses increased by $1,303,000, or 14.5% to $10,310,000
in the first nine months of 1997 from $9,007,000 in the first nine months of
1996.
Salaries and employee benefits, the largest component of non-interest
expense, increased $464,000 or 8.7% from $5,343,000 in the first nine months
of 1996 to $5,807,000 in the first nine months of 1997. This increase is due
principally to salary increases and an increase in the Company's employee stock
ownership plan (ESOP) and directors deferred compensation plan expense. The
expense related to these plans is tied closely to the market value of the
Company's common stock. The market value of the Company's common stock in the
last nine months increased from $28.59 per share at December 31, 1996 to
$47.50 per share at September 30, 1997. This significantly increased the
expense for both plans. These increases are partially offset by a reduction
in employee retirement expense.
Occupancy and equipment expenses increased from $1,473,000 in the first
nine months of 1996 to $1,546,000 in the first nine months of 1997, due largely
to an increase in depreciation expense resulting from building and leasehold
improvements and the Bank's recent investment in new computer systems.
Data processing expenses decreased from $454,000 for the nine months ended
September 30, 1996 to $372,000 for the same period this year. In the third
quarter of 1997, as previously noted, the Bank transferred its data processing
to a different data center. The decrease in data processing expenses reflects
one half of the $150,000 in total credits which the Bank negotiated as part of
its initial contract with the new data center. The balance of the credits will
be reflected in the fourth quarter 1997.
Merger and acquisition related expenses incurred in connection with the
acquisition of the Glendale Co-operative Bank totalled $156,000 in the first
nine months of 1997. The acquisition was completed on July 21, 1997. The
transaction was accounted for as a purchase.
<PAGE>
Bank contributions for the first nine months of this year were $662,000
compared to $42,000 for the same period last year. During the 1997 second
quarter, the Company established and endowed a tax exempt private foundation --
the "MASSBANK" Charitable Foundation" -- for the purpose of making grants in
future years to benefit the Bank's local communities. MASSBANK contributed
appreciated stock to the Foundation valued at $622,000 which is included in
the Bank's contribution expense.
Professional services, advertising and marketing, amortization of
intangibles and other expenses combined totalled $1,767,000 for the nine
months ended September 30, 1997 compared to $1,695,000 for the same period
a year ago. This increase is due primarily to an increase in deposit insurance
premiums of $77,000. All other expense increases were fully offset by a
reduction in advertising and marketing expenses.
Income Tax Expense
The provision for federal and state income taxes decreased to $4,326,000
for the nine months ended September 30, 1997 from $4,542,000 for the same
period in 1996. The decrease is due principally to the tax benefit of
approximately $260,000 which the Bank obtained by contributing appreciated
stock to the MASSBANK Charitable Foundation. The Company's combined effective
income tax rate for the first nine months of 1997 is 36.5% as compared to 39.2%
for the same period a year ago.
Federal Taxation
General
The Company, the Bank and its subsidiaries will report their income on a
(October 31) fiscal year basis using the accrual method of accounting and will
be subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank and its subsidiaries or the Company.
Bad Debt Reserve
In August, 1996, the provisions repealing the current thrift bad dept
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 federal 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 continue to be subject to
provision of present law referred to below 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.
<PAGE>
Distributions
To the extent that the Bank makes "non-dividend distributions" to the
Company that are considered as made (i) from the reserve for losses on
qualifying real property loans or (ii) from the supplemental reserve for
losses on loans ("Excess Distributions"), then an amount based on the amount
distributed will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not
be considered to result in a distribution from the Bank's bad debt reserve.
Thus, any dividends to the Company that would reduce amounts appropriated to
the Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created form an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. If the
Bank makes a "non-dividend distribution," then approximately one and one-half
times the amount so used would be incredible in gross income for federal income
tax purposes, assuming a 35% corporate income tax rate (exclusive of income tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and
local taxes). The Bank does not intend to pay dividends that would result in a
recapture of any portion of its bad debt reserve.
Financial Condition
The Company's total assets increased by $44.5 million in the last nine
months, from $888.2 million at December 31, 1996 to $932.7 million at
September 30, 1997. The increase is largely attributable to the Glendale
Co-operative Bank acquisition in July. Glendale, as of the acquisition date,
had total assets of approximately $35.9 million. Most of the growth in the
Company's total assets is in loans and securities available for sale. Since
year end 1996, the Bank has increased its loan portfolio by $19.2 million and
its securities available portfolio by $18.9 million. The Bank's deposits
increased by $32.6 million or 4.1% during the nine months ended September 30,
1997, from $788.3 million at year end 1996 to $820.9 million at September 30,
1997. The growth in deposits is primarily attributable to the Glendale
acquisition. As of the acquisition date, Glendale had total deposits of
approximately $29.8 million. Total stockholder's equity reached $100.6 million
at September 30, 1997, up $8.3 million from $92.3 million at December 31, 1996.
The increase in stockholders' equity resulted primarily from the Company's net
income of $7.5 million in the first nine months of 1997 and an increase in the
net unrealized gains on investment securities available for sale, net of tax
effect, of approximately $4.0 million. These were partially offset by the
payment of $2.3 million in dividends to stockholders and the cost of additional
shares of treasury stock repurchased during the last nine months of
approximately $1.4 million.
Favorable earnings in 1997 and a strong capital position have permitted
the Company to continue to reward its stockholders through the payment of
higher quarterly dividends. Cash dividends paid to stockholders in the first
nine months of 1997 were $0.645 per share. This represents an increase of
26.5% over the $0.51 per share paid in the same period the prior year.
The Company's book value per share at September 30, 1997 was $28.25 up
from $25.76 at December 31, 1996.
<PAGE>
Investments
Total investments consisting of investment securities and other short-term
investments, including term federal funds sold and interest-bearing bank
deposits, increased from $622.6 million at year end 1996 to $647.8 million at
September 30, 1997. These investments are principally in federal funds sold,
short-term U.S. Treasury notes and government agency fifteen year mortgage-
backed securities. The Bank also maintains an equity securities portfolio,
valued at $17.1 million as of September 30, 1997, which has yielded substantial
realized and unrealized gains. Nearly all of the Bank's investment securities
are classified as available for sale or trading securities. Management
evaluates its investment alternatives in order to properly manage the mix of
assets on its balance sheet. 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.
The Bank continues to maintain a large proportion of its securities
portfolio in government agency mortgage-backed securities. These represent an
attractive investment with minimal credit risk, no servicing responsibilities,
and no delinquencies. The Bank's investment in mortgage-backed securities
totalled $326.3 million at September 30, 1997 versus $306.6 million at year end
1996.
The Bank also maintains a portfolio of trading securities which consisted
of the following as of the dates shown:
September 30, December 31,
(In thousands) 1997 1996
_____________ ____________
U.S. Treasury bills $ 9,760 $ --
Investment in mutual funds 2,706 4,672
Equity securities 44 --
_______ _______
Total $12,510 $ 4,672
<PAGE>
<TABLE>
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at September 30, 1997 and December 31, 1996 with gross unrealized gains and
losses, follows:
<CAPTION>
__________________________________________________________________________________________
Gross Gross
(In thousands) At September 30, 1997 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________________________________________________________________________________________
<S> <C> <C> <C> <C>
Securities held to maturity:
Other bonds and obligations $ 377 $ -- $ -- $ 377
__________________________________________________________________________________________
Total securities held to maturity $ 377 $ -- $ -- $ 377
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $134,289 $ 1,537 $ -- $135,826
U.S. Government agency obligations 10,628 31 (10) 10,649
__________________________________________________________________________________________
Total $144,917 1,568 (10) 146,475
__________________________________________________________________________________________
Mortgage-backed securities:
Collateralized mortgage obligations:
Federal Home Loan Mortgage
Corporation 4,328 26 -- 4,354
Federal National Mortgage
Association 3,740 17 (1) 3,756
Other:
Government National Mortgage
Association 63,208 1,154 (136) 64,226
Federal Home Loan Mortgage
Corporation 242,303 3,233 (574) 244,962
Federal National Mortgage
Association 8,319 293 -- 8,612
Other 326 16 -- 342
__________________________________________________________________________________________
Total mortgage-backed securities 322,224 4,739 (711) 326,252
__________________________________________________________________________________________
Total debt securities 467,141 6,307 (721) 472,727
__________________________________________________________________________________________
Mutual funds 1,110 2 -- 1,112
Equity securities 8,992 8,138 (2) 17,128
__________________________________________________________________________________________
Total securities available for sale 477,243 $ 14,447 $ (723) $490,967
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 13,724
__________________________________________________________________________________________
Total securities available
for sale, net $490,967
__________________________________________________________________________________________
Trading securities $ 12,538 $ 12,510
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
INVESTMENT SECURITIES (continued)
<CAPTION>
__________________________________________________________________________________________
Gross Gross
(In thousands) At December 31, 1996 Amortized Unrealized Unrealized Market
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
__________________________________________________________________________________________
Trading securities $ 4,790 $ 4,672
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of debt securities held to
maturity and debt securities available for sale by contractual maturity at
September 30, 1997 and December 31, 1996 are as follows:
<CAPTION>
September 30, 1997
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 47,125 $ 47,336 $ -- $ --
After 1 year through 5 years 96,509 97,860 230 230
After 5 years through 10 years 1,000 994 101 101
After 10 years through 15 years -- -- 46 46
After 15 years 283 285 -- --
________ _______ ________ _______
144,917 146,475 377 377
Mortgage-backed securities 322,224 326,252 -- --
________ _______ ________ _______
$467,141 $472,727 $ 377 $ 377
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
____________________________________________
Available for Sale Held to Maturity
Amortized Market Amortized Market
Maturing: Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 56,820 $ 57,120 $ -- $ --
After 1 year through 5 years 87,289 88,470 -- --
After 5 years through 10 years 3,987 3,993 111 111
After 10 years through 15 years -- -- 49 49
________ _______ ______ ______
148,096 149,583 160 160
Mortgage-backed securities 305,747 306,595 -- --
________ _______ ______ ______
$453,843 $456,178 $ 160 $ 160
</TABLE>
<PAGE>
<TABLE>
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
<CAPTION>
_______________________________________________________________________________________
At At
(In thousands) September 30, 1997 December 31, 1996
_______________________________________________________________________________________
<S> <C> <C>
Mortgage loans:
Residential $239,176 $219,347
Commercial 4,769 4,121
Construction 1,121 1,388
_______________________________________________________________________________________
245,066 224,856
Add: Premium on loans 359 325
Less: deferred mortgage loan origination fees (1,168) (1,042)
_______________________________________________________________________________________
Total mortgage loans 244,257 224,139
Other loans:
Consumer:
Installment 2,240 1,967
Guaranteed education 9,112 9,729
Other secured 1,624 1,611
Home equity lines of credit 11,006 11,316
Unsecured 264 271
_______________________________________________________________________________________
Total consumer loans 24,246 24,894
Commercial 35 628
_______________________________________________________________________________________
Total other loans 24,281 25,522
_______________________________________________________________________________________
Total loans $268,538 $249,661
_______________________________________________________________________________________
The Bank's loan portfolio increased $18.9 million during the first nine
months of 1997, from $249.7 million at December 31, 1996 to $268.5 million at
September 30, 1997. Most of the increase was in the residential 1-4 family
category. Approximately $14.1 million of the increase is attributable to the
Glendale acquisition in July. The remainder was due to loan originations
during the period exceeding loan amortization and payoffs.
Loan originations decreased slightly in the first nine months of 1997
compared to the first nine months of 1996. Loan originations totalled $11.8
million for the three months ended September 30, 1997 compared to $7.7 million
for the third quarter of last year. For the nine months ended September 30,
1997 loan originations were $40.3 million compared to $41.1 million for the
same period in 1996.
</TABLE>
<PAGE>
<TABLE>
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing assets at
September 30, 1997 and 1996, and December 31, 1996:
<CAPTION>
At At At
September 30, December 31, September 30,
(In thousands) 1997 1996 1996
____________________________________________________________________________________
<S> <C> <C> <C>
Non-Performing Assets:
Non-accrual loans $ 1,163 $ 1,601 $ 1,925
Real estate acquired through foreclosure 290 503 417
____________________________________________________________________________________
Total non-performing assets $ 1,453 $ 2,104 $ 2,342
____________________________________________________________________________________
Allowance for possible loan losses $ 2,254 $ 2,237 $ 2,349
Allowance as percent of
non-accrual loans 193.8 % 139.7 % 122.0 %
Non-accrual loans as percent
of total loans 0.43% 0.64% 0.77%
Non-performing assets as percent
of total assets 0.16% 0.24% 0.27%
____________________________________________________________________________________
The Bank generally does not accrue interest on loans which are 90 days or
more past due. It is the Bank's policy to place such loans on non-accrual status
and to reverse from income all interest previously accrued but not collected
and to discontinue all amortization of deferred loan fees.
Non-performing assets decreased from December 31, 1996 to September 30,
1997 as noted in the table above. The principal balance of non-accrual loans
was $1.2 million, or less than 1/2 of 1% of total loans and real estate acquired
through foreclosure was down to $290 thousand at September 30, 1997. Real
estate formally acquired in settlement of loans is recorded at the lower of the
carrying value of the loan or the fair value of the property received, less
estimated costs to sell the property following foreclosure.
The Bank did not have any impaired loans as of September 30, 1997.
</TABLE>
<PAGE>
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
_______________________________________________________________________________
(In thousands)
<S> <C> <C>
Balance at beginning of period $ 2,237 $ 2,529
Glendale Co-operative acquisition 105 --
Provision for loan losses 165 150
Recoveries of loans previously charged-off 35 40
Less: Charge-offs (288) (370)
________________________________________________________________________________
Balance at end of period $ 2,254 $ 2,349
________________________________________________________________________________
</TABLE>
Potential losses on loans are provided for under the allowance method of
accounting. The allowance is increased by provisions charged to operations
based on management's assessment of many factors including the risk
characteristics of the portfolio, underlying collateral, current and
anticipated economic conditions that may effect the borrowers ability to pay
and trends in loan delinquencies and charge-offs. Realized losses, net of
recoveries, are charged directly to the allowance. While management uses
the information available in establishing the allowance for losses, future
adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on judgments
different from those of management.
At September 30, 1997 the balance of the allowance for loan losses was
$2,254,000 representing 193.8% of total non-accrual loans. Management believes
that the allowance for loan losses is adequate to cover the risks inherent in
the portfolio under current conditions.
<PAGE>
DEPOSITS
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 total deposits increased by approximately $32.6 million to
$820.9 million at September 30, 1997 from $788.3 million at December 31, 1996.
<TABLE>
The composition of the Bank's total deposits at the dates shown are
summarized as follows:
<CAPTION>
September 30, December 31,
1997 1996
______________________________________________________________________________
(In thousands)
<S> <C> <C>
Demand and NOW $ 65,362 $ 62,734
Savings and money market accounts 355,854 357,658
Time certificates of deposit 400,680 369,139
Deposit acquisition premium,
net of amortization (962) (1,181)
________________________________________________________________________________
Total deposits $820,934 $788,350
________________________________________________________________________________
</TABLE>
Recent Accounting Developments
"Earnings Per Share"
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share". This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock, (that is, securities such as options, warrants
or convertible securities). This Statement simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share". It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15.
This Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. This Statement requires restatement of all prior-period EPS
data presented. The adoption of this pronouncement is not expected to have a
material impact on the Company's computation of earnings per share.
<PAGE>
Recent Accounting Developments (continued)
"Reporting Comprehensive Income"
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements.
Statement 130 is applicable to all entities that provide a full set of
financial statements consisting of a statement of financial position, earnings
(net income), cash flows and changes in equity.
FASB Concepts Statement No. 6 defines comprehensive income as "the change
in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners."
The term "comprehensive income" is used in the Statement to describe the
total of all components of comprehensive income including net income.
Prior to the issuance of Statement No. 130, the FASB did not require an
enterprise to report comprehensive income or recommend a format for displaying
comprehensive income.
Various formats for reporting comprehensive income are illustrated in
Statement 130.
Statement 130 is effective for interim and annual periods beginning after
December 15, 1997. Earlier application is permitted. Comparative financial
statements provided for earlier periods are required to be reclassified to
reflect application of the provisions of the Statement.
"Disclosure of Information about Capital Structure"
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 129, "Disclosure of Information about Capital Structure". This Statement
establishes standards for disclosing information about an entity's capital
structure. It applies to all entities and is effective for reporting periods
ending after December 15, 1997. The Company's disclosures currently comply
with these new requirements.
"Disclosures about Segments of an Enterprise and Related Information"
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
This Statement establishes standards for reporting information about operating
segments. An operating segment is defined as a component of an enterprise for
which separate financial information is available and reviewed regularly by
the enterprise's chief operating decision maker in order to make decisions
about resources to be allocated to the segment and also to evaluate the
segment's performance. SFAS No. 131 requires a company to disclose certain
balance sheet and income statement information by operating segment, as well
as provide a reconciliation of operating segment information to the company's
consolidated balances. This Statement is effective for reporting periods
beginning after December 15, 1997.
<PAGE>
Liquidity and Capital Resources
The Bank must maintain a sufficient amount of cash and assets which can
readily be converted into cash in order to meet cash 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 September 30, 1997 the Bank had $117.2 million or
12.6% of total assets and $156.2 million or 16.8% of total assets invested,
respectively, in overnight federal funds sold and United States obligations.
The Bank is a Federal Deposit Insurance Corporation ("FDIC") insured
institution subject to the FDIC regulatory capital requirements. The FDIC
regulations require all FDIC insured institutions to maintain minimum levels
of Tier 1 capital. Highly rated banks (i.e., those with a composite rating
of 1 under the CAMEL rating system) are required to maintain a minimum leverage
ratio of Tier 1 capital to total 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 1 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 components include supplemental capital components such as
qualifying allowance for loan losses and qualifying subordinated debt. Tier I
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 September 30, 1997, the Bank had a leverage
Tier I capital to total assets ratio of 9.51%, a Tier I capital to risk-
weighted assets ratio of 32.20% and a total capital to risk-weighted assets
ratio of 33.03%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to total assets of 9.81%, Tier I capital to risk-weighted assets
of 33.21% and total capital to risk-weighted assets of 34.04% at September 30,
1997.
Impact Of Inflation And Changing Prices
MASSBANK Corp.'s financial statements presented herein have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time, due to the fact that substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their
business. As of September 30, 1997, none of these actions individually
or in the aggregate is believed by management to be material to the
financial condition of MASSBANK Corp. or the Bank.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. 11.1: Statement regarding computation of per
share earnings.
b. Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSBANK Corp. & Subsidiaries
_____________________________
(Registrant)
Date November 13, 1997 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date November 13, 1997 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO
<PAGE>
<TABLE> EXHIBIT 11.1
MASSBANK CORP.
Earnings Per Share
The following is a calculation of earnings per share for the three months
and nine months ended September 30, 1997 and 1996.
<CAPTION>
Three Months Ended Nine Months Ended
Calculation of Primary September 30, September 30,
Earnings Per Share 1997 1996 1997 1996
______________________________ ____ ____ ____ ____
<S> <C> <C> <C> <C>
Average common shares outstanding 3,572,418 3,587,247 3,578,807 3,629,181
Less: Unallocated Employee Stock Ownership
Plan (ESOP) shares not committed
to be released (52,800) (61,600) (52,800) (61,600)
Shares assumed to be repurchased
under treasury stock method
for stock options 150,963 95,838 130,764 100,692
_______ _______ _______ _______
Total Shares 3,670,581 3,621,485 3,656,771 3,668,273
__________ __________ _________ _________
Net Income $2,589,000 $2,444,000 $7,511,000 $7,037,000
__________ __________ __________ __________
Per Share Amount $ 0.70 $ 0.67 $ 2.05 $ 1.92
__________ __________ __________ __________
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Calculation of Fully Diluted September 30, September 30,
Earnings Per Share 1997 1996 1997 1996
______________________________ ____ ____ ____ ____
<S> <C> <C> <C> <C>
Average common shares outstanding 3,572,418 3,587,247 3,578,807 3,629,181
Less: Unallocated Employee Stock Ownership
Plan (ESOP) shares not committed
to be released (52,800) (61,600) (52,800) (61,600)
Shares assumed to be repurchased
under treasury stock method
for stock options 170,639 96,665 143,959 101,426
________ _______ _______ _______
Total Shares 3,690,257 3,622,312 3,669,966 3,669,007
_________ _________ _________ _________
Net Income $2,589,000 $2,444,000 $7,511,000 $7,037,000
__________ __________ __________ __________
Per Share Amount $ 0.70 $ 0.67 $ 2.05 $ 1.92
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000799166
<NAME> MASSBANK CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,160
<INT-BEARING-DEPOSITS> 2,554
<FED-FUNDS-SOLD> 117,180
<TRADING-ASSETS> 12,510
<INVESTMENTS-HELD-FOR-SALE> 490,967
<INVESTMENTS-CARRYING> 377
<INVESTMENTS-MARKET> 377
<LOANS> 268,538
<ALLOWANCE> (2,254)
<TOTAL-ASSETS> 932,757
<DEPOSITS> 820,934
<SHORT-TERM> 1,608
<LIABILITIES-OTHER> 8,708
<LONG-TERM> 937
<COMMON> 7,322
0
0
<OTHER-SE> 93,248
<TOTAL-LIABILITIES-AND-EQUITY> 932,757
<INTEREST-LOAN> 14,769
<INTEREST-INVEST> 25,037
<INTEREST-OTHER> 5,431
<INTEREST-TOTAL> 45,237
<INTEREST-DEPOSIT> 25,841
<INTEREST-EXPENSE> 25,841
<INTEREST-INCOME-NET> 19,396
<LOAN-LOSSES> 170
<SECURITIES-GAINS> 1,501
<EXPENSE-OTHER> 10,310
<INCOME-PRETAX> 11,837
<INCOME-PRE-EXTRAORDINARY> 11,837
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,511
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.05
<YIELD-ACTUAL> 2.93
<LOANS-NON> 1,163
<LOANS-PAST> 527
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,690
<ALLOWANCE-OPEN> 2,237
<CHARGE-OFFS> (288)
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 2,254
<ALLOWANCE-DOMESTIC> 1,825
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 429
</TABLE>
