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 June 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: (617) 662-0100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's classes of common stock,
as of the latest practicable date is:
Class: Common stock $1.00 per share.
Outstanding at July 31, 1997: 2,685,789 shares.
<PAGE>
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1997 (unaudited) and December 31, 1996 3
Consolidated Statements of Income (unaudited)
for the three months ended June 30, 1997 and 1996 4
and for the six months ended June 30, 1997 and 1996 5
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1997 (unaudited)
and the year ended December 31, 1996 6
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1997 and 1996 7 - 8
Condensed Notes to the Consolidated Financial Statements 9 - 10
Average Consolidated Balance Sheets
for the three months ended June 30, 1997 and 1996
and for the six months ended June 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>
June 30, December 31,
1997 1996
(unaudited)
<S>
Assets: <C> <C>
Cash and due from banks $ 7,560 $ 6,612
Short-term investments (Note 4) 125,122 134,310
______________________________________________________________________________
Total cash and cash equivalents 132,682 140,922
Term federal funds sold 10,000 10,000
Interest-bearing deposits in banks 2,011 1,751
Securities held to maturity, at amortized cost
(market value of $381 in 1997 and $160 in 1996) 381 160
Securities available for sale, at market value
(amortized cost of $473,202 in 1997
and $464,857 in 1996) 481,730 471,752
Trading securities, at market value 13,283 4,672
Loans: (Note 5)
Mortgage loans 231,440 224,139
Other loans 24,365 25,522
Less: allowance for loan losses (2,235) (2,237)
______________________________________________________________________________
Net loans 253,570 247,424
Premises and equipment 4,243 4,095
Real estate acquired through foreclosure 324 503
Accrued interest receivable 5,764 5,647
Other assets 1,429 1,311
______________________________________________________________________________
Total assets $905,417 $888,237
Liabilities and Stockholders' Equity:
Deposits $798,504 $788,350
Escrow deposits of borrowers 1,377 1,271
Employee stock ownership plan liability 937 937
Accrued income taxes payable 405 805
Deferred income taxes payable, net 2,406 1,789
Other liabilities 5,477 2,835
______________________________________________________________________________
Total liabilities 809,106 795,987
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, 5,486,575 and
5,476,125 shares issued, respectively 5,487 5,476
Additional paid-in capital 58,118 57,858
Retained earnings 69,253 65,756
______________________________________________________________________________
132,858 129,090
Treasury stock at cost, 2,805,411 and
2,789,411 shares, respectively (40,560) (39,904)
Net unrealized gains on securities
available for sale, net of tax effect 4,950 4,001
Common stock acquired by ESOP (937) (937)
______________________________________________________________________________
Total stockholders' equity 96,311 92,250
______________________________________________________________________________
Total liabilities and stockholders' equity $905,417 $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
June 30,
(In thousands except share data) 1997 1996
_______________________________________________________________________________
<S> <C> <C>
Interest and dividend income:
Mortgage Loans $ 4,320 $ 4,273
Other loans 560 619
Securities available for sale:
Mortgage-backed securities 5,647 4,740
Other securities 2,664 3,154
Trading securities 241 195
Federal funds sold 1,223 1,073
Other investments 362 336
________________________________________________________________________________
Total interest and dividend income 15,017 14,390
________________________________________________________________________________
Interest expense:
Deposits 8,555 8,139
________________________________________________________________________________
Total interest expense 8,555 8,139
________________________________________________________________________________
Net interest income 6,462 6,251
Provision for loan losses 52 35
________________________________________________________________________________
Net interest income after provision for loan losses 6,410 6,216
________________________________________________________________________________
Non-interest income:
Deposit account service fees 226 238
Gains on securities, net 610 211
Other 300 275
________________________________________________________________________________
Total non-interest income 1,136 724
________________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,955 1,792
Occupancy and equipment 516 484
Data processing 156 152
Professional services 90 97
Merger and acquisition related expense 100 --
Advertising and marketing 36 61
Amortization of intangibles 57 58
Contributions 644 10
Other 370 376
________________________________________________________________________________
Total non-interest expense 3,924 3,030
________________________________________________________________________________
Income before income taxes 3,622 3,910
Income tax expense 1,173 1,540
________________________________________________________________________________
Net income $ 2,449 $ 2,370
________________________________________________________________________________
Weighted average common shares outstanding:
Primary 2,739,449 2,754,461
Fully diluted 2,752,672 2,754,461
________________________________________________________________________________
Earnings per share (in dollars):
Primary $ 0.90 $ 0.86
Fully diluted 0.89 0.86
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Six months ended
June 30,
(In thousands except share data) 1997 1996
________________________________________________________________________________
<S> <C> <C>
Interest and dividend income:
Mortgage Loans $ 8,557 $ 8,472
Other loans 1,120 1,265
Securities available for sale:
Mortgage-backed securities 11,012 8,670
Other securities 5,346 6,481
Trading securities 336 395
Federal funds sold 2,705 2,652
Other investments 701 579
________________________________________________________________________________
Total interest and dividend income 29,777 28,514
________________________________________________________________________________
Interest expense:
Deposits 16,904 16,148
________________________________________________________________________________
Total interest expense 16,904 16,148
________________________________________________________________________________
Net interest income 12,873 12,366
Provision for loan losses 120 65
________________________________________________________________________________
Net interest income after provision for loan losses 12,753 12,301
________________________________________________________________________________
Non-interest income:
Deposit account service fees 448 456
Gains on securities, net 1,078 418
Other 504 467
________________________________________________________________________________
Total non-interest income 2,030 1,341
________________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 3,824 3,564
Occupancy and equipment 1,019 1,001
Data processing 301 305
Professional services 227 206
Merger and acquisition related expense 140 --
Advertising and marketing 92 115
Amortization of intangibles 115 115
Contributions 656 34
Other 745 746
________________________________________________________________________________
Total non-interest expense 7,119 6,086
________________________________________________________________________________
Income before income taxes 7,664 7,556
Income tax expense 2,742 2,963
________________________________________________________________________________
Net income $ 4,922 $ 4,593
________________________________________________________________________________
Weighted average common shares outstanding:
Primary 2,737,313 2,768,944
Fully diluted 2,744,740 2,769,458
________________________________________________________________________________
Earnings per share (in dollars):
Primary $ 1.80 $ 1.66
Fully diluted 1.79 1.66
<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 Six Months Ended June 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
($0.92 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
Net Income -- -- 4,922 -- -- -- 4,922
Cash dividends declared and paid
($0.54 per share) -- -- (1,432) -- -- -- (1,432)
Tax benefit resulting from dividends
paid on unallocated shares held by
the ESOP 7 7
Purchase of treasury stock -- -- -- (656) -- -- (656)
Exercise of stock options
and related tax benefits 11 260 -- -- -- -- 271
Change in net unrealized gains
(losses) on securities available
for sale, net of tax effect -- -- -- -- 949 -- 949
_____________________________________________________________________________________________________________________
Balance at June 30, 1997 $ 5,487 $58,118 $69,253 $(40,560) $ 4,950 $ (937) $96,311
_____________________________________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1997 1996
____ ____
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,922 $ 4,593
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 250 215
Amortization of deposit acquisition premium 115 115
Amortization of loan valuation premium 32 32
Contribution of appreciated stock to MASSBANK
Charitable Foundation 622 --
(Increase) decrease in accrued interest receivable (117) 242
Increase in other liabilities 648 872
Decrease in current income taxes payable (400) (945)
Accretion of discounts on securities, net of
amortization of premiums (554) (501)
Net trading securities activity (8,549) 10
Gains on securities available for sale (1,016) (611)
(Gains) Losses on trading securities (62) 193
Increase in deferred mortgage loan
origination fees, net of amortization 80 113
Deferred income tax expense (benefit) (67) 236
Increase in other assets (148) (103)
Loans originated for sale (200) (145)
Loans sold 200 208
Provision for loan losses 120 65
Provisions for losses and writedowns on real estate
acquired through foreclosure -- 40
Gains on sales of real estate acquired through
foreclosure (15) --
Increase in escrow deposits of borrowers 106 (38)
______________________________________________________________________________
Net cash used in operating activities (4,033) 4,591
______________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds (5,000) --
Proceeds from maturities of term federal funds 5,000 5,000
Purchases of bank certificates of deposit (260) (753)
Proceeds from sales of investment securities
available for sale 30,157 14,250
Proceeds from maturities of investment securities
held to maturity and available for sale 31,000 51,225
Purchases of investment securities available for sale (46,958) (24,637)
Purchases of mortgage-backed securities (38,638) (100,708)
Principal repayments of mortgage-backed securities 18,835 18,242
Principal repayments of tax-exempt bonds 9 8
Loans originated (28,257) (33,286)
Loan principal payments received 21,557 24,006
Purchases of premises & equipment (398) (108)
Proceeds from sales of real estate acquired
through foreclosure 520 149
Net advances on real estate required through foreclosure (4) --
______________________________________________________________________________
Net cash used in investing activities (12,437) (46,612)
______________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1997 1996
____ ____
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 10,039 24,634
Payments to acquire treasury stock (656) (2,022)
Issuance of common stock under stock option plan 199 480
Tax benefit resulting from stock options exercised 72 214
Dividends paid on common stock (1,431) (1,188)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 7 --
______________________________________________________________________________
Net cash provided by financing activities 8,230 22,118
______________________________________________________________________________
Net decrease in cash and cash equivalents (8,240) (19,903)
Cash and cash equivalents at beginning of period 140,922 125,655
______________________________________________________________________________
Cash and cash equivalents at end of period $132,682 $105,752
______________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $ 16,887 $ 16,139
Cash paid during the period for taxes, net of refunds 3,130 3,458
Purchase of securities incomplete (not settled) at
beginning of period which settled during the period -- 138
Sales of securities incomplete (not settled) at
beginning of period which settled during the period 30 --
Non-cash transactions:
SFAS 115:
Decrease in stockholders' equity (949) (6,697)
Decrease in deferred tax liabilities 684 (4,759)
Transfers from loans to real estate acquired
through foreclosure 322 160
Purchases of securities incomplete (not settled)
at end of period 1,994 10,000
Sales of securities incomplete (not settled) at
end of period -- 73
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 June 30, 1997 and
December 31, 1996, and its operating results for the three and six months ended
June 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 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 six months
ended June 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.
<TABLE>
(4) Short-Term Investments
Short-term investments consist of the following:
<CAPTION>
________________________________________________________________________________
At At
(In thousands) June 30, 1997 December 31, 1996
________________________________________________________________________________
<S> <C> <C>
Federal funds sold (overnight) $100,279 $109,902
Money market funds 24,843 24,408
________________________________________________________________________________
Total short-term investments $125,122 $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 June 30, 1997, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$3,878,000 and commitments under existing home equity lines of credit and other
loans of approximately $18,288,000 which are not reflected on the consolidated
balance sheet. In addition, as of June 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>
AVERAGE BALANCE SHEETS
<CAPTION>
Three Months Ended
June 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 $ 89,153 $ 1,223 5.50% $ 80,960 $ 1,073 5.33%
Short-term investments (2) 26,051 358 5.51 25,051 334 5.36
Investment securities 171,062 2,706 6.33 197,888 3,192 6.45
Mortgage-backed securities 321,987 5,647 7.02 270,862 4,740 7.00
Trading securities 16,622 241 5.80 13,908 195 5.61
Mortgage loans (1) 229,663 4,320 7.52 227,401 4,273 7.52
Other loans (1) 24,600 560 9.11 27,268 619 9.08
__________________________________________________ ________________
Total earning assets 879,138 $15,055 6.85% 843,338 $14,426 6.84%
Allowance for loan losses 2,222 2,455
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 876,916 840,883
Other assets 18,948 20,427
__________________________________________________________________________________________
Total assets $895,864 $861,310
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
AVERAGE BALANCE SHEETS - Continued
<CAPTION>
Three Months Ended
June 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 $ 64,630 $ 132 0.82% $ 64,753 $ 143 0.89%
Savings 351,946 3,044 3.47 358,885 3,038 3.40
Time certificates of deposit 380,134 5,379 5.68 347,166 4,958 5.74
__________________________________________________ ________________
Total deposits 796,710 8,555 4.31 770,804 8,139 4.25
Other liabilities 6,193 4,494
__________________________________________________________________________________________
Total liabilities 802,903 775,298
Stockholders' Equity 92,961 86,012
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $895,864 $861,310
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,500 6,287
Less adjustment of tax-exempt
interest income 38 36
__________________________________________________________________________________________
Net interest income $ 6,462 $ 6,251
__________________________________________________________________________________________
Interest rate spread 2.54% 2.59%
__________________________________________________________________________________________
Net interest margin (3) 2.96% 2.98%
__________________________________________________________________________________________
(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>
AVERAGE BALANCE SHEETS
<CAPTION>
Six Months Ended
June 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 $100,999 $ 2,705 5.40% $ 99,363 $ 2,652 5.37%
Short-term investments (2) 25,860 694 5.41 21,527 574 5.36
Investment securities 170,840 5,430 6.36 205,228 6,558 6.39
Mortgage-backed securities 315,277 11,012 6.99 249,539 8,670 6.95
Trading securities 11,577 336 5.85 14,115 395 5.62
Mortgage loans (1) 227,667 8,557 7.52 224,208 8,472 7.56
Other loans (1) 24,915 1,120 8.99 27,720 1,265 9.13
__________________________________________________ ________________
Total earning assets 877,135 $29,854 6.81% 841,700 $28,586 6.79%
Allowance for loan losses 2,211 2,497
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 874,924 839,203
Other assets 18,380 19,572
__________________________________________________________________________________________
Total assets $893,304 $858,775
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
AVERAGE BALANCE SHEETS - Continued
<CAPTION>
Six Months Ended
June 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 $ 63,998 $ 260 0.82% $ 64,554 $ 298 0.93%
Savings 354,507 6,097 3.47 357,951 6,053 3.40
Time certificates of deposit 375,677 10,547 5.66 341,498 9,797 5.77
__________________________________________________ ________________
Total deposits 794,182 16,904 4.29 764,003 16,148 4.25
Other liabilities 5,988 6,109
__________________________________________________________________________________________
Total liabilities 800,170 770,112
Stockholders' Equity 93,134 88,663
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $893,304 $858,775
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 12,950 12,438
Less adjustment of tax-exempt
interest income 77 72
__________________________________________________________________________________________
Net interest income $12,873 $12,366
__________________________________________________________________________________________
Interest rate spread 2.52% 2.54%
__________________________________________________________________________________________
Net interest margin (3) 2.95% 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
June 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 June 30, 1997
General
For the quarter ended June 30, 1997, MASSBANK Corp. reported consolidated
net income of $2,449,000 or $0.90 per share ($0.89 per share on a fully-
diluted basis), compared to $2,370,000 or $0.86 per share for the same quarter
of 1996.
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 second quarter of 1997,
as shown in the tables appearing on pages 11 and 12 of this Form 10-Q, increased
to $879.1 million, up $35.8 million from the corresponding quarter in 1996.
Results for the quarter ended June 30, 1997 were also influenced by several
other factors.
During the 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 stock to the Foundation valued at $622,000,
which is reflected in the Company's non-interest expense. By contributing
appreciated stock, the Bank obtained a tax benefit of approximately $260,000.
The Bank was also able to fully offset the contribution with the resulting
$620,000 gain which it recorded on the donated securities.
In the recent quarter, the Bank also incurred nonrecurring merger and
acquisition related expenses of $100,000 in conjunction with its acquisition
of the Glendale Co-operative Bank ("Glendale"), Everett, Massachusetts. The
merger of Glendale with and into MASSBANK has been completed. The Glendale
Co-operative Bank became a branch office of MASSBANK effective July 21, 1997.
Non-interest expenses in the recent quarter also reflect approximately
$50,000 in expenses incurred in conjunction with a computer conversion which
the Bank implemented over the July 4th weekend. The Bank made this change to
its computer systems to enhance its technological capabilities in order to
better serve its customers and continue to provide increased efficiencies
throughout the Bank.
<PAGE>
Net Interest Income
Net interest income was $6.462 million for the second quarter of 1997 as
compared to $6.251 million for the same period in 1996. This increase resulted
from the growth in the Company's interest-earning assets partially offset by
a modest decrease in net interest margin. The net interest margin for the three
months ended June 30, 1997 and 1996 was 2.96% and 2.98%, respectively.
The Company's interest rate spread increased to 2.54% for the second
quarter of 1997, from 2.49% in the first quarter. This compares to a net
interest spread of 2.59% for the second quarter of 1996. The yield on the
Company's average earning assets in the second quarter of 1997 increased by
1 basis point to 6.85% from 6.84% in the corresponding quarter of 1996. This
improvement was offset by an increase of 6 basis points in the Company's
average cost of funds, from 4.25% in the second quarter of 1996 to 4.31% in
the recent quarter.
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 second quarter of 1997 was $52,000
versus $35,000 for the comparable period in 1996. This increase was due to the
higher level of loan charge-offs which the Bank experienced in prior quarters.
However, this past quarter, loan charge-offs net of recoveries declined to
$27,000 from $119,000 for the same quarter last year.
The reserve coverage as a percentage of the Bank's nonaccrual loans showed
improvement in the recent quarter. At June 30, 1997, MASSBANK's allowance for
loan losses totalled $2.235 million representing 191% of nonaccrual loans
compared to $2.420 million representing 102% of nonaccrual loans at the end of
the second 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 second quarter of 1997 totalled $1,136,000, up
$412,000 or approximately 57% from the $724,000 reported in the corresponding
quarter last year. This increase is principally due to net gains on securities
of $610,000 reported in the recent quarter versus $211,000 reported in the
second quarter of 1996. The Company continues to benefit from the stock
market's strong performance. The Company's equity portfolio has yielded
substantial realized and unrealized gains. Net unrealized gains in the equity
securities portfolio totalled $6.6 million at June 30, 1997.
<PAGE>
Non-Interest Expense
Non-interest expenses increased by $894,000, or 29.5% to $3,924,000 in the
second quarter of 1997 from $3,030,000 in the second quarter of 1996.
Salaries and employee benefits, the largest component of non-interest
expense, increased $163,000 or 9.1% from $1,792,000 in the second quarter of
1996 to $1,955,000 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 increase in the market value of the Company's common stock during
the recent quarter, from $41.00 per share at March 31, 1997 to $47.75 per share
at June 30, 1997, significantly increased the expense for both plans.
Occupancy and equipment expenses increased from $484,000 in the second
quarter of 1996 to $516,000 in the second quarter of 1997, due largely to an
increase in depreciation expense resulting from the Bank's recent investment
in new computer systems. As previously noted, the Bank implemented a computer
conversion over the July 4th weekend. The Bank made this change to enhance
its technological capabilities in order to better serve its customers and
continue to provide increased efficiencies throughout the Bank.
Data processing expenses increased slightly from $152,000 for the quarter
ended June 30, 1996 to $156,000 for the quarter ended June 30, 1997 due largely
to expenses incurred in conjunction with the Bank's computer conversion over the
July 4th weekend.
Professional fees decreased from $97,000 in the first quarter 1996 to
$90,000 in the recent quarter due primarily to a decrease in consultant fees.
Merger and acquisition related expenses incurred in connection with the
acquisition of the Glendale Co-operative Bank totalled $100,000 in the second
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 will be accounted for as a purchase.
Bank contributions in the recent quarter were $644,000 compared to $10,000
for the same quarter 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
contributions expenses.
Advertising and marketing, amortization of intangibles and other expenses
combined totalled $463,000 in the recent quarter versus $495,000 for the same
quarter a year ago.
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 decreased to $1,173,000
for the three months ended June 30, 1997 from $1,540,000 for the same period in
1996. The decrease is due principally to the tax benefit, approximately
$260,000, which the Bank obtained by contributing appreciated stock to the
MASSBANK Charitable Foundation, as previously noted.
Results of Operations for the six months ended June 30, 1997
General
For the six months ended June 30, 1997, the Company reported consolidated
net income of $4,922,000 or $1.80 per share, ($1.79 per share on a fully-diluted
basis) up from $4,593,000 or $1.66 per share earned in the first six months of
1996.
The Company's financial performance in the first six 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 half of
1997 increased to $877.1 million, up $35.4 million from the corresponding
period in 1996. Net interest income for the six months ended June 30, 1997 was
$12,873,000, up $507,000 when compared to the same period in 1996.
The Company's earnings results for the six months ended June 30, 1997 were
also impacted by the following factors:
a) MASSBANK contributed appreciated stock to the MASSBANK Charitable
Foundation valued at $622,000. By contributing appreciated stock, the Bank
also obtained a tax benefit of approximately $260,000.
b) In the first six months of 1997 the Bank incurred non-recurring merger
and acquisition related expenses of $140,000 in conjunction with its
acquisition of the Glendale Co-operative Bank.
c) Non-interest expenses in the first half of 1997 also reflect
approximately $50,000 in expenses incurred in conjunction with a computer
conversion which the Bank implemented over the July 4th weekend.
Net Interest Income
Net interest income was $12.873 million for the six months ended June 30,
1997 up $507,000 from $12.366 million for the same period in 1996. This
increase resulted from the growth in the Company's interest-earning assets
partially offset by a modest decrease in net interest margin. The net interest
margin for the six months ended June 30, 1997 and 1996 was 2.95% and 2.96%,
respectively.
The Company's interest rate spread decreased slightly to 2.52% for the
first six months of 1997, from 2.54% in the first six months of last year. The
yield on the Company's average earning assets in the first half of 1997
increased by 2 basis points to 6.81% from 6.79% in the corresponding period of
1996. This improvement was offset by an increase of 4 basis points in the
Company's average cost of funds, from 4.25% for the six months ended June 30,
1996 to 4.29% for the same period this year.
The provision for loan losses for the first half of 1997 was $120,000
versus $65,000 for the comparable period in 1996. This increase was due to the
higher level of loan charge-offs which the Bank experienced in prior periods.
For the six months ended June 30, 1997, loan charge-offs net of recoveries
declined to $122,000 from $174,000 for the same period last year.
<PAGE>
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 six months of 1997 totalled $2,030,000,
up $689,000 or approximately 51% from the $1,341,000 reported in the
corresponding period last year. This increase is principally due to net gains
on securities of $1,078,000 reported for the six months ended June 30, 1997
versus $418,000 reported for the same period last year. The Company
continues to benefit from the stock market's strong performance. The Company's
equity portfolio has yielded substantial realized and unrealized gains. Net
unrealized gains in the equity securities portfolio totalled $6.6 million at
June 30, 1997.
Non-Interest Expense
Non-interest expenses increased by $1,033,000, or 17.0% to $7,119,000 in
the first six months of 1997 from $6,086,000 in the first six months of 1996.
Salaries and employee benefits, the largest component of non-interest
expense, increased $260,000 or 7.3% from $3,564,000 in the first half of 1996
to $3,824,000 in the first half of 1997. This increase is due principally to
salary increases, an increase in employee health insurance expense, 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 increase
in the market value of the Company's common stock in the last six months, from
$38.125 per share at December 31, 1996 to $47.75 per share at June 30, 1997,
significantly increased the expense for both plans. In the first quarter,
last year, MASSBANK received a one-time reduction in employee health insurance
premium equal to one full month's expense. There was no such reduction in 1997.
These increases are partially offset by a reduction in employee retirement
expense.
Occupancy and equipment expenses increased from $1,001,000 in the first
half of 1996 to $1,019,000 in the first half of 1997, due largely to an
increase in depreciation expense resulting from the Bank's recent investment in
new computer systems. As previously noted, the Bank implemented a computer
conversion over the July 4th weekend. The Bank made this change to enhance its
technological capabilities in order to better serve its customers and continue
to provide increased efficiencies throughout the Bank. This increase was
partially offset by a reduction in snow removal expense of approximately
$16,000, when compared to the prior year, the results of a milder winter.
Merger and acquisition related expenses incurred in connection with the
acquisition of the Glendale Co-operative Bank totalled $140,000 in the first
six months of 1997. The acquisition was completed on July 21, 1997. The
transaction will be accounted for as a purchase.
Bank contributions for the first six months of this year were $656,000
compared to $34,000 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 expenses.
Data processing, professional services, advertising and marketing,
amortization of intangibles and other expenses combined totalled $1,480,000 for
the six months ended June 30, 1997 compared to $1,487,000 for the same period
a year ago.
<PAGE>
Income Tax Expense
The provision for federal and state income taxes decreased to $2,742,000
for the six months ended June 30, 1997 from $2,963,000 for the same period in
1996. The decrease is due principally to the tax benefit, approximately
$260,000, which the Bank obtained by contributing appreciated stock to the
MASSBANK Charitable Foundation, as previously noted. The Company's combined
effective income tax rate for the first six months of 1997 is 35.8% 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 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 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.
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 includable in gross income for federal
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.
<PAGE>
Financial Condition
The Company's total assets increased by $17.2 million in the last
six months from $888.2 million at December 31, 1996 to $905.4 million at
June 30, 1997. Most of this growth is attributable to an increase in deposits
and retained earnings. Total stockholder's equity was $96.3 million at
June 30, 1997, up $4.1 million from $92.2 million at December 31, 1996. The
increase in stockholders' equity resulted primarily from the Company's net
income of $4.9 million in the first half of 1997 and an increase in the net
unrealized gains on investment securities available for sale, net of tax
effect, of approximately $0.9 million. These were partially offset by the
payment of $1.4 million in dividends to stockholders and the cost of additional
shares of treasury stock repurchased during the last six months of
approximately $0.7 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
half of 1997 were $0.54 per share. This represents an increase of 22.7% over
the $0.44 per share paid in the same period the prior year. Additionally,
on July 17, 1997 the Company announced that the Board of Directors had voted
a dividend of $0.32 per share, a $0.05 or 18.5% increase from the dividend paid
in the previous quarter. This increase will raise the annualized dividend from
$1.08 to $1.28 per share.
The Company's book value per share at June 30, 1997 was $35.92 up from
$34.34 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 $632.5 million at
June 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
$16.2 million as of June 30, 1997, which has yielded substantial realized and
unrealized gains. The majority of the Bank's investment securities, $495.4
million at June 30, 1997, are classified as either 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 $317.4 million at June 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:
June 31, December 31,
(In thousands) 1997 1996
_________ ____________
U.S. Treasury bills $10,605 $ --
Investment in mutual funds 2,678 4,672
_______ _______
Total $13,283 $ 4,672
<PAGE>
<TABLE>
FINANCIAL CONDITION
Investment Securities
The amortized cost and estimated market value of investment securities
at June 30, 1997 and December 31, 1996 with gross unrealized gains and losses,
follows:
<CAPTION>
__________________________________________________________________________________________
Gross Gross
(In thousands) At June 30, 1997 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________________________________________________________________________________________
<S> <C> <C> <C> <C>
Securities held to maturity:
Other bonds and obligations $ 381 $ -- $ -- $ 381
__________________________________________________________________________________________
Total securities held to maturity $ 381 $ -- $ -- $ 381
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $139,175 $ 1,063 $ (4) $140,234
U.S. Government agency obligations 7,899 18 (47) 7,870
__________________________________________________________________________________________
Total 147,074 1,081 (51) 148,104
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 65,205 810 (487) 65,528
Federal Home Loan Mortgage
Corporation 242,810 1,827 (1,594) 243,043
Federal National Mortgage
Association 8,171 274 -- 8,445
Other 388 19 -- 407
__________________________________________________________________________________________
Total mortgage-backed securities 316,574 2,930 (2,081) 317,423
__________________________________________________________________________________________
Total debt securities 463,648 4,011 (2,132) 465,527
__________________________________________________________________________________________
Equity securities 9,554 6,662 (13) 16,203
__________________________________________________________________________________________
Total securities available for sale 473,202 $ 10,673 $ (2,145) $481,730
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 8,528
__________________________________________________________________________________________
Total securities available
for sale, net $481,730
__________________________________________________________________________________________
Trading securities $ 13,346 $ 13,283
__________________________________________________________________________________________
</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
June 30, 1997 and December 31, 1996 are as follows:
<CAPTION>
June 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 $ 46,867 $ 47,107 $ -- $ --
After 1 year through 5 years 96,219 97,023 230 230
After 5 years through 10 years 3,988 3,974 104 104
After 10 years through 15 years -- -- 47 47
________ _______ ________ _______
147,074 148,104 381 381
Mortgage-backed securities 316,574 317,423 -- --
________ _______ ________ _______
$463,648 $465,527 $ 381 $ 381
</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 June 30, 1997 December 31, 1996
_______________________________________________________________________________________
<S> <C> <C>
Mortgage loans:
Residential $228,291 $219,347
Commercial 3,102 4,121
Construction 877 1,388
_______________________________________________________________________________________
232,270 224,856
Add: Premium on loans 293 325
Less: deferred mortgage loan origination fees (1,123) (1,042)
_______________________________________________________________________________________
Total mortgage loans 231,440 224,139
Other loans:
Consumer:
Installment 2,144 1,967
Guaranteed education 9,283 9,729
Other secured 1,527 1,611
Home equity lines of credit 10,639 11,316
Unsecured 284 271
_______________________________________________________________________________________
Total consumer loans 23,877 24,894
Commercial 488 628
_______________________________________________________________________________________
Total other loans 24,365 25,522
_______________________________________________________________________________________
Total loans $255,805 $249,661
_______________________________________________________________________________________
The Bank's loan portfolio increased during the first half of 1997,
from $249.7 million at December 31, 1996 to $255.8 million at June 30, 1997.
All of the increase was in residential 1-4 family category as loan
originations during this period exceeded loan amortization and payoffs.
Loan originations, which are sensitive to interest rates, decreased in the
first half of 1997 compared to the first half of 1996 as higher interest rates
in 1997 affected both the mortgage refinance and home purchase markets and also
reduced the demand for consumer and other loans. Loan originations totalled
$15.7 million for the three months ended June 30, 1997 compared to $21.0 million
for the second quarter of last year. For the first half of 1997 loan
originations were $28.5 million compared to $33.4 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 June 30, 1997 and 1996, and December 31, 1996:
<CAPTION>
June 30, December 31, June 30,
(In thousands) 1997 1996 1996
______________________________________________________________________________
<S> <C> <C> <C>
Non-Performing Assets:
Non-accrual loans $ 1,168 $ 1,601 $ 2,362
Real estate acquired through foreclosure 324 503 226
______________________________________________________________________________
Total non-performing assets $ 1,492 $ 2,104 $ 2,588
______________________________________________________________________________
Allowance for possible loan losses $ 2,235 $ 2,237 $ 2,420
Allowance as percent of
non-accrual loans 191.4 % 139.7 % 102.5 %
Non-accrual loans as percent
of total loans 0.46% 0.64% 0.92%
Non-performing assets as percent
of total assets 0.16% 0.24% 0.29%
______________________________________________________________________________
The Bank 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 nonaccural 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 June 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 $324 thousand at June 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 June 30, 1997.
</TABLE>
<PAGE>
<TABLE>
Allowance For Loan Losses
An analysis of the activity in the allowance for possible loan losses is
as follows:
<CAPTION>
Six Months Ended
June 30,
1997 1996
_______________________________________________________________________________
(In thousands)
<S> <C> <C>
Balance at beginning of period $ 2,237 $ 2,529
Provision for loan losses 120 65
Recoveries of loans previously charged-off 35 5
Less: Charge-offs (157) (179)
_________________________________________________________________________________
Balance at end of period $ 2,235 $ 2,420
_________________________________________________________________________________
</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 possible loan losses. Such
agencies may require the Bank to recognize additions to the allowance based on
judgments different from those of management.
At June 30, 1997 the balance of the allowance for possible loan losses
was $2,235,000 representing 191.4% of total non-performing loans. Management
believes that the allowance for possible loan losses is adequate to cover the
risks inherent in the portfolio under current conditions.
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 $10.1 million to $798.5 million at
June 30, 1997 from $788.4 million at December 31, 1996.
<PAGE>
<TABLE>
Deposits (continued)
The composition of the Bank's total deposits at the dates shown are
summarized as follows:
<CAPTION>
June 30, December 31,
1997 1996
______________________________________________________________________________
(In thousands)
<S> <C> <C>
Demand and NOW $ 62,868 $ 62,734
Savings and money market accounts 350,045 357,658
Time certificates of deposit 386,657 369,139
Deposit acquisition premium,
net of amortization (1,066) (1,181)
________________________________________________________________________________
Total deposits $798,504 $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.
"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.
<PAGE>
Recent Accounting Developments (continued)
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.
<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 June 30, 1997 the Bank had $100.3 million or
11.1% of total assets and $158.7 million or 17.5% 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 June 30, 1997, the Bank had a leverage
Tier I capital to total assets ratio of 9.77%, a Tier I capital to risk-
weighted assets ratio of 33.56% and a total capital to risk-weighted assets
ratio of 32.42%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to total assets of 10.06%, Tier I capital to risk-weighted assets
of 34.59% and total capital to risk-weighted assets of 35.44% at June 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 June 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
At the Annual Meeting of Stockholders of MASSBANK Corp. held on
April 22, 1997, stockholders voted affirmatively on the following
proposal:
To elect one Director to serve until the 1999 Annual Meeting of
Stockholders and four Directors to serve until the 2000 Annual
Meeting of Stockholders.
Elected at Meeting Term:
Alexander S. Costello Two Years
Mathias B. Bedell Three Years
Robert S. Cummings Three Years
Leonard Lapidus Three Years
Herbert G. Schurian Three Years
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: August 13, 1997 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: August 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 six months ended June 30, 1997 and 1996.
<CAPTION>
Three Months Ended Six Months Ended
Calculation of Primary June 30, June 30,
Earnings Per Share 1997 1996 1997 1996
______________________________ ____ ____ ____ ____
<S> <C> <C> <C> <C>
Average common shares outstanding 2,686,150 2,726,564 2,686,541 2,737,785
Less: Unallocated Employee Stock Ownership
Plan (ESOP) shares not committed
to be released (39,600) (46,200) (39,600) (46,200)
Shares assumed to be repurchased
under treasury stock method
for stock options 92,899 74,097 90,372 77,359
_______ _______ _______ _______
Total Shares 2,739,449 2,754,461 2,737,313 2,768,944
__________ __________ _________ _________
Net Income $2,449,000 $2,370,000 $4,922,000 $4,593,000
__________ __________ __________ __________
Per Share Amount $ 0.90 $ 0.86 $ 1.80 $ 1.66
__________ __________ __________ __________
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Calculation of Fully Diluted June 30, June 30,
Earnings Per Share 1997 1996 1997 1996
______________________________ ____ ____ ____ ____
<S> <C> <C> <C> <C>
Average common shares outstanding 2,686,150 2,726,564 2,686,541 2,737,785
Less: Unallocated Employee Stock Ownership
Plan (ESOP) shares not committed
to be released (39,600) (46,200) (39,600) (46,200)
Shares assumed to be repurchased
under treasury stock method
for stock options 106,122 74,097 97,799 77,873
________ _______ _______ _______
Total Shares 2,752,672 2,754,461 2,744,740 2,769,458
_________ _________ _________ _________
Net Income $2,449,000 $2,370,000 $4,922,000 $4,593,000
__________ __________ __________ __________
Per Share Amount $ 0.89 $ 0.86 $ 1.79 $ 1.66
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000799166
<NAME> MASSBANK CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,560
<INT-BEARING-DEPOSITS> 2,011
<FED-FUNDS-SOLD> 110,279
<TRADING-ASSETS> 13,283
<INVESTMENTS-HELD-FOR-SALE> 481,730
<INVESTMENTS-CARRYING> 381
<INVESTMENTS-MARKET> 381
<LOANS> 255,805
<ALLOWANCE> (2,235)
<TOTAL-ASSETS> 905,417
<DEPOSITS> 798,504
<SHORT-TERM> 1,377
<LIABILITIES-OTHER> 8,288
<LONG-TERM> 937
<COMMON> 5,487
0
0
<OTHER-SE> 90,824
<TOTAL-LIABILITIES-AND-EQUITY> 905,417
<INTEREST-LOAN> 9,677
<INTEREST-INVEST> 16,694
<INTEREST-OTHER> 3,406
<INTEREST-TOTAL> 29,777
<INTEREST-DEPOSIT> 16,904
<INTEREST-EXPENSE> 16,904
<INTEREST-INCOME-NET> 12,873
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 1,078
<EXPENSE-OTHER> 7,119
<INCOME-PRETAX> 7,664
<INCOME-PRE-EXTRAORDINARY> 7,664
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,922
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 2.95
<LOANS-NON> 1,168
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,168
<ALLOWANCE-OPEN> 2,237
<CHARGE-OFFS> (157)
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 2,235
<ALLOWANCE-DOMESTIC> 1,856
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 379
</TABLE>
