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, 1999
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, 1999: 3,367,025 shares.
<PAGE>
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income (unaudited)
for the three months ended September 30, 1999 and 1998 4
and for the nine months ended September 30, 1999 and 1998 5
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1999 (unaudited)
and the year ended December 31, 1998 6 - 7
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1999 and 1998 8 - 9
Condensed Notes to the Consolidated Financial Statements 10 - 11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 34
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 35
ITEM 2. Changes in Securities 35
ITEM 3. Defaults Upon Senior Securities 35
ITEM 4. Submission of Matters to a Vote of Security Holders 35
ITEM 5. Other Information 35
ITEM 6. Exhibits and Reports on Form 8-K 35
Signature Page 36
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 7,687 $ 7,038
Short-term investments (Note 3) 121,026 147,776
________________________________________________________________________________
Total cash and cash equivalents 128,713 154,814
Term federal funds sold -- 25,000
Interest-bearing deposits in banks 3,790 2,033
Securities held to maturity, at amortized cost
(market value of $230 in 1999 and $354 in 1998) 230 354
Securities available for sale, at market value (amortized
cost of $449,818 in 1999 and $398,343 in 1998) 455,941 418,126
Trading securities, at market value 6,033 30,793
Loans: (Note 4)
Mortgage loans 293,744 283,654
Other loans 36,278 21,335
Less: allowance for loan losses (2,506) (2,450)
________________________________________________________________________________
Net loans 327,516 302,539
Premises and equipment 4,234 4,320
Real estate acquired through foreclosure 58 86
Accrued interest receivable 4,957 5,058
Goodwill 1,313 1,387
Accrued income tax asset, net 320 --
Other assets 1,981 2,115
________________________________________________________________________________
Total assets $935,086 $946,625
Liabilities and Stockholders' Equity:
Deposits $825,960 $824,031
Escrow deposits of borrowers 1,517 1,438
Employee stock ownership plan liability 625 625
Accrued income taxes payable -- 723
Deferred income taxes payable 1,146 6,761
Other liabilities 2,970 2,558
________________________________________________________________________________
Total liabilities 832,218 836,136
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, 7,391,582 and
7,384,332 shares issued, respectively 7,392 7,384
Additional paid-in capital 60,289 60,003
Retained earnings 84,072 78,308
________________________________________________________________________________
151,753 145,695
Accumulated other comprehensive income: (Note 5)
Net unrealized gains on securities
available for sale, net of tax effect 3,541 11,691
Treasury stock at cost, 4,032,507 and
3,885,222 shares, respectively (51,801) (46,272)
Common stock acquired by ESOP ( 625) ( 625)
________________________________________________________________________________
Total stockholders' equity 102,868 110,489
________________________________________________________________________________
Total liabilities and stockholders' equity $935,086 $946,625
<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) 1999 1998
______________________________________________________________________________
<S> <C> <C>
Interest and dividend income:
Mortgage Loans $ 5,158 $ 4,927
Other loans 652 493
Securities available for sale:
Mortgage-backed securities 4,944 4,958
Other securities 2,154 2,045
Trading securities 75 54
Federal funds sold 1,411 2,152
Other investments 336 366
______________________________________________________________________________
Total interest and dividend income 14,730 14,995
______________________________________________________________________________
Interest expense:
Deposits 8,391 8,703
______________________________________________________________________________
Total interest expense 8,391 8,703
______________________________________________________________________________
Net interest income 6,339 6,292
Provision for loan losses 15 15
______________________________________________________________________________
Net interest income after provision for loan losses 6,324 6,277
______________________________________________________________________________
Non-interest income:
Deposit account service fees 187 194
Gains on securities, net 752 430
Other 150 172
______________________________________________________________________________
Total non-interest income 1,089 796
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,823 1,598
Occupancy and equipment 539 522
Data processing 122 132
Professional services 97 101
Advertising and marketing 47 44
Amortization of intangibles 82 82
Other 356 392
______________________________________________________________________________
Total non-interest expense 3,066 2,871
______________________________________________________________________________
Income before income taxes 4,347 4,202
Income tax expense 1,564 1,507
______________________________________________________________________________
Net income $ 2,783 $ 2,695
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,351,825 3,548,156
Diluted 3,465,603 3,692,269
Earnings per share (in dollars):
Basic $ 0.83 $ 0.76
Diluted 0.80 0.73
<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) 1999 1998
_______________________________________________________________________________
<S> <C> <C>
Interest and dividend income:
Mortgage Loans $15,421 $14,351
Other loans 1,573 1,529
Securities available for sale:
Mortgage-backed securities 13,759 15,812
Other securities 6,519 6,400
Trading securities 420 507
Federal funds sold 4,778 5,404
Other investments 978 1,110
_______________________________________________________________________________
Total interest and dividend income 43,448 45,113
_______________________________________________________________________________
Interest expense:
Deposits 24,839 25,786
_______________________________________________________________________________
Total interest expense 24,839 25,786
_______________________________________________________________________________
Net interest income 18,609 19,327
Provision for loan losses 125 105
_______________________________________________________________________________
Net interest income after provision for loan losses 18,484 19,222
_______________________________________________________________________________
Non-interest income:
Deposit account service fees 543 615
Gains on securities, net 3,261 1,858
Other 604 670
_______________________________________________________________________________
Total non-interest income 4,408 3,143
_______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 5,585 5,445
Occupancy and equipment 1,598 1,549
Data processing 363 385
Professional services 317 341
Advertising and marketing 142 141
Amortization of intangibles 245 219
Other 1,106 1,166
_______________________________________________________________________________
Total non-interest expense 9,356 9,246
_______________________________________________________________________________
Income before income taxes 13,536 13,119
Income tax expense 4,974 4,884
_______________________________________________________________________________
Net income $ 8,562 $ 8,235
_______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,393,807 3,543,051
Diluted 3,509,139 3,699,169
Earnings per share (in dollars):
Basic $ 2.52 $ 2.32
Diluted 2.44 2.23
<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, 1999 (unaudited)
(In thousands except share data)
<CAPTION>
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL
________ __________ _________ __________ __________ _________ ________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $7,384 $60,003 $78,308 $(46,272) $11,691 $(625) $110,489
Net Income -- -- 8 ,562 -- -- -- 8,562
Other comprehensive income or (loss),
net of tax:
Unrealized losses on securities,
net of reclassification adjustment (Note 5) -- -- -- -- (8,150) -- (8,150)
_____
Comprehensive income 412
Cash dividends declared and paid
($0.825 per share) -- -- (2,808) -- -- -- (2,808)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 10 -- -- -- 10
Amortization of ESOP shares
committed to be released -- 130 -- -- -- -- 130
Purchase of treasury stock -- -- -- (5,529) -- -- (5,529)
Exercise of stock options
and related tax benefits 8 156 -- -- -- -- 164
___________________________________________________________________________________________________________________________
Balance at September 30, 1999 $7,392 $60,289 $84,072 $(51,801) $ 3,541 $(625) $102,868
<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 Year Ended December 31, 1998 (unaudited)
(In thousands except share data)
<CAPTION>
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP TOTAL
________ __________ _________ __________ __________ _________ ________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $7,337 $58,737 $70,984 $(41,569) $ 9,071 $(781) $103,779
Net income -- -- 10,914 -- -- -- 10,914
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 5) -- -- -- -- 2,620 -- 2,620
______
Comprehensive income 13,534
Cash dividends declared and paid
($1.02 per share) -- -- (3,605) -- -- -- (3,605)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 15 -- -- -- 15
Net decrease in liability to ESOP -- -- -- -- -- 156 156
Amortization of ESOP shares
committed to be released -- 243 -- -- -- -- 243
Purchase of treasury stock -- -- -- (4,703) -- -- (4,703)
Exercise of stock options
and related tax benefits 47 1,023 -- -- -- -- 1,070
__________________________________________________________________________________________________________________________
Balance at December 31, 1998 $7,384 $60,003 $78,308 $(46,272) $11,691 $(625) $110,489
<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,
1999 1998
____ ____
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,562 $ 8,235
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 711 687
Loan interest capitalized (42) (65)
Amortization of ESOP shares committed to be released 130 199
Decrease in accrued interest receivable 101 607
Increase in other liabilities 412 357
Decrease in current income taxes payable (1,044) (1,780)
Accretion of discounts on securities, net of amortization
of premiums (750) (866)
Net trading securities activity 25,132 21,296
Gains on securities available for sale, net (3,233) (1,804)
Gains on trading securities, net (28) (54)
Increase in deferred mortgage loan
origination fees, net of amortization 27 187
Deferred income tax (benefit) expense (104) 349
(Decrease) increase in other assets (286) 120
Loans originated for sale -- (129)
Loans sold -- 129
Provision for loan losses 125 105
Gains on sales of real estate acquired through foreclosure -- (4)
Increase in escrow deposits of borrowers 79 20
Gains on sales of premises and equipment (2) --
__________________________________________________________________________________________
Net cash provided by operating activities 29,790 27,589
__________________________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds -- (30,000)
Proceeds from maturities of term federal funds 25,000 30,000
Increase in interest bearing bank deposits (3,066) (581)
Proceeds from maturities of interest bearing bank deposits 1,309 816
Proceeds from sales of investment securities available for sale 54,281 17,639
Proceeds from maturities of investment securities
available for sale 60,800 35,650
Purchases of investment securities
available for sale (130,414) (42,467)
Purchases of mortgage-backed securities (88,397) --
Principal repayments of mortgage-backed securities 56,271 49,664
Principal repayments of securities held to maturity 124 14
Principal repayments of securities available for sale 43 1
Loans originated (74,648) (75,281)
Loan principal payments received 49,799 50,130
Loans purchased (345) --
Purchases of premises & equipment (334) (297)
Proceeds from sales of real estate acquired through foreclosure 86 262
Proceeds from sales of premises and equipment 2 --
Net advances on real estate acquired through foreclosure -- (12)
__________________________________________________________________________________________
Net cash (used in) provided by investing activities (49,489) 35,538
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
1999 1998
____ ____
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 1,761 1,671
Payments to acquire treasury stock (5,529) (2,096)
Issuance of common stock under stock option plan 120 558
Tax benefit resulting from stock options exercised 44 262
Dividends paid on common stock (2,808) (2,660)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 10 11
__________________________________________________________________________________________
Net cash used in financing activities (6,402) (2,254)
__________________________________________________________________________________________
Net (decrease) increase in cash and cash equivalents (26,101) 60,873
Cash and cash equivalents at beginning of period 154,814 116,563
_________________________________________________________________________________________
Cash and cash equivalents at end of period $128,713 $177,436
_________________________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $24,844 $25,791
Cash paid during the period for taxes, net of refunds 6,071 5,717
Purchases of securities incomplete (not settled) at
beginning of period which settled during the period 129 32
Sales of securities incomplete (not settled) at
beginning of period which settled during the period 583 --
Non-cash transactions:
SFAS 115:
(Decrease) increase in accumulated other comprehensive income (8,150) 2,080
(Decrease) increase in deferred tax liabilities (5,510) 1,195
Securities reclassified from available for sale to
trading securities -- 1,111
Transfers from loans to real estate acquired through foreclosure 58 299
Transfers from premises and equipment to other assets -- 9
Transfers from loans to other assets -- 19
Purchases of securities incomplete (not settled) at end of period 236 --
Sales of securities incomplete (not settled) at end of period 270 --
_________________________________________________________________________________________
<FN>
See accompanying condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
MASSBANK CORP.
CONDENSED 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, 1999
and December 31, 1998, and its operating results for the three and nine months
ended September 30, 1999 and 1998. 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, 1998.
(2) 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.
(3) Short-Term Investments
Short-term investments consist of the following:
<TABLE>
<CAPTION>
________________________________________________________________________________
At At
(In thousands) September 30, 1999 December 31, 1998
________________________________________________________________________________
<S> <C> <C>
Federal funds sold (overnight) $111,096 $123,207
Money market funds 9,930 24,569
________________________________________________________________________________
Total short-term investments $121,026 $147,776
________________________________________________________________________________
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
</TABLE>
(4) Commitments
At September 30, 1999, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$2,131,000 and commitments under existing home equity lines of credit and other
loans of approximately $31,822,000 which are not reflected on the consolidated
balance sheet. In addition, as of September 30, 1999, the Company had a
performance standby letter of credit conveyed to others in the amount of
$625,000 which is also not reflected on the consolidated balance sheet.
<PAGE>
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) Reporting Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." This Statement establishes standards
for the reporting and displaying of comprehensive income. Comprehensive income
is defined as "the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources."
It includes all changes in equity during a period except those resulting from
investments by and distributions to shareholders.
The term "comprehensive income", is used in the Statement to describe
the total of all components of comprehensive income including net income.
The Company's other comprehensive income and related tax effect for the
nine months ended September 30, 1999 and the year ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1999
____________________________________________________________________________________
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
______ __________ ______
<S> <C> <C> <C>
Unrealized losses on securities:
Unrealized holding losses arising during period $(10,427) $4,137 $(6,290)
Less: reclassification adjustment for
gains realized in net income (3,233) 1,373 (1,860)
______ ________ ______
Net unrealized losses (13,660) 5,510 (8,150)
______ ________ ______
Other comprehensive loss $(13,660) $5,510 $(8,150)
______ ________ _____
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998
____________________________________________________________________________________
Tax
Before-Tax (Expense) Net-of-Tax
(In thousands) Amount or Benefit Amount
______ __________ ______
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period $ 7,106 $(2,864) $4,242
Less: reclassification adjustment for
gains realized in net income (2,798) 1,176 (1,622)
______ ________ ______
Net unrealized gains 4,308 (1,688) 2,620
______ ________ ______
Other comprehensive income $ 4,308 $(1,688) $2,620
______ ________ ______
</TABLE>
<PAGE>
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
Cautionary Statement.
Certain statements contained in this report or incorporated herein by
reference are "forward-looking statements." We may also make written or oral
forward-looking statements in other documents we file with the Securities and
Exchange Commission, in our annual reports to stockholders, in press releases
and other written materials, and in oral statements made by our officers,
directors or employees. You can identify forward-looking statements by the use
of the words "believe," "expect," "anticipate," "intend," "estimate," "assume"
and other similar expressions which predict or indicate future events and trends
and which do not relate to historical matters. In addition, information
concerning the costs, timing and effectiveness of Year 2000 compliance, are
forward-looking statements. You should not rely on forward-looking statements,
because they involve known and unknown risks, uncertainties and other factors,
some of which are beyond the control of the Company. These risks, uncertainties
and other factors may cause the actual results, performance or achievements of
the Company to be materially different from the anticipated future results,
performance or achievements expressed or implied by the forward-looking
statements.
Some of the factors that might cause these differences include the
following: fluctuations in interest rates, price volatility in the stock and
bond markets, inflation, government regulations and economic conditions and
competition in the geographic and business areas in which the Company conducts
its operations; and the Company and its customers and suppliers may experience
unanticipated delays or expenses in achieving Year 2000 compliance. You should
carefully review all of these factors, and you should be aware that there may
be other factors that could cause these differences. These forward-looking
statements were based on information, plans and estimates at the date of this
report, and we do not promise to update any forward-looking statements to
reflect changes in underlying assumptions or factors, new information, future
events or other changes.
Results of Operations for the three months ended September 30, 1999
GENERAL
For the quarter ended September 30, 1999, MASSBANK Corp. reported
consolidated net income of $2,783,000 or $0.83 in basic earnings per share
compared to net income of $2,695,000, or $0.76 in basic earnings per share in
the third quarter of 1998. Diluted earnings per share increased to $0.80 per
share from $0.73 per share in the third quarter of last year, representing an
increase of 9.6%.
The Company's favorable earnings results for the recent quarter were
attributed primarily to an increase in net securities gains of $322,000 and an
increase of $47,000 in net interest income due to higher average earning assets.
These improvements were partially offset by an increase of $195,000 in non-
interest expense. The third quarter earnings results also reflect modest
reductions in deposit account service fees and other non-interest income.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
Three Months Ended
September 30,
1999 1998
______________ ______________
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 $110,481 $ 1,411 5.07% $156,588 $ 2,152 5.45%
Short-term investments (2) 26,392 334 5.02 26,213 361 5.47
Investment securities 161,175 2,192 5.44 144,386 2,094 5.80
Mortgage-backed securities 289,508 4,944 6.83 290,679 4,958 6.82
Trading securities 6,000 75 4.95 3,840 54 5.59
Mortgage loans (1) 295,165 5,158 6.99 270,208 4,927 7.29
Other loans (1) 36,164 652 7.13 21,980 493 8.91
__________________________________________________ ________________
Total earning assets 924,885 $14,766 6.37% 913,894 $15,039 6.56%
Allowance for loan losses (2,521) (2,413)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 922,364 911,481
Other assets 20,213 19,474
__________________________________________________________________________________________
Total assets $942,577 $930,955
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
September 30,
1999 1998
______________ ______________
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 $ 75,282 $ 121 0.64% $ 70,522 $ 138 0.77%
Savings 358,576 3,083 3.41 348,558 3,016 3.43
Time certificates of deposit 399,681 5,187 5.15 392,973 5,549 5.60
__________________________________________________ ________________
Total deposits 833,539 8,391 3.99 812,053 8,703 4.25
Other liabilities 5,851 8,949
__________________________________________________________________________________________
Total liabilities 839,390 821,002
Stockholders' equity 103,187 109,953
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $942,577 $930,955
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,375 6,336
Less adjustment of tax-exempt
interest income 36 44
__________________________________________________________________________________________
Net interest income $ 6,339 $ 6,292
__________________________________________________________________________________________
Interest rate spread 2.38% 2.31%
__________________________________________________________________________________________
Net interest margin (3) 2.76% 2.77%
__________________________________________________________________________________________
(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>
Net Interest Income
The Company's net interest income was $6,339,000 for the third quarter
of 1999, an increase of $47,000 over the same quarter a year ago. The recent
quarter's improvement in net interest income reflects the positive effect of
average earning asset growth exceeding the negative effect of a slightly lower
net interest margin. Average earning assets for the third quarter of 1999
increased to $924.9 million, up $11.0 million from the corresponding quarter
in 1998. The Company's net interest margin was 2.76% in the recent quarter,
slightly below its third quarter 1998 net interest margin of 2.77%.
Interest and Dividend Income
Interest and dividend income on a fully taxable equivalent basis for the
three months ended September 30, 1999, decreased to $14,766,000 from $15,039,000
for the three months ended September 30, 1998. The average total earning assets
of the Company increased by $11.0 million, as noted above. The increase in
interest income resulting from the growth in earning assets in the recent
quarter, however, was more than offset by a decline in yield on earning assets.
As reflected in the table on page 13, yield declines in each of the Bank's
categories of earning assets, except mortgage-backed securities, resulted in an
overall decline in yield on the Company's total average earning assets of 19
basis points. The weighted average yield on earning assets for the third
quarter of 1999 was 6.37% compared to 6.56% in the same quarter of the prior
year.
Interest Expense
Total interest expense for the three months ended September 30, 1999 was
$8,391,000, down from $8,703,000 for the same quarter last year. The Company's
average deposits, as shown in the table on page 14, increased $21.5 million or
2.6% to $833.5 million in the third quarter of 1999, from $812.0 million in the
third quarter of 1998. The decrease in interest expense resulted from a
decrease in average cost of funds partially offset by the additional interest
expense resulting from the higher deposit volume. The Company's average cost of
funds for the three months ended September 30, 1999 was 3.99%, down from 4.25%
for the comparable period in 1998.
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 1999 was $15,000,
unchanged from the comparable quarter in 1998. Loan charge-offs net of
recoveries in the recent quarter were $67,000, compared to net recoveries on
loans of $5,000 in the same quarter last year.
<PAGE>
Provision for Loan Losses (continued)
The reserve coverage as a percentage of the Bank's non-accrual loans
increased in the recent quarter. At September 30, 1999, MASSBANK's allowance
for loan losses totaled $2,506,000 representing 317% of non-accrual loans
compared to $2,425,000 representing 172% of non-accrual loans at the end of the
third quarter 1998.
Non-Interest Income
Non-interest income consists of deposit account service fees, net gains
on securities and other non-interest income.
Non-interest income increased to $1,089,000 for the quarter ended
September 30, 1999, from $796,000 for the comparable quarter of the prior year.
This improvement is due to an increase in securities gains in 1999.
Net gains on securities totaled $752,000 in the third quarter of this year
compared to $430,000 in the third quarter of the prior year. The Bank's equity
securities portfolio continues to provide the Bank with favorable returns.
Realized gains on the sale of equity securities totaled $867,000 for the three
months ended September 30, 1999. These gains, however, were partially offset by
net losses realized on the sale of debt securities of $109,000. The Bank also
recorded a mark-to-market loss of $6,000 on its trading account during this same
period.
The Bank's deposit account service fees and other non-interest income
totaled $187,000 and $150,000, respectively, in the third quarter of 1999
compared to $194,000 and $172,000, respectively, in the third quarter of 1998.
Non-Interest Expense
Non-interest expense increased $195,000 to $3,066,000 in the third quarter
of 1999, from $2,871,000 in the same quarter of the prior year. This increase
is due largely to an increase in salaries and employee benefits expenses.
Salaries and employee benefits, the largest component of non-interest
expense, increased by $225,000 or 14.1% in the third quarter of 1999 to
$1,823,000. The primary reasons for this increase are twofold: an increase of
$105,000 in the expense amount provided for payments to employees under the
Company's profit sharing and incentive compensation bonus plans and an increase
of $91,000 in the Company's directors' deferred compensation plan expense. The
expense related to the directors' deferred compensation plan is tied closely to
the market value of the Company's common stock. A decrease in the market value
of the Company's common stock during the third quarter of last year, from $49.00
per share at June 30, 1998 to $38.75 per share at September 30, 1998,
significantly decreased the expense for the plan for the 1998 third quarter. In
the 1999 third quarter, the price of MASSBANK Corp. stock declined from $37.50
per share at June 30, 1999 to $35.69 per share at September 30, 1999 also
reducing the expense for the plan but by a much smaller amount than in the prior
year. This produced an increase in expense of $91,000 when comparing the third
quarter of 1999 to the third quarter of 1998.
All other expenses combined, consisting of occupancy and equipment, data
processing, professional services, advertising and marketing, amortization of
intangibles and other expenses, decreased by $30,000 from $1,273,000 for the
three months ended September 30, 1998 to $1,243,000 for the three months ended
September 30, 1999. This was due largely to a reduction in the amortization of
the costs of computer software.
<PAGE>
Income Tax Expense
The Company, the Bank and its subsidiaries file a consolidated federal
income tax return. 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.
The provision for federal and state income taxes increased to $1,564,000
for the three months ended September 30, 1999 from $1,507,000 for the same
period in 1998. This increase in income taxes is due to higher income before
income taxes in the recent quarter combined with a modest increase in effective
income tax rate. The Company's combined effective income tax rate for the third
quarter of 1999 is 36.0% compared to 35.9% for the same quarter a year ago.
Results of Operations for the nine months ended September 30, 1999
GENERAL
For the nine months ended September 30, 1999, the Company reported
consolidated net income of $8,562,000 or $2.52 in basic earnings per share
($2.44 per share on a diluted basis) compared to net income of $8,235,000 or
$2.32 in basic earnings per share ($2.23 per share on a diluted basis) earned in
the first nine months of 1998.
The Company's positive financial performance in the first nine months of
1999 reflects an increase in net securities gains of $1,403,000 due to the
favorable performance of the Bank's equity securities portfolio, partially
offset by a decrease in net interest income of $718,000. The lower net interest
income results from a decline in net interest margin, partially offset by modest
growth in the Company's average earning assets. Average earning assets for the
first nine months of 1999 increased to $925.6 million, up $15.7 million from the
corresponding period in 1998.
The Company's earnings results for the nine months ended September 30, 1999
were also impacted by increases in the provision for loan losses, non-interest
expense and income tax expense, and modest reductions in deposit account service
fees and other non-interest income.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
Nine Months Ended
September 30,
1999 1998
______________ ______________
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 $133,167 $ 4,778 4.80% $132,048 $ 5,404 5.47%
Short-term investments (2) 26,609 966 4.85 26,796 1,096 5.47
Investment securities 163,415 6,628 5.40 148,366 6,521 5.86
Mortgage-backed securities 270,268 13,759 6.79 307,553 15,812 6.85
Trading securities 12,345 420 4.54 12,356 506 5.44
Mortgage loans (1) 292,545 15,421 7.03 260,245 14,351 7.35
Other loans (1) 27,212 1,573 7.71 22,509 1,529 9.08
__________________________________________________ ________________
Total earning assets 925,561 $43,545 6.27% 909,873 $45,219 6.62%
Allowance for loan losses (2,493) (2,373)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 923,068 907,500
Other assets 19,957 19,491
__________________________________________________________________________________________
Total assets $943,025 $926,991
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS - (continued)
Nine Months Ended
September 30,
1999 1998
______________ ______________
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 $ 74,965 $ 382 0.68% $ 69,042 $ 411 0.80%
Savings 352,955 8,987 3.40 351,020 8,998 3.43
Time certificates of deposit 400,018 15,470 5.17 389,139 16,377 5.63
__________________________________________________ ________________
Total deposits 827,938 24,839 4.01 809,201 25,786 4.26
Other liabilities 8,105 9,730
__________________________________________________________________________________________
Total liabilities 836,043 818,931
Stockholders' equity 106,982 108,060
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $943,025 $926,991
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 18,706 19,433
Less adjustment of tax-exempt
interest income 97 106
__________________________________________________________________________________________
Net interest income $18,609 $19,327
__________________________________________________________________________________________
Interest rate spread 2.26% 2.36%
__________________________________________________________________________________________
Net interest margin (3) 2.69% 2.85%
__________________________________________________________________________________________
(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>
Net Interest Income
Net interest income was $18,609,000 for the nine months ended September 30,
1999, reflecting a decrease of $718,000 from the same period a year ago. This
decrease is the result of a lower net interest margin, partially offset by
modest growth in the Company's average earning assets. The Company's net
interest margin for the first nine months of 1999 was 2.69%, down from 2.85% for
the comparable period in 1998. Average earning assets for the nine months ended
September 30, 1999 increased $15.7 million or 1.7% to $925.6 million from $909.9
million for the corresponding period in 1998.
The Company's interest rate spread decreased to 2.26% for the first nine
months of 1999, from 2.36% in the first nine months of last year. The yield on
the Company's average earning assets in the first nine months of 1999 decreased
by 35 basis points to 6.27% from 6.62% in the corresponding period of 1998.
This decrease was partially offset by a decrease of 25 basis points in the
Company's average cost of funds, from 4.26% for the nine months ended
September 30, 1998 to 4.01% for the same period this year.
Provision for Loan Losses
The provision for loan losses for the first nine months of 1999 was
$125,000 versus $105,000 for the comparable period in 1998. This increase is
essentially due to the growth in the Bank's loan portfolio during the last
twelve months and a modest increase in loan charge-offs. Loan charge-offs net
of recoveries for the nine months ended September 30, 1999 increased to $69,000
from $14,000 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 1999 totaled $4,408,000,
up $1,265,000 or approximately 40% from $3,143,000 reported in the corresponding
period last year. This increase is due to net gains on securities of $3,261,000
reported for the nine months ended September 30, 1999 versus $1,858,000 reported
for the same period last year. The Company continues to benefit from the strong
performance of its stock portfolio. Deposit account service fees and other non-
interest income combined decreased $138,000 to $1,147,000 in the first nine
months of 1999 from $1,285,000 in the first nine months of 1998.
Non-Interest Expense
Non-interest expense increased by $110,000, or 1.2% to $9,356,000 in the
first nine months of 1999 from $9,246,000 in the first nine months of 1998.
This was due primarily to an increase in salaries and employee benefits
expenses.
Salaries and employee benefits, the largest component of non-interest
expense, increased by $140,000 or 2.6% from $5,445,000 in the first nine months
of 1998 to $5,585,000 in the first nine months of this year. This increase is
due primarily to an increase of $155,000 in the expense amount provided for
payments to employees under the Company's profit sharing and incentive
compensation bonus plans. The increase in salaries and employee benefits
expenses also reflects an increase in expense of $98,000 related to the Bank's
deferred compensation plans which was partially offset by a reduction of $82,000
in the Bank's Employee Stock Ownership Plan ("ESOP") expense.
All other expenses combined, consisting of occupancy and equipment, data
processing, professional services, advertising and marketing, amortization of
intangibles and other expenses, decreased by $30,000 from $3,801,000 for the
nine months ended September 30, 1998 to $3,771,000 for the same period in 1998.
<PAGE>
Income Tax Expense
The provision for federal and state income taxes increased to $4,974,000
for the nine months ended September 30, 1999 from $4,884,000 for the same period
in 1998. This increase is due primarily to an increase in income before taxes
in the first nine months of 1999, partly offset by a reduction in the Company's
effective income tax rate. The Company's combined effective income tax rate for
the first nine months of 1999 is 36.7% compared to 37.2% for the same period a
year ago.
The Company's income tax expense for the first nine months of 1998 includes
a state income tax refund, net of federal tax, of approximately $44,000 which
the Company received in 1998, representing the financial settlement of a state
income tax issue for prior years.
<PAGE>
Financial Condition
Total assets at September 30, 1999 were $935.1 million, down $11.5 million
or 1.2% from $946.6 million at December 31, 1998. The decrease in total assets
was driven by a decline of $37.1 million in the investment portfolio, partially
offset by $25.0 million growth in the loan portfolio, net of allowance for loan
losses. Other assets increased by $0.6 million in 1999.
Total investments consisting of investment securities and other short-term
investments, including term federal funds sold and interest-bearing bank
deposits, decreased from $624.1 million at December 31, 1998 to $587.0 million
at September 30, 1999. The decrease is mainly attributable to the Bank's
trading securities portfolio, term federal funds sold and short-term investments
which declined $24.8 million, $25.0 million and $26.8 million, respectively,
during the first nine months of 1999. These reductions were partially offset by
a net increase in the Bank's investment in debt and equity securities available
for sale and held to maturity, and interest-bearing bank deposits, which grew by
$37.7 million and $1.8 million, respectively, during this same period.
MASSBANK's net loan portfolio increased to $327.5 million at September 30,
1999 reflecting a net increase in loans of $25.0 million in the first nine
months of 1999. This improvement results essentially from loan originations of
$74.6 million which exceeded loan principal payments, including prepayments,
received from borrowers during the first nine months of 1999.
Total deposits were $826.0 million at September 30, 1999 reflecting an
increase of approximately $2.0 million from $824.0 million at year-end 1998.
Total stockholders' equity declined to $102.9 million at September 30, 1999
from $110.5 million at December 31, 1998. The decrease results primarily from
a reduction in net unrealized gains, net of tax effect, on the Company's
available for sale securities in the amount of $8.2 million, and the cost of the
147,285 shares of (MASSBANK Corp.) treasury stock that the Company repurchased
during the first nine months of 1999 for a total amount of $5.5 million. These
decreases were partially offset by an increase of $5.8 million in the Company's
retained earnings in the nine months ended September 30, 1999. As a result, the
Company's book value per share decreased to $30.62 per share, from $31.58 per
share at year-end 1998.
<PAGE>
Investments
As previously noted, total investments consisting of investment securities,
short-term investments, term federal funds sold and interest-bearing bank
deposits equalled $587.0 million at September 30, 1999, down $37.1 million from
$624.1 million at year end 1998. These investments are principally in federal
funds sold, short-term U.S. Treasury and government agency obligations and
government agency fifteen year mortgage-backed securities. The Bank also
maintains an equity securities portfolio, valued at $21.8 million as of
September 30, 1999, that 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
totaled $297.3 million at September 30, 1999 versus $272.6 million at year end
1998.
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) 1999 1998
_____________ ____________
U.S. Treasury bills $ 4,898 $29,707
Investment in mutual funds 1,093 1,086
Equity securities 42 --
_______ _______
Total $ 6,033 $30,793
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at September 30, 1999 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At September 30, 1999 Cost Gains Losses Value
__________________________________________________________________________________________
<S> <C> <C> <C> <C>
Securities held to maturity:
Other bonds and obligations $ 230 $ -- $ -- $ 230
__________________________________________________________________________________________
Total securities held to maturity $ 230 $ -- $ -- $ 230
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $120,660 $ 515 $ (376) $120,799
U.S. Government agency obligations 16,139 -- (103) 16,036
__________________________________________________________________________________________
Total 136,799 515 (479) 136,835
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 39,838 438 (383) 39,893
Federal Home Loan Mortgage
Corporation 249,041 1,110 (2,266) 247,885
Federal National Mortgage
Association 4,535 102 (40) 4,597
Collateralized mortgage
obligations 4,888 28 (8) 4,908
__________________________________________________________________________________________
Total mortgage-backed securities 298,302 1,678 (2,697) 297,283
__________________________________________________________________________________________
Total debt securities 435,101 2,193 (3,176) 434,118
__________________________________________________________________________________________
Equity securities 14,717 7,796 (690) 21,823
__________________________________________________________________________________________
Total securities available for sale 449,818 $ 9,989 $ (3,866) $455,941
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 6,123
__________________________________________________________________________________________
Total securities available
for sale, net $455,941
__________________________________________________________________________________________
Total investment securities, net $456,171
__________________________________________________________________________________________
Trading securities $ 6,052 $ 6,033
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL CONDITION
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investment securities
at December 31, 1998 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At December 31, 1998 Cost Gains Losses Value
__________________________________________________________________________________________
<S> <C> <C> <C> <C>
Securities held to maturity:
Other bonds and obligations $ 354 $ -- $ -- $ 354
__________________________________________________________________________________________
Total securities held to maturity $ 354 $ -- $ -- $ 354
__________________________________________________________________________________________
Securities available for sale:
Debt securities:
U.S. Treasury obligations $112,627 $ 2,354 $ -- $114,981
U.S. Government agency obligations 8,966 26 -- 8,992
__________________________________________________________________________________________
Total 121,593 2,380 -- 123,973
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 48,347 1,517 -- 49,864
Federal Home Loan Mortgage
Corporation 205,949 5,116 (6) 211,059
Federal National Mortgage
Association 4,984 181 -- 5,165
Collateralized mortgage
obligations 6,193 60 (3) 6,250
Other 223 12 -- 235
__________________________________________________________________________________________
Total mortgage-backed securities 265,696 6,886 (9) 272,573
__________________________________________________________________________________________
Total debt securities 387,289 9,266 (9) 396,546
__________________________________________________________________________________________
Equity securities 11,054 10,579 (53) 21,580
__________________________________________________________________________________________
Total securities available for sale 398,343 $ 19,845 $ (62) $418,126
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 19,783
__________________________________________________________________________________________
Total securities available
for sale, net $418,126
__________________________________________________________________________________________
Total investment securities, net $418,480
__________________________________________________________________________________________
Trading securities $ 30,802 $ 30,793
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investments (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, 1999 and December 31, 1998 are as follows:
September 30, 1999
____________________________________________
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 $ 44,891 $ 45,049 $ -- $ --
After 1 year but within 5 years 88,791 88,700 230 230
After 5 years but within 10 years 2,965 2,938 -- --
After 15 years 152 148 -- --
________ _______ ______ ______
136,799 136,835 230 230
Mortgage-backed securities 298,302 297,283 -- --
________ _______ ______ ______
$435,101 $434,118 $ 230 $ 230
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
____________________________________________
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 $ 52,876 $ 53,266 $ -- $ --
After 1 year but within 5 years 65,561 67,345 230 230
After 5 years but within 10 years 2,961 3,164 82 82
After 15 years 195 198 42 42
________ _______ ______ ______
121,593 123,973 354 354
Mortgage-backed securities 265,696 272,573 -- --
________ _______ ______ ______
$387,289 $396,546 $ 354 $ 354
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
_______________________________________________________________________________________
At At
(In thousands) September 30, 1999 December 31, 1998
_______________________________________________________________________________________
<S> <C> <C>
Mortgage loans:
Residential $292,107 $281,862
Commercial 2,519 2,257
Construction 390 730
_______________________________________________________________________________________
295,016 284,849
Add: Premium on loans 209 259
Less: Deferred mortgage loan origination fees (1,481) (1,454)
_______________________________________________________________________________________
Total mortgage loans 293,744 283,654
Other loans:
Consumer:
Installment 1,320 1,547
Guaranteed education 7,207 7,967
Other secured 1,290 1,366
Home equity lines of credit 11,207 10,159
Unsecured 224 235
_______________________________________________________________________________________
Total consumer loans 21,248 21,274
Commercial 15,030 61
_______________________________________________________________________________________
Total other loans 36,278 21,335
_______________________________________________________________________________________
Total loans $330,022 $304,989
_______________________________________________________________________________________
The Bank's loan portfolio increased $25.0 million during the first nine
months of 1999, from $305.0 million at December 31, 1998 to $330.0 million at
September 30, 1999. The increase was primarily in the commercial loan and
residential 1-4 family mortgage loan categories.
Loan originations decreased by $0.8 million to $74.6 million in the first
nine months of 1999 compared to $75.4 million in the first nine months of last
year.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing
assets at September 30, 1999 and 1998, and December 31, 1998:
At At At
September 30, December 31, September 30,
(In thousands) 1999 1998 1998
____________________________________________________________________________________
<S> <C> <C> <C>
Non-Performing Assets:
Non-accrual loans $ 790 $ 1,004 $ 1,406
Real estate acquired through foreclosure 58 86 53
____________________________________________________________________________________
Total non-performing assets $ 848 $ 1,090 $ 1,459
____________________________________________________________________________________
Allowance for loan losses $ 2,506 $ 2,450 $ 2,425
Allowance as a percent of
non-accrual loans 317.2 % 244.0 % 172.5 %
Allowance as a percent of
non-performing assets 295.5 % 224.8 % 166.2 %
Non-accrual loans as a percent
of total loans 0.24% 0.33% 0.47%
Non-performing assets as a percent
of total assets 0.09% 0.12% 0.16%
____________________________________________________________________________________
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, 1998 to September 30,
1999 as noted in the table above. The principal balance of non-accrual loans
was down to $790,000, or approximately one-quarter of 1% of total loans at
September 30, 1999.
The Bank did not have any impaired loans as of September 30, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Nine Months Ended
September 30,
1999 1998
_______________________________________________________________________________
(In thousands)
<S> <C> <C>
Balance at beginning of period $ 2,450 $ 2,334
Provision for loan losses 125 105
Recoveries of loans previously charged-off 4 18
Less: Charge-offs (73) (32)
_________________________________________________________________________________
Balance at end of period $ 2,506 $ 2,425
_________________________________________________________________________________
The allowance for loan losses is established through a provision for loan
losses 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, 1999 the balance of the allowance for loan losses was
$2,506,000 representing 317.2% of non-accrual loans. Management believes that
the allowance for loan losses is adequate to cover the risks inherent in the
portfolio under current conditions.
</TABLE>
<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 $2.0 million to $826.0
million at September 30, 1999 from $824.0 million at December 31, 1998.
The composition of the Bank's total deposits as of the dates shown are
summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
______________________________________________________________________________
(In thousands)
<S> <C> <C>
Demand and NOW $ 72,602 $ 76,173
Savings and money market accounts 358,969 348,049
Time certificates of deposit 394,934 400,524
Deposit acquisition premium,
net of amortization (545) (715)
______________________________________________________________________________
Total deposits $825,960 $824,031
______________________________________________________________________________
</TABLE>
Recent Accounting Developments
"Accounting for Derivative Instruments and Hedging Activities"
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in its balance sheet and measure those instruments
at fair market value. Under this Statement, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 1999, FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of Statement
No. 133" which defers the effective date of Statement No. 133. Statement No.
133 is now effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. This Statement is not expected to have a material effect on the
Company's consolidated financial statements.
<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, 1999 the Bank had $111.1 million
or 11.9% of total assets and $141.7 million or 15.2% 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 and up to
45 percent of the pre-tax net unrealized holding gains on certain available for
sale equity securities. 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, 1999, the Bank had a leverage
Tier I capital to total assets ratio of 10.48%, a Tier I capital to risk-
weighted assets ratio of 31.38% and a total capital to risk-weighted assets
ratio of 33.22%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to total assets of 10.50%, Tier I capital to risk-weighted assets
of 31.42% and total capital to risk-weighted assets of 33.26% at September 30,
1999.
<PAGE>
Impact of the Year 2000 Issue
As we near the 21st century, MASSBANK is taking important steps to tackle
the computer glitch dubbed the Year 2000 Problem, Y2K, or Millennium Bug. The
problem originated from software designers' attempt to save memory by recording
years in a two-digit format - "98" instead of "1998" for example - but didn't
take into account that the year 2000, or "00" could also be interpreted, by any
system that has time sensitive software, as the year 1900 rather than the year
2000. This could result in a system failure or in miscalculations.
In May 1997, the Company organized a Year 2000 project team to address the
Y2K critical issues in order to resolve its Year 2000 computer problems. The
Company's Year 2000 project continues to be directed by the project team which
provides direct oversight of the Year 2000 initiative. The team's project
manager continues to update the Bank's Board of Directors monthly on the
project's progress and the Company's Board of Directors continues to receive
formal project updates on a quarterly basis.
The project team has completed its assessment of the Company's technology
and non-information technology systems, such as vault doors, elevators, and
security systems, to identify the systems that could be affected by the Year
2000 issue and has developed a plan to address this issue. The project plan,
which incorporates the Federal Financial Institutions Examination Council
("FFIEC") recommended guidelines, encompasses a service bureau for systems that
are outsourced, in-house systems, vendors, customers and suppliers (including
correspondent banks). In addition to addressing the Company's technology
issues, the project plan includes a customer awareness program designed to keep
the Bank's customers informed about the Year 2000 issue and the Company's state
of readiness.
The Company has incurred and will continue to incur expenses in connection
with its Year 2000 readiness efforts. Year 2000 project expenditures to-date,
excluding personnel costs, approximate $262,000. Expenditures for the first
nine months of 1999 totaled $209,000. Approximately $45,000 of the current
year's expenditures were expensed as incurred, while the costs of new hardware
and software of approximately $164,000 was capitalized and will be amortized
over the hardware and software's useful life in accordance with the Company's
standard accounting practices. The capitalized expenditures represent the
payment on new check processing equipment and the replacement of some personal
computers and VCRs that were not Year 2000 ready. Expenses for the remainder
of the Year 2000 project are not expected to exceed $75,000.
The expenditures of the project are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including
the continued availability of certain resources, third party modification plans
and other factors.
The Company relies on a third party service bureau for its primary
business processes (e.g., loans and deposits applications). It has worked
closely with the service bureau to monitor the progress of their Year 2000
efforts. The service bureau's Y2K remediation efforts are also being monitored
by the federal banking regulators. The service bureau has successfully
completed the remediation and testing of all its applications and the Company
has successfully completed testing with the service bureau.
<PAGE>
Year 2000 (continued)
The Company has also successfully completed the testing of all its computer
hardware and mission critical internal information systems. However, the
Company will continue to re-test some of its computer hardware and internal
information systems throughout 1999.
Most of the Company's other date sensitive systems operate on software
supported by outside vendors. The Company continues to monitor the progress
of their Year 2000 efforts and is seeking to receive written verification from
these vendors as to their Year 2000 readiness. A majority of these vendors have
represented themselves to the Company as being Year 2000 compliant.
Testing of the Company's non-mission critical internal information systems
and interfaces has also been substantially completed. Examination of the
Company's non-information technology systems indicated that no significant
replacements are required for Year 2000 readiness.
While the Company continues to receive written verification from its
service bureau and vendors as to their Year 2000 compliance, and has tested a
number of their systems, there is no guarantee that these systems will not fail
in the Year 2000. Also, there can be no assurance that the systems of other
companies, banks, government agencies, utilities, etc. that interface with the
Company will be timely remediated. If they are not successful, the Year 2000
problem could have a material effect on the Company's operations. In the
unlikely event that a disruption does occur, the Company has developed business
resumption contingency plans that will provide the Company with alternative
methods of operation for its primary lines of business. These plans, which were
completed in the second quarter 1999, continue to be enhanced to address
potential Year 2000 failure scenarios. In addition, the Company has developed a
Year 2000 event plan to govern its activities prior to, during and after the
calendar rollover to 2000.
The Company will continue to focus on the Year 2000 preparedness of its
vendors, enhance its contingency and event plans, and communicate with its
customers and employees throughout 1999.
Management presently does not believe that the Year 2000 issue will result
in significant operational problems for the Company. Management believes that
the Company is now ready for the year 2000. The Company expects to conduct
business as usual in the Year 2000 and beyond.
<PAGE>
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.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity and Liquidity
See discussion and analysis of interest rate sensitivity and liquidity
provided in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998. There have been no material changes in reported market
risks faced by the Corporation since the filing of the Corporation's 1998
Annual Report on Form 10-K.
<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, 1999, 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 12, 1999 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: November 12, 1999 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
V.P., Treasurer and CFO
<PAGE>
<TABLE>
<CAPTION> EXHIBIT 11.1
MASSBANK CORP.
Earnings Per Share
The following is a calculation of earnings per share for the three and
and nine months ended September 30, 1999 and 1998.
Three Months Ended Nine Months Ended
Calculation of Basic September 30, September 30,
Earnings Per Share 1999 1998 1999 1998
______________________________ ____ ____ ____ ____
<S> <C> <C> <C> <C>
Net Income $2,783,000 $2,695,000 $8,562,000 $8,235,000
_________ _________ _________ _________
Average common shares outstanding 3,387,025 3,592,156 3,429,007 3,587,051
Less: Unallocated Employee Stock Ownership
Plan (ESOP) shares not committed
to be released (35,200) (44,000) (35,200) (44,000)
__________ _________ __________ ________
Weighted average shares outstanding 3,351,825 3,548,156 3,393,807 3,543,051
_________ _________ _________ _________
Earnings per share (in dollars) $ 0.83 $ 0.76 $ 2.52 $ 2.32
_________ _________ _________ _________
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Calculation of Diluted September 30, September 30,
Earnings Per Share 1999 1998 1999 1998
______________________________ ____ ____ ____ ____
<S> <C> <C> <C> <C>
Net Income $2,783,000 $2,695,000 $8,562,000 $8,235,000
_________ _________ _________ _________
Average common shares outstanding 3,387,025 3,592,156 3,429,007 3,587,051
Less: Unallocated Employee Stock Ownership
Plan (ESOP) shares not committed
to be released (35,200) (44,000) (35,200) (44,000)
Diluted stock options 113,778 144,113 115,332 156,118
_________ _________ _________ _________
Weighted average shares outstanding 3,465,603 3,692,269 3,509,139 3,699,169
_________ _________ __________ _________
Earnings per share (in dollars) $ 0.80 $ 0.73 $ 2.44 $ 2.23
_________ __________ __________ __________
</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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,687
<INT-BEARING-DEPOSITS> 3,790
<FED-FUNDS-SOLD> 111,096
<TRADING-ASSETS> 6,033
<INVESTMENTS-HELD-FOR-SALE> 455,941
<INVESTMENTS-CARRYING> 230
<INVESTMENTS-MARKET> 230
<LOANS> 330,022
<ALLOWANCE> (2,506)
<TOTAL-ASSETS> 935,086
<DEPOSITS> 825,960
<SHORT-TERM> 1,517
<LIABILITIES-OTHER> 4,116
<LONG-TERM> 625
0
0
<COMMON> 7,392
<OTHER-SE> 95,476
<TOTAL-LIABILITIES-AND-EQUITY> 935,086
<INTEREST-LOAN> 16,994
<INTEREST-INVEST> 20,698
<INTEREST-OTHER> 5,756
<INTEREST-TOTAL> 43,448
<INTEREST-DEPOSIT> 24,839
<INTEREST-EXPENSE> 24,839
<INTEREST-INCOME-NET> 18,609
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 3,261
<EXPENSE-OTHER> 9,356
<INCOME-PRETAX> 13,536
<INCOME-PRE-EXTRAORDINARY> 13,536
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,562
<EPS-BASIC> 2.52
<EPS-DILUTED> 2.44
<YIELD-ACTUAL> 2.69
<LOANS-NON> 790
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 790
<ALLOWANCE-OPEN> 2,450
<CHARGE-OFFS> (73)
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 2,506
<ALLOWANCE-DOMESTIC> 2,253
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 253
</TABLE>
