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, 2000
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 November 1, 2000: 3,215,593 shares.
<PAGE>
MASSBANK CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Income (unaudited)
for the three months ended September 30, 2000 and 1999 4
and for the nine months ended September 30, 2000 and 1999 5
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 2000 (unaudited)
and the year ended December 31, 1999 6 - 7
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2000 and 1999 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 - 32
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 32
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 33
ITEM 2. Changes in Securities 33
ITEM 3. Defaults Upon Senior Securities 33
ITEM 4. Submission of Matters to a Vote of Security Holders 33
ITEM 5. Other Information 33
ITEM 6. Exhibits and Reports on Form 8-K 33
Signature Page 34
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 9,929 $ 10,476
Short-term investments (Note 3) 137,387 110,928
_______________________________________________________________________________
Total cash and cash equivalents 147,316 121,404
Term federal funds sold 10,000 --
Interest-bearing deposits in banks 1,517 3,841
Securities held to maturity, at amortized cost
(market value of $230 in 2000 and 1999) 230 230
Securities available for sale, at market value (amortized
cost of $438,699 in 2000 and $453,844 in 1999) 443,633 457,502
Trading securities, at market value 2 6,042
Loans: (Note 4)
Mortgage loans 277,066 288,580
Other loans 36,999 36,785
Allowance for loan losses (2,579) (2,555)
_______________________________________________________________________________
Net loans 311,486 322,810
Premises and equipment 4,007 4,127
Real estate acquired through foreclosure -- 62
Accrued interest receivable 5,802 5,045
Goodwill 1,214 1,288
Accrued income tax asset, net -- 292
Other assets 5,006 2,073
_______________________________________________________________________________
Total assets $930,213 $924,716
Liabilities and Stockholders' Equity:
Deposits $819,694 $818,057
Escrow deposits of borrowers 1,440 1,477
Employee stock ownership plan liability 468 468
Accrued income taxes payable 129 --
Deferred income taxes payable 508 199
Other liabilities 2,437 3,036
_______________________________________________________________________________
Total liabilities 824,676 823,237
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, 7,412,632 and
7,407,432 shares issued, respectively 7,413 7,407
Additional paid-in capital 61,082 60,591
Retained earnings 91,254 85,873
_______________________________________________________________________________
159,749 153,871
Accumulated other comprehensive income: (Note 5)
Net unrealized gains on securities
available for sale, net of tax effect 2,844 1,966
Treasury stock at cost, 4,192,189 and
4,096,189 shares, respectively (56,588) (53,890)
Common stock acquired by ESOP (468) (468)
_______________________________________________________________________________
Total stockholders' equity 105,537 101,479
_______________________________________________________________________________
Total liabilities and stockholders' equity $930,213 $924,716
<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) 2000 1999
<S> <C> <C>
_________________________________________________________________________________
Interest and dividend income:
Mortgage Loans $ 4,879 $ 5,158
Other loans 783 652
Securities available for sale:
Mortgage-backed securities 4,669 4,944
Other securities 2,327 2,154
Trading securities -- 75
Federal funds sold 2,504 1,411
Other investments 64 336
______________________________________________________________________________
Total interest and dividend income 15,226 14,730
______________________________________________________________________________
Interest expense:
Deposits 9,079 8,391
______________________________________________________________________________
Total interest expense 9,079 8,391
______________________________________________________________________________
Net interest income 6,147 6,339
Provision for loan losses 15 15
______________________________________________________________________________
Net interest income after provision for loan losses 6,132 6,324
______________________________________________________________________________
Non-interest income:
Deposit account service fees 169 187
Gains on securities, net 580 752
Other 196 150
______________________________________________________________________________
Total non-interest income 945 1,089
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 1,671 1,823
Occupancy and equipment 504 539
Data processing 116 122
Professional services 135 97
Advertising and marketing 51 47
Amortization of intangibles 82 82
Other 335 356
______________________________________________________________________________
Total non-interest expense 2,894 3,066
______________________________________________________________________________
Income before income taxes 4,183 4,347
Income tax expense 1,486 1,564
______________________________________________________________________________
Net income $ 2,697 $ 2,783
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,216,527 3,351,825
Diluted 3,292,370 3,465,603
Earnings per share (in dollars):
Basic $ 0.84 $ 0.83
Diluted 0.82 0.80
<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) 2000 1999
<S> <C> <C>
______________________________________________________________________________
Interest and dividend income:
Mortgage Loans $14,803 $15,421
Other loans 2,240 1,573
Securities available for sale:
Mortgage-backed securities 14,227 13,759
Other securities 7,112 6,519
Trading securities 53 420
Federal funds sold 6,006 4,778
Other investments 410 978
______________________________________________________________________________
Total interest and dividend income 44,851 43,448
______________________________________________________________________________
Interest expense:
Deposits 26,121 24,839
______________________________________________________________________________
Total interest expense 26,121 24,839
______________________________________________________________________________
Net interest income 18,730 18,609
Provision for loan losses 45 125
______________________________________________________________________________
Net interest income after provision for loan losses 18,685 18,484
______________________________________________________________________________
Non-interest income:
Deposit account service fees 515 543
Gains on securities, net 2,433 3,261
Other 602 604
______________________________________________________________________________
Total non-interest income 3,550 4,408
______________________________________________________________________________
Non-interest expense:
Salaries and employee benefits 5,140 5,585
Occupancy and equipment 1,577 1,598
Data processing 361 363
Professional services 801 317
Advertising and marketing 169 142
Amortization of intangibles 247 245
Other 1,104 1,106
______________________________________________________________________________
Total non-interest expense 9,399 9,356
______________________________________________________________________________
Income before income taxes 12,836 13,536
Income tax expense 4,594 4,974
______________________________________________________________________________
Net income $ 8,242 $ 8,562
______________________________________________________________________________
Weighted average common shares outstanding:
Basic 3,236,156 3,393,807
Diluted 3,311,474 3,509,139
Earnings per share (in dollars):
Basic $ 2.55 $ 2.52
Diluted 2.49 2.44
<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, 2000 (unaudited)
(In thousands except share data)
<CAPTION>
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) BY ESOP TOTAL
________ __________ _________ __________ __________ _________ ________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $7,407 $60,591 $85,873 $(53,890) $ 1,966 $(468) $101,479
Net Income -- -- 8 ,242 -- -- -- 8,242
Other comprehensive income,
net of tax:
Unrealized gains on securities,
net of reclassification adjustment (Note 5) -- -- -- -- 878 -- 878
_____
Comprehensive income 9,120
Cash dividends declared and paid
($0.885 per share) -- -- (2,869) -- -- -- (2,869)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 8 -- -- -- 8
Amortization of ESOP shares
committed to be released -- 69 -- -- -- -- 69
Purchase of Company stock for
deferred compensation plan -- 347 -- (347) -- -- --
Purchase of treasury stock -- -- -- (2,351) -- -- (2,351)
Exercise of stock options
and related tax benefits 6 75 -- -- -- -- 81
___________________________________________________________________________________________________________________________
Balance at September 30, 2000 $7,413 $61,082 $91,254 $(56,588) $ 2,844 $(468) $105,537
<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, 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 (LOSS) 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 -- -- 11,311 -- -- -- 11,311
Other comprehensive (loss), net of tax:
Unrealized (losses) on securities,
net of reclassification adjustment (Note 5) -- -- -- -- (9,725) -- (9,725)
______
Comprehensive income 1,586
Cash dividends declared and paid
($1.11 per share) -- -- (3,759) -- -- -- (3,759)
Tax benefit resulting from dividends
paid on unallocated shares held by the ESOP -- -- 13 -- -- -- 13
Net decrease in liability to ESOP -- -- -- -- -- 157 157
Amortization of ESOP shares
committed to be released -- 163 -- -- -- -- 163
Purchase of treasury stock -- -- -- (7,618) -- -- (7,618)
Exercise of stock options
and related tax benefits 23 425 -- -- -- -- 448
__________________________________________________________________________________________________________________________
Balance at December 31, 1999 $7,407 $60,591 $85,873 $(53,890) $ 1,966 $(468) $101,479
<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,
2000 1999
____ ____
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,242 $ 8,562
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 657 711
Loan interest capitalized (31) (42)
Amortization of ESOP shares committed to be released 69 130
Increase (decrease) in accrued interest receivable (757) 101
(Decrease) increase in other liabilities (599) 412
Increase (decrease) in current income taxes payable 421 (1,044)
Accretion of discounts on securities, net of amortization
of premiums (649) (750)
Net trading securities activity 6,569 25,132
Gains on securities available for sale, net (2,078) (3,233)
Gains on trading securities, net (355) (28)
(Decrease) increase in deferred mortgage loan
origination fees, net of amortization (117) 27
Deferred income tax benefit (90) (104)
Increase in other assets (1,309) (286)
Provision for loan losses 45 125
Gains on sales of real estate acquired through foreclosure (8) --
Gains on sales of premises and equipment -- (2)
(Decrease) increase in escrow deposits of borrowers (37) 79
__________________________________________________________________________________________
Net cash provided by operating activities 9,973 29,790
__________________________________________________________________________________________
Cash flows from investing activities:
Purchases of term federal funds (10,000) --
Proceeds from maturities of term federal funds -- 25,000
Net decrease (increase) in interest bearing bank deposits 2,324 (1,757)
Proceeds from sales of investment securities available for sale 28,700 54,281
Proceeds from maturities of investment securities
available for sale 29,000 60,800
Purchases of investment securities
available for sale (48,479) (130,414)
Purchases of mortgage-backed securities (28,652) (88,397)
Principal repayments of mortgage-backed securities 35,503 56,271
Principal repayments of securities held to maturity -- 124
Principal repayments of securities available for sale 3 43
Loans originated (22,304) (74,648)
Loan principal payments received 33,692 49,799
Loans purchased -- (345)
Purchases of premises & equipment (251) (334)
Proceeds from sales of real estate acquired through foreclosure 70 86
Proceeds from sales of premises and equipment -- 2
__________________________________________________________________________________________
Net cash provided by (used in) investing activities 19,606 (49,489)
__________________________________________________________________________________________
Continued on next page.
</TABLE>
<PAGE>
<TABLE>
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
2000 1999
____ ____
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 1,464 1,761
Payments to acquire treasury stock (2,698) (5,529)
Purchase of Company stock for deferred compensation plan 347 --
Issuance of common stock under stock option plan 81 164
Dividends paid on common stock (2,869) (2,808)
Tax benefit resulting from dividends paid on
unallocated shares held by the ESOP 8 10
__________________________________________________________________________________________
Net cash used in financing activities (3,667) (6,402)
__________________________________________________________________________________________
Net increase (decrease) in cash and cash equivalents 25,912 (26,101)
Cash and cash equivalents at beginning of period 121,404 154,814
__________________________________________________________________________________________
Cash and cash equivalents at end of period $147,316 $128,713
__________________________________________________________________________________________
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest $26,119 $24,844
Cash paid during the period for taxes, net of refunds 4,250 6,071
Purchases of securities executed but not settled at
beginning of period which settled during the period 117 129
Sales of securities executed but not settled at
beginning of period which settled during the period 202 583
Non-cash transactions:
SFAS 115:
Increase (decrease) in accumulated other comprehensive income 878 (8,150)
Increase (decrease) in deferred tax liabilities 399 (5,510)
Purchases of securities executed but not settled at end of period 253 236
Sales of securities executed but not settled at end of period 1,962 270
__________________________________________________________________________________________
<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, 2000
and December 31, 1999, and its operating results for the three and nine months
ended September 30, 2000 and 1999. 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, 1999.
(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
90 days or less.
<TABLE>
(3) Short-Term Investments
Short-term investments consist of the following:
<CAPTION>
________________________________________________________________________________
At At
(In thousands) September 30, 2000 December 31, 1999
________________________________________________________________________________
<S> <C> <C>
Federal funds sold (overnight) $126,873 $ 86,211
Term federal funds sold 10,000 --
Money market funds 514 24,717
________________________________________________________________________________
Total short-term investments $137,387 $110,928
________________________________________________________________________________
The investments above are stated at cost which approximates market value and
have original maturities of 90 days or less.
(4) Commitments
At September 30, 2000, the Company had outstanding commitments to originate
mortgage loans and to advance funds for construction loans amounting to
$2,478,000 and commitments under existing home equity lines of credit and other
loans of approximately $30,742,000 which are not reflected on the consolidated
balance sheet. In addition, as of September 30, 2000, the Company had a
performance standby letter of credit conveyed to others in the amount of
$468,000 which is also not reflected on the consolidated balance sheet.
</TABLE>
<PAGE>
<TABLE>
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) 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" describes the total of all components of
comprehensive income including net income.
The Company's other comprehensive income (loss) and related tax effect for
the nine months ended September 30, 2000 and the year ended December 31, 1999
is as follows:
<CAPTION>
For the Nine Months Ended
September 30, 2000
____________________________________________________________________________________
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 $ 3,355 $1,287 $ 2,068
Less: reclassification adjustment for
gains realized in net income 2,078 888 1,190
______ ________ ______
Net unrealized gains 1,277 399 878
______ ________ ______
Other comprehensive income $ 1,277 $ 399 $ 878
______ ________ _____
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended
December 31, 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 $(12,171) $ 4,716 $(7,455)
Less: reclassification adjustment for
gains realized in net income 3,954 (1,684) 2,270
______ ________ ______
Net unrealized losses (16,125) 6,400 (9,725)
______ ________ ______
Other comprehensive loss $(16,125) $ 6,400 $(9,725)
______ ________ ______
</TABLE>
<PAGE>
MASSBANK CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2000
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. 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 increases in loan defaults. 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, 2000
GENERAL
For the quarter ended September 30, 2000, MASSBANK Corp. reported net income
of $2,697,000 or $0.84 in basic earnings per share ($0.82 diluted), compared to
net income of $2,783,000 or $0.83 in basic earnings per share ($0.80 diluted) in
the third quarter of 1999.
The Company's net income performance for the third quarter 2000 compared to
the same quarter of 1999 reflects a decrease in non-interest expense due to
tighter expense controls. This is offset by a decrease in net interest income
due to a decrease in net interest margin and average earning assets and lower
securities gains. Additionally, the earnings per share results for the recent
quarter were positively affected by the reduced number of average common shares
outstanding due to the shares purchased by the Company pursuant to its stock
repurchase program.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
Three Months Ended
September 30,
2000 1999
______________ ______________
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 $151,918 $ 2,504 6.54% $110,481 $ 1,411 5.07%
Short-term investments (2) 4,008 61 6.02 26,392 334 5.02
Investment securities 167,144 2,364 5.66 161,175 2,192 5.44
Mortgage-backed securities 268,229 4,669 6.96 289,508 4,944 6.83
Trading securities 39 -- -- 6,000 75 4.95
Mortgage loans (1) 278,662 4,879 7.00 295,165 5,158 6.99
Other loans (1) 36,826 783 8.40 36,164 652 7.13
__________________________________________________ ________________
Total earning assets 906,826 $15,260 6.73% 924,885 $14,766 6.37%
Allowance for loan losses (2,569) (2,521)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 904,257 922,364
Other assets 20,581 20,213
__________________________________________________________________________________________
Total assets $924,838 $942,577
Continued on next page.
</TABLE>
<PAGE>
[CAPTION]
<TABLE>
AVERAGE BALANCE SHEETS - (continued)
Three Months Ended
September 30,
2000 1999
______________ ______________
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 $ 76,149 $ 124 0.64% $ 75,282 $ 121 0.64%
Savings 341,608 2,932 3.41 358,576 3,083 3.41
Time certificates of deposit 401,761 6,023 5.95 399,681 5,187 5.15
__________________________________________________ ________________
Total deposits 819,518 9,079 4.40 833,539 8,391 3.99
Other liabilities 3,018 5,851
__________________________________________________________________________________________
Total liabilities 822,536 839,390
Stockholders' equity 102,302 103,187
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $924,838 $942,577
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 6,181 6,375
Less adjustment of tax-exempt
interest income 34 36
__________________________________________________________________________________________
Net interest income $ 6,147 $ 6,339
__________________________________________________________________________________________
Interest rate spread 2.33% 2.38%
__________________________________________________________________________________________
Net interest margin (3) 2.73% 2.76%
__________________________________________________________________________________________
(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 $6,147,000 for the third quarter of
2000 reflecting a decrease of $192,000 from the same quarter a year ago. The
recent quarter's decrease in net interest income is due to a decrease in the
Company's net interest margin and average earning assets. The Company's net
interest margin for the recent quarter decreased to 2.73% from 2.76% in the
third quarter of 1999. Average earning assets in the recent quarter were $906.8
million, down from $924.9 million in the third quarter of 1999.
Interest and Dividend Income
Interest and dividend income on a fully taxable equivalent basis for the
three months ended September 30, 2000, increased to $15,260,000 from $14,766,000
for the three months ended September 30, 1999. The increase in interest income
resulted from an improvement in yield on the Company's average earning assets
partially offset by a decrease in average earning assets, as noted above. As
reflected in the table on page 13 of this report, the yield on average earning
assets in the third quarter of 2000 improved 36 basis points to 6.73% from 6.37%
in the same quarter of 1999.
The Federal Reserve Bank has raised the Federal Funds rate four times in
the last twelve months, raising the rate from 5.25% to 6.50%. This increase,
because of the Bank's high volume of Federal Funds sold, has helped to improve
the overall yield on MASSBANK's earning assets. Also contributing to the
increase in yield on earning assets were improvements in yield on the Bank's
investment securities, mortgage-backed securities and other short-term
investments. This is due essentially to the proceeds from sales and maturing
securities being reinvested and earning higher returns, due to an increase in
market interest rates in the last twelve months. In addition, the yield on the
Bank's commercial and consumer loans also show an improvement due to the higher
market interest rates.
Interest Expense
Total interest expense for the three months ended September 30, 2000 was
$9,079,000, up from $8,391,000 for the same quarter last year. The Company's
average deposits, as shown in the table on page 14, decreased $14.0 million
to $819.5 million in the third quarter of 2000, from $833.5 million in the
third quarter of 1999. The increase in interest expense resulted from an
increase in average cost of funds partially offset by the decrease in interest
expense resulting from the lower deposit volume. The Company's average cost of
funds for the three months ended September 30, 2000 was 4.40%, up from 3.99%
for the comparable period in 1999.
Provision for Loan Losses
The provision for loan losses represents a charge against current earnings
and an addition to the allowance for loan losses. The provision for loan losses
in the third quarter of 2000 was $15,000, unchanged from the third quarter of
1999. In determining the amount to provide for loan losses, the key factor is
the adequacy of the allowance for loan losses. In making its decision,
management considers a number of factors, including the risk characteristics of
the loan portfolio, underlying collateral, current and anticipated economic
conditions, and trends in loan delinquencies and charge-offs. At September 30,
2000, the allowance for loan losses was $2,579,000 representing 308.0% of
nonaccrual loans. The Bank's nonaccrual loans totaled $838,000 at September 30,
2000 compared to $790,000 a year earlier. There were zero net charge-offs for
the recent quarter compared to $67,000 in net-charge-offs for the same quarter
last year. Management believes that the allowance for loan losses as of
September 30, 2000 is adequate to cover the risks inherent in the loan portfolio
under current conditions.
<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 decreased by $144,000 to $945,000 for the recent
quarter, from $1,089,000 for the comparable quarter of the prior year. This
decrease is due essentially to lower net securities gains in the third quarter
of 2000.
Net gains on securities totaled $580,000 in the third quarter of this year
compared to $752,000 in the third quarter of last year. Realized gains on the
sale of equity securities totaled $624,000 for the three months ended
September 30, 2000. These gains, however, were partially offset by net losses
realized on the sale of debt securities of $44,000.
The Bank's deposit account service fees and other non-interest income
totaled $169,000 and $196,000, respectively, in the third quarter of 2000
compared to $187,000 and $150,000, respectively, in the third quarter of 1999.
The increase in other non-interest income primarily reflects an increase of
$42,000 in income earned on the Bank's deferred compensation plan assets during
the recent quarter compared to the same quarter last year. A corresponding
increase of $42,000 is also reflected in non-interest expense.
Non-Interest Expense
Non-interest expense decreased $172,000 to $2,894,000 in the third quarter
of 2000, from $3,066,000 in the same quarter of the prior year. This decrease
is due largely to a decrease in salaries and employee benefits.
Salaries and employee benefits, the largest component of non-interest
expense, decreased by $152,000 or 8.3% in the third quarter of 2000 to
$1,671,000 from $1,823,000 in the third quarter of the prior year. This
reduction is due to a decrease in salaries and lower expenses associated with
various employee benefits.
Occupancy and equipment expense decreased $35,000 to $504,000 in the third
quarter of 2000. This decrease is due largely to a reduction in depreciation
expense.
Professional services expense increased by $38,000 to $135,000 in the
recent quarter, from $97,000 for the same quarter last year due to increased
legal fees.
All other expenses combined, consisting of data processing, advertising and
marketing, amortization of intangibles and other expenses, decreased $23,000
to $584,000 for the three months ended September 30, 2000 from $607,000 for the
three months ended September 30, 1999.
<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 Company recorded income tax expense of $1,486,000 in the third quarter
of 2000, a decrease of $78,000 when compared to the same quarter last year.
The decrease in income tax expense is due primarily to a decrease in income
before income taxes and a reduction in the Company's effective income tax rate.
The Company's income before income taxes was $4,183,000 in the recent quarter
compared to $4,347,000 for the same quarter a year ago. The effective income
tax rate for the three months ended September 30, 2000 was 35.5% down from 36.0%
for the three months ended September 30, 1999. The decrease in effective income
tax rate is due in part to the increased investment income generated by the
Bank's two security corporation subsidiaries which are taxed at a lower rate
than the Bank for state income tax purposes.
Results of Operations for the nine months ended September 30, 2000
General
For the nine months ended September 30, 2000, the Company reported net
income of $8,242,000 or $2.55 in basic earnings per share ($2.49 per share on a
diluted basis) compared to net income of $8,562,000 or $2.52 in basic earnings
per share ($2.44 per share on a diluted basis) earned in the first nine months
of 1999.
Net income for the first nine months of 2000 includes (net) non-recurring
charges of $363,000 ($211,000 post tax) incurred in connection with MASSBANK's
successful prosecution of its trademark case. Excluding the impact of these
charges, the Company's net income for the first nine months of 2000 was
$8,453,000 or $2.61 in basic earnings per share ($2.55 diluted) compared to
$8,562,000 or $2.52 in basic earnings per share ($2.44 diluted) for the same
period in 1999.
The Company's financial performance in the first nine months of 2000 also
reflects an improvement in net interest income of $121,000 due to an improvement
in net interest margin partially offset by a decrease in average earning assets,
a decrease in the provision for loan losses of $80,000, and a decrease in the
Company's effective income tax rate. These improvements were offset by a
decrease in non-interest income of $858,000 due essentially to lower securities
gains and an increase of $43,000 in non-interest expense due to (net) non-
recurring charges of $363,000 incurred by the Company in the aforementioned
trademark dispute. Additionally, the earnings per share results for the first
nine months of 2000 were positively affected by the reduced number of average
common shares outstanding as a result of the Company's purchase of 147,182
shares of its common stock, in the last twelve months, pursuant to its stock
repurchase program.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
Nine Months Ended
September 30,
2000 1999
______________ ______________
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 $128,617 $ 6,006 6.24% $133,167 $ 4,778 4.80%
Short-term investments (2) 9,305 402 5.77 26,609 966 4.85
Investment securities 172,471 7,213 5.58 163,415 6,628 5.40
Mortgage-backed securities 271,666 14,227 6.98 270,268 13,759 6.79
Trading securities 1,388 53 5.05 12,345 420 4.54
Mortgage loans (1) 282,822 14,803 6.98 292,545 15,421 7.03
Other loans (1) 36,677 2,240 8.10 27,212 1,573 7.71
__________________________________________________ ________________
Total earning assets 902,946 $44,944 6.64% 925,561 $43,545 6.27%
Allowance for loan losses (2,567) (2,493)
__________________________________________________________________________________________
Total earning assets
less allowance for
loan losses 900,379 923,068
Other assets 21,032 19,957
__________________________________________________________________________________________
Total assets $921,411 $943,025
Continued on next page.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS - (continued)
Nine Months Ended
September 30,
2000 1999
______________ ______________
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 $ 75,350 $ 366 0.65% $ 74,965 $ 382 0.68%
Savings 345,825 8,838 3.41 352,955 8,987 3.40
Time certificates of deposit 396,837 16,917 5.69 400,018 15,470 5.17
__________________________________________________ ________________
Total deposits 818,012 26,121 4.27 827,938 24,839 4.01
Other liabilities 3,142 8,105
__________________________________________________________________________________________
Total liabilities 821,154 836,043
Stockholders' equity 100,257 106,982
__________________________________________________________________________________________
Total liabilities and
stockholders' equity $921,411 $943,025
__________________________________________________________________________________________
Net interest income
(tax-equivalent basis) 18,823 18,706
Less adjustment of tax-exempt
interest income 93 97
__________________________________________________________________________________________
Net interest income $18,730 $18,609
__________________________________________________________________________________________
Interest rate spread 2.37% 2.26%
__________________________________________________________________________________________
Net interest margin (3) 2.78% 2.69%
__________________________________________________________________________________________
(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 totaled $18,730,000 for the nine months ended
September 30, 2000, compared to $18,609,000 for the same period in 1999. The
$121,000 increase is primarily attributable to an improvement in the Company's
net interest margin, partially offset by a decrease in average earning assets.
The Company's net interest margin for the first nine months of 2000 was
2.78% compared to 2.69% for the same period last year. Average earning assets
for the nine months ended September 30, 2000 decreased $22.6 million to $902.9
million from $925.5 million for the corresponding period in 1999.
The Company's interest rate spread increased to 2.37% for the first nine
months of 2000, from 2.26% in the first nine months of last year. The yield on
the Company's average earning assets in the first nine months of 2000 increased
by 37 basis points to 6.64% from 6.27% in the corresponding period of 1999.
This increase was partially offset by an increase of 26 basis points in the
Company's average cost of funds, from 4.01% for the nine months ended
September 30, 1999 to 4.27% for the same period this year.
Provision for Loan Losses
The provision for loan losses for the first nine months of 2000 was $45,000
compared to $125,000 for the same period in 1999. This decrease is essentially
due to a decrease in the size of the Bank's loan portfolio and low net loan
charge-offs. Loan charge-offs net of recoveries for the nine months ended
September 30, 2000 and 1999 were $21,000 and $69,000, respectively.
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 2000 decreased $858,000
to $3,550,000 from $4,408,000 for the same period in 1999. This decrease is
essentially due to lower net securities gains. Net securities gains totaled
$2,433,000 for the nine months ended September 30, 2000 compared to $3,261,000
for the nine months ended September 30, 1999. Deposit account service fees and
other non-interest income combined decreased $30,000 to $1,117,000 for the first
nine months of 2000 from $1,147,000 for the first nine months of 1999. This
reduction is due primarily to a decrease in deposit account service fees.
Non-Interest Expense
Non-interest expense for the nine months ended September 30, 2000
increased $43,000 to $9,399,000 from $9,356,000 for the same period last year.
This increase is due to (net) non-recurring charges of $363,000 that the
Company incurred in the second quarter of this year in protecting its
trademarks from infringement by another financial institution. The Company's
non-interest expense for the first nine months of 2000 excluding the
aforementioned non-recurring charges decreased 3.4% or $320,000 to $9,036,000
from $9,356,000 for the comparable period last year. The decrease was due
primarily to a decrease in salaries and employee benefit expenses.
<PAGE>
Salaries and employee benefits, the largest component of non-interest
expense, decreased $445,000 or 8.0% to $5,140,000 for the first nine months of
2000 from $5,585,000 for the first nine months of last year. This reduction is
due to a decrease in salaries and lower expenses associated with various
employee benefits.
All other expenses combined, consisting of occupancy and equipment, data
processing, professional services, advertising and marketing, amortization of
intangibles and other expenses totaled $4,259,000 for the first nine months of
2000, reflecting an increase of $488,000 over the $3,771,000 in expenses
incurred for the same period last year. Excluding the net non-recurring
charges of $363,000 incurred in connection with the Company's trademarks
dispute, the Company's all other expenses combined increased $125,000 or 3.3%
compared to the same period of 1999. This increase is due primarily to an
increase in legal fees incurred by the Company in connection with other
business matters.
Income Tax Expense
The provision for federal and state income taxes decreased to $4,594,000
for the nine months ended September 30, 2000 from $4,974,000 for the same
period in 1999. This decrease is due primarily to a decrease in income before
income taxes for the first nine months of 2000 and a reduction in the Company's
effective income tax rate. The Company's combined effective income tax rate for
the first nine months of 2000 is 35.8% compared to 36.7% for the same period a
year ago.
<PAGE>
Financial Condition
The Company's total assets increased by $5.5 million to $930.2 million at
September 30, 2000 from $924.7 million at December 31, 1999. The increase in
total assets reflects an increase in total investments and other assets of
$14.2 million and $2.6 million, respectively, partially offset by a decrease in
total loans of $11.3 million.
Total investments consisting of investment securities, interest-bearing
bank deposits, term federal funds sold and other short-term investments
increased from $578.5 million at December 31, 1999 to $592.7 million at
September 30, 2000. The mix of the Company's investments also changed during
the first nine months of 2000. Short-term investments and term federal funds
sold increased by $26.4 million and $10.0 million, respectively. Offsetting
these increases were reductions in the Company's securities available for sale,
trading account and interest bearing bank deposits of $13.9 million, $6.0
million and $2.3 million, respectively.
The Bank's total loan portfolio at September 30, 2000, prior to the
allowance for loan losses, amounted to $314.1 million compared to $325.4
million at December 31, 1999. The decrease in the loan portfolio reflects a
decline in the Bank's loan originations during the first nine months of 2000
compared to the same period of 1999. Higher market interest rates during the
first nine months of 2000 compared to the first nine months of 1999
significantly reduced the demand for mortgage refinancings resulting in lower
loan originations for the Bank. Loan originations were $22.3 million in the
first nine months of 2000 compared to $74.6 million in the first nine months of
last year. Loan originations for the first nine months of 1999 include a single
commercial loan in the amount of $15.0 million.
Total deposits were $819.7 million at September 30, 2000 reflecting an
increase of $1.6 million from $818.1 million at year-end 1999.
Total stockholders' equity increased to $105.5 million at September 30,
2000 from $101.5 million at December 31, 1999. The increase results primarily
from increases in retained earnings, additional paid-in capital, and net
unrealized gains (net of tax effect) on the Company's available for sale
securities of $5.4 million, $0.5 million and $0.9 million, respectively. These
increases were partially offset by the $2.7 million cost of the treasury shares
purchased by the Company during the period pursuant to its stock repurchase
program. As a result, the Company's book value per share at September 30, 2000
increased to $32.64, from $30.65 at year-end 1999.
<PAGE>
Investments
As previously noted, total investments consisting of investment securities,
short-term investments, term federal funds sold and interest-bearing bank
deposits equalled $592.7 million at September 30, 2000, up $14.2 million from
$578.5 million at year-end 1999. 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 $19.2 million as of
September 30, 2000, 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 $278.7 million at September 30, 2000 versus $282.3 million at year-end
1999.
The Bank also maintains a portfolio of trading securities which consisted
of the following as of the dates shown:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 2000 1999
_____________ ____________
<S> <C> <C>
U.S. Treasury obligations $ -- $ 4,956
Investments in mutual funds 2 1,086
_______ _______
Total $ 2 $ 6,042
</TABLE>
<PAGE>
<TABLE>
FINANCIAL CONDITION
INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at September 30, 2000 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At September 30, 2000 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 $136,565 $ 203 $ (165) $136,603
U.S. Government agency obligations 9,148 -- (44) 9,104
__________________________________________________________________________________________
Total 145,713 203 (209) 145,707
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 32,422 311 (240) 32,493
Federal Home Loan Mortgage
Corporation 242,009 928 (2,056) 240,881
Federal National Mortgage
Association 2,673 39 (26) 2,686
Collateralized mortgage
obligations 2,661 3 (41) 2,623
__________________________________________________________________________________________
Total mortgage-backed securities 279,765 1,281 (2,363) 278,683
__________________________________________________________________________________________
Total debt securities 425,478 1,484 (2,572) 424,390
__________________________________________________________________________________________
Equity securities 13,221 7,093 (1,071) 19,243
__________________________________________________________________________________________
Total securities available for sale 438,699 $ 8,577 $ (3,643) $443,633
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 4,934
__________________________________________________________________________________________
Total securities available
for sale, net 443,633
__________________________________________________________________________________________
Total investment securities, net $443,863
__________________________________________________________________________________________
Trading securities $ 1 $ 2
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL CONDITION
INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investment securities
at December 31, 1999 with gross unrealized gains and losses, follows:
__________________________________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) At December 31, 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 $138,518 $ 122 $ (1,025) $137,615
U.S. Government agency obligations 16,143 -- (128) 16,015
__________________________________________________________________________________________
Total 154,661 122 (1,153) 153,630
__________________________________________________________________________________________
Mortgage-backed securities:
Government National Mortgage
Association 38,061 251 (490) 37,822
Federal Home Loan Mortgage
Corporation 239,607 311 (4,028) 235,890
Federal National Mortgage
Association 3,951 74 (45) 3,980
Collateralized mortgage
obligations 4,649 16 (22) 4,643
__________________________________________________________________________________________
Total mortgage-backed securities 286,268 652 (4,585) 282,335
__________________________________________________________________________________________
Total debt securities 440,929 774 (5,738) 435,965
__________________________________________________________________________________________
Equity securities 12,915 8,985 (363) 21,537
__________________________________________________________________________________________
Total securities available for sale 453,844 $ 9,759 $ (6,101) $457,502
__________________________________________________________________________________________
Net unrealized gains on securities
available for sale 3,658
__________________________________________________________________________________________
Total securities available
for sale, net 457,502
__________________________________________________________________________________________
Total investment securities, net $457,732
__________________________________________________________________________________________
Trading securities $ 6,072 $ 6,042
__________________________________________________________________________________________
</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, 2000 and December 31, 1999 are as follows:
September 30, 2000
____________________________________________
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 $ 70,880 $ 70,832 $ -- $ --
After 1 year but within 5 years 71,715 71,767 230 230
After 5 years but within 10 years 2,970 2,963 -- --
After 15 years 148 145 -- --
________ _______ ______ ______
145,713 145,707 230 230
Mortgage-backed securities 279,765 278,683 -- --
________ _______ ______ ______
$425,478 $424,390 $ 230 $ 230
</TABLE>
<TABLE>
<CAPTION>
December 31, 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 $ 59,837 $ 59,796 $ -- $ --
After 1 year but within 5 years 91,707 90,818 230 230
After 5 years but within 10 years 2,966 2,871 -- --
After 15 years 151 145 -- --
________ _______ ______ ______
154,661 153,630 230 230
Mortgage-backed securities 286,268 282,335 -- --
________ _______ ______ ______
$440,929 $435,965 $ 230 $ 230
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOANS
The composition of the Bank's loan portfolio is summarized as follows:
_______________________________________________________________________________________
At At
(In thousands) September 30, 2000 December 31, 1999
_______________________________________________________________________________________
<S> <C> <C>
Mortgage loans:
Residential $274,575 $287,169
Commercial 3,194 2,471
Construction 512 232
_______________________________________________________________________________________
278,281 289,872
Add: Premium on loans 118 159
Deferred mortgage loan origination fees (1,333) (1,451)
_______________________________________________________________________________________
Total mortgage loans 277,066 288,580
Other loans:
Consumer:
Installment 2,026 1,418
Guaranteed education 6,403 7,037
Other secured 1,020 1,318
Home equity lines of credit 12,272 11,737
Unsecured 220 225
_______________________________________________________________________________________
Total consumer loans 21,941 21,735
Commercial 15,058 15,050
_______________________________________________________________________________________
Total other loans 36,999 36,785
_______________________________________________________________________________________
Total loans $314,065 $325,365
_______________________________________________________________________________________
The Bank's loan portfolio decreased $11.3 million during the first nine
months of 2000, from $325.4 million at December 31, 1999 to $314.1 million at
September 30, 2000. The decrease was primarily in the residential 1-4 family
mortgage loan category.
Loan originations decreased by $6.0 million to $7.6 million in the recent
quarter compared to $13.6 million in the third quarter of 1999. This is due,
in large part, to an increase in mortgage interest rates and the resulting
decline in mortgage loan refinancings.
For the first nine months of 2000, loan originations were $22.3 million,
down from $74.6 million for the same period last year. Loan originations for
the first nine months of 1999 include a single commercial loan in the amount of
$15.0 million.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
The following table shows the composition of the Bank's non-performing
assets at September 30, 2000 and 1999, and December 31, 1999:
At At At
September 30, December 31, September 30,
(In thousands) 2000 1999 1999
____________________________________________________________________________________
<S> <C> <C> <C>
Non-Performing Assets:
Non-accrual loans $ 838 $ 795 $ 790
Real estate acquired through foreclosure -- 62 58
____________________________________________________________________________________
Total non-performing assets $ 838 $ 857 $ 848
____________________________________________________________________________________
Allowance for loan losses $ 2,579 $ 2,555 $ 2,506
Allowance as a percent of
non-accrual loans 307.7 % 321.4 % 317.2 %
Allowance as a percent of
non-performing assets 307.7 % 298.1 % 295.5 %
Non-accrual loans as a percent
of total loans 0.27% 0.24% 0.24%
Non-performing assets as a percent
of total assets 0.09% 0.09% 0.09%
____________________________________________________________________________________
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 slightly from December 31, 1999 to
September 30, 2000 as noted in the table above. The principal balance of non-
accrual loans at September 30, 2000 was $838,000 representing less than 3/10 of
1% of total loans at September 30, 2000.
The Bank did not have any impaired loans as of September 30, 2000.
</TABLE>
<PAGE>
ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
Nine Months Ended
September 30,
2000 1999
________________________________________________________________________________
(In thousands)
Balance at beginning of period $ 2,555 $ 2,450
Provision for loan losses 45 125
Recoveries of loans previously charged-off 3 4
Charge-offs (24) (73)
________________________________________________________________________________
Balance at end of period $ 2,579 $ 2,506
________________________________________________________________________________
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, 2000 the balance of the allowance for loan losses was
$2,579,000 representing 307.7% 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.
<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 $1.6 million to $819.7 million at
September 30, 2000 from $818.1 million at December 31, 1999.
The composition of the Bank's total deposits as of the dates shown are
summarized as follows:
September 30, December 31,
2000 1999
______________________________________________________________________________
(In thousands)
Demand and NOW $ 76,442 $ 72,938
Savings and money market accounts 336,839 353,090
Time certificates of deposit 406,727 392,516
Deposit acquisition premium,
net of amortization (314) (487)
______________________________________________________________________________
Total deposits $819,694 $818,057
______________________________________________________________________________
Recent Accounting Developments
"Accounting for Derivative Instruments and Hedging Activities"
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes comprehensive
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." SFAS No. 137 deferred the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which amends the accounting and reporting standards of SFAS
No. 133 for certain derivative instruments and certain hedging activities. The
Company intends to adopt SFAS No. 133 as of January 1, 2001. These Statements
are 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, 2000 the Bank had $126.9 million
or 13.6% of total assets and $145.7 million or 15.7% 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 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 risk-based capital guidelines take
into consideration risk factors, as defined by the regulators, associated with
various categories of assets, both on and off the balance sheet. Under the
guidelines, capital strength is measured in two tiers which are used in
conjunction with risk adjusted assets to determine the risk-based capital
ratios. Tier II capital components include supplemental capital components such
as qualifying allowance for loan losses, 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 are referred
to as total qualifying capital. The capital ratios of the Bank and the Company
currently exceed the minimum regulatory requirements. At September 30, 2000,
the Bank had a leverage Tier I capital to total assets ratio of 10.71%, a Tier 1
capital to risk-weighted assets ratio of 33.50% and a total capital to risk-
weighted assets ratio of 35.29%. The Company, on a consolidated basis, had
ratios of leverage Tier I capital to total assets of 10.93%, Tier I capital to
risk-weighted assets of 34.17% and total capital to risk-weighted assets of
35.96% at September 30, 2000.
<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, 1999. There have been no material changes in reported market
risks faced by the Corporation since the filing of the Corporation's 1999
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, 2000, 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:
1. Exhibit No. 11.1: Statement regarding computation of per
share earnings.
2. Exhibit No. 27: Financial Data Schedule.
b. Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSBANK Corp. & Subsidiaries
_____________________________
(Registrant)
Date: November 13, 2000 /s/Gerard H. Brandi
___________________________
(Signature)
Gerard H. Brandi
President and CEO
Date: November 13, 2000 /s/Reginald E. Cormier
___________________________
(Signature)
Reginald E. Cormier
Sr. V.P., Treasurer and CFO
<PAGE>
