Item 1. Business Business of MASSBANK Corp.
General
MASSBANK Corp. (the "Company") is a general business corporation incorporated under the laws of the State of Delaware on August 11, 1986. MASSBANK Corp. was organized for the purpose of becoming the holding company for MASSBANK (the "Bank"). The Company is a one-bank holding company registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. As of and since December 2, 1986, the effective date of the reorganization whereby MASSBANK Corp. became the holding company for the Bank, the Bank has been a wholly-owned subsidiary of MASSBANK Corp. The only office of MASSBANK Corp., and its principal place of business, is located at the main office of the Bank at 123 Haven Street, Reading, Massachusetts 01867.
MASSBANK Corp. currently has no material assets other than its investment in the Bank. The Company's primary business, therefore, is managing its investment in the stock of the Bank. MASSBANK Corp. is classified by the Commonwealth of Massachusetts as a securities corporation for tax purposes which restricts its business to buying, selling, dealing in, or holding securities on its own behalf. In the future, MASSBANK Corp. may become an operating company or acquire banks or companies engaged in bank-related activities.
MASSBANK Corp.'s principal sources of revenues on an unconsolidated basis, which are used for the payment of dividends to stockholders and other purposes, are dividends from MASSBANK and, to a lesser extent, interest income received from its interest-bearing bank deposits. MASSBANK Corp.'s assets on an unconsolidated basis at December 31, 1997 were represented by its investment in the Bank of $101.1 million and other assets of $3.5 million. The Company's liabilities consisted of loan indebtedness of $0.8 million and other liabilities of less than $0.1 million. The proceeds of the loan were used to fund stock purchases through the Employee Stock Ownership Plan ("ESOP"). See Note 18 to the Consolidated Financial Statements for parent company only financial information. At December 31, 1997 MASSBANK Corp. on a consolidated basis had total assets of $925.4 million, deposits of $809.9 million, and stockholders' equity of $103.8 million which represents 11.2% of total assets. Book value per share at December 31, 1997 was $29.06.
The Company does not own or lease any real or personal property. Instead it intends to utilize during the immediate future the premises, equipment and furniture of the Bank without the direct payment of rental fees to the Bank.
Competition The primary business of MASSBANK Corp. currently is the ongoing business of the Bank. Therefore, the competitive conditions faced by MASSBANK Corp. currently are the same as those faced by the Bank. See "Business of MASSBANK - Competition." In addition, many banks and financial institutions have formed holding companies. It is likely that these holding companies will attempt to acquire commercial banks, thrift institutions or companies engaged in bank-related activities. MASSBANK Corp. would face competition in undertaking any such acquisitions and in operating any such entity subsequent to its acquisition.
Employees MASSBANK Corp. does not employ any persons; its management also serves as management of, and is paid by, the Bank. See "Item 10 - Directors and Executive Officers of the Registrant." MASSBANK Corp. utilizes the support staff of the Bank from time to time and does not pay any separate salaries or expenses in connection therewith.
Dividends MASSBANK Corp. paid total cash dividends of $0.885 per share in 1997 compared to $0.69 per share in 1996 and $0.5475 per share in 1995. The Company's dividend payout ratios (cash dividends paid divided by net income) for 1997, 1996 and 1995 were 31%, 26% and 23%, respectively.
Stock Repurchase Program In July 1997, MASSBANK Corp. announced that its Board of Directors (the "Board") had extended, for another year, the stock repurchase program which it authorized in July, 1996. During 1997, the Company repurchased 46,807 of its common shares under its ongoing repurchase program. This leaves 171,398 shares available for repurchase in the current program.
Preferred Stock Purchase Rights In January 1990, the Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right for each outstanding share of MASSBANK Corp. common stock. These Rights, which expire in January 2000, entitle their holders to purchase from the Company one one-hundredth of a share (a "unit") of Series A Junior Participating Cumulative Preferred Stock, par value $1.00 per share ("preferred stock") at a cash exercise price of $70.00 per unit, subject to adjustment. The Rights will trade separately from the common stock and will become exercisable when a person or group has acquired 15% or more of the outstanding common stock, upon a tender offer that would result in a person or group acquiring 15% or more of the outstanding common stock, or upon the declaration by the Board of Directors that any person holding 10% or more of the outstanding shares of common stock is an "adverse person".
In the event a person or group acquires 15% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person", each Right would entitle its holder (except if the holder is a person or group described above) to receive upon exercise sufficient units of preferred stock to equal a value of two times the exercise price of the Right. In the event the Company is acquired in a merger or other business combination transaction or if 50% or more of the Company's assets or earning power is sold, each holder may receive upon exercise common stock of the acquiring company having a market value equal to two times the exercise price of the Right.
The Rights are redeemable in whole, but not in part, by the Board of Directors at a price of $.01 per Right any time before a person or group acquires 15% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person".
Business of MASSBANK
General MASSBANK is a Massachusetts-chartered savings bank founded in 1872 as the Melrose Savings Bank. In 1983, the Reading Savings Bank was merged into the Melrose Savings Bank and the name of the resulting institution was changed to MASSBANK for Savings. In 1986, the Bank converted from mutual to stock form of ownership. In 1996, the name of the bank was changed from "MASSBANK for Savings" to "MASSBANK".
The Bank is primarily engaged in the business of attracting deposits from the general public through its fifteen full service banking offices in Reading, Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Stoneham, Tewksbury, Westford and Wilmington, and originating residential and commercial real estate mortgages, construction, and a variety of consumer loans. The Bank also invests a significant portion of its funds in U.S. Treasury and Government agency securities, mortgage-backed securities, federal funds sold, and other authorized investments. The Bank's earnings depend largely upon net interest income, which is the difference between the interest and dividend income derived by the Bank from its loans and investments and the interest paid by the Bank on its deposits and borrowed funds.
The Bank's deposits are insured to applicable limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC") and excess deposit accounts are insured by the Depositors Insurance Fund ("DIF"), a private industry-sponsored deposit insurer.
The Bank recognizes that loan and investment opportunities change over time and that yields derived from such opportunities can vary significantly even when the risks associated with those opportunities are comparable. By developing a relatively liquid loan and investment portfolio, the Bank has attempted to position itself so as to be able to take advantage of these changing opportunities. Consequently, the Bank expects that the relative mix of its loan and investment portfolios will change over time in response to changing market conditions.
Acquisition On February 26, 1997, MASSBANK signed a definitive merger agreement to purchase the Glendale Co-operative Bank ("Glendale") of Everett, Massachusetts. Under the agreement, MASSBANK acquired all of the outstanding shares of Glendale at a price of $28.00 per share, for an aggregate purchase price of $7.38 million.
Glendale Co-operative Bank was a Massachusetts chartered co-operative bank founded in 1928. Glendale operated a single banking office in the city of Everett with total assets of $35.6 million. On July 21, 1997 MASSBANK completed the acquisition. The transaction was accounted for as a purchase.
Market Area The Bank is headquartered in Reading, Massachusetts, which is located approximately 15 miles north of Boston. The Bank's market area includes a significant portion of eastern Massachusetts and is served by a network of 15 branch offices located on a broad arc stretching from Melrose and Everett in the south, Dracut in the north, and Westford in the west.
The Bank's general market area consists of the municipalities in which it operates banking offices and all of the contiguous cities and towns.
The Bank currently operates banking offices in the municipalities of Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Reading, Stoneham, Tewksbury, Westford and Wilmington.
Lending Activities The Bank's net loan portfolio totaled $270.0 million at December 31, 1997.
The following table sets forth information concerning the Bank's loan portfolio by type of loan at the dates shown:
The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 1997:
Maturity/Scheduled Payments (1)
(1) Loan amounts are accumulated as if the entire balance came due on the last contractual payment date. Accordingly, the amounts do not reflect proceeds from contractual loan amortization or anticipated prepayments.
The following table shows the amounts, included in the table above, which are due after one year and which have fixed or adjustable interest rates:
Mortgage Lending. The Bank believes that the repayment periods of long-term first mortgage loans, the general resistance of the public to variable rate mortgage instruments and the highly competitive nature of the mortgage industry require a prudent approach to mortgage lending. Consequently, as part of its policy of generally attempting to match the maturities of its assets and its liabilities, the Bank, over several years, has kept its mortgage loan portfolio to a level at which the Bank believed there was an acceptable risk-to-reward ratio in light of opportunities in the marketplace and the Bank's long-term objectives. The Bank's net loan portfolio represented approximately 29.2% and 27.9% of the Company's total assets at December 31, 1997, and 1996, respectively. The Bank realizes that this low level of loans with respect to assets in relation to the securities portfolio results in a reduction in yield; however, the Bank believes that this reduction would be more than offset in risk and loss associated with lending during periods of economic decline. In today's economic climate, the Bank would prefer a more even mix of loans and securities. However, there remains a tremendous amount of competition for mortgages in the Bank's area, and developing a quality loan portfolio takes time. The Bank anticipates that its loan portfolio will grow slowly over the next few years.
Mortgage Lending (continued)
Loan originations come from a number of sources, including referrals from real estate brokers, walk-in customers, purchasers of property owned by existing customers and refinancing for existing customers. In addition to actively soliciting loan referrals, the Bank conducts an advertising and promotion program, directed both toward the general public and real estate professionals who might refer potential borrowers.
Substantially all of the real estate loans originated by the Bank during 1997 were secured by real estate located in the Bank's primary lending area, reflecting the Bank's commitment to serve the credit needs of the local communities in which it operates banking offices.
The Bank makes both conventional fixed and adjustable-rate loans on one-to-four family residential properties for a term of ten to thirty years. The Bank retains the 10, 12, 15 or 20 year fixed rate mortgages and adjustable rate mortgages it originates for its own portfolio. Long-term (25 or 30 year) fixed rate residential mortgages are generally sold in the secondary market. Adjustable-rate mortgage loans ("ARMs") have rates that are re-set at either 1, 3, 5 or 10 year intervals and provide a margin over various mortgage indices.
During the latter part of 1997, the Bank introduced a new Home Equity Line of Credit product which it hopes will be well received by customers in the months ahead. This new product offers customers a special introductory interest rate of 7.25% which is fixed until the year 2000. Thereafter, the interest rate will be variable and will be indexed to the 13 week (91 day) Treasury Bill auction rate plus a margin of 3.25%. This indexed variable rate has historically responded more favorably to movements in market interest rates than the PRIME RATE used by many financial institutions and should, therefore, be more attractive to bank customers.
In the last few years, the Bank has instituted several other new loan programs which have been well received by customers. It instituted a program featuring a 5/1 and 7/1 year ARM product with an initial fixed rate for 5 or 7 years and a 1 year adjustable rate thereafter. A special First Time Home Buyers Program has also been instituted featuring a discounted 7/1 ARM. This program is designed for first-time home buyers meeting certain income and property location restrictions. In 1996, the Bank introduced the "Home Town Advantage" mortgage program which has produced some good results. This new program offers homebuyers a (0.125) percent discount on their mortgage rate if they purchase residential property located in one of the communities where the bank operates a banking office.
At December 31, 1997, 1-4 family residential mortgage loans totaled $244.5 million, or 89.8% of the total loan portfolio, compared to $218.6 million, or 87.6% of the total loan portfolio, at December 31, 1996. Residential mortgage loan originations amounted to $50.0 million during 1997, an increase of 19.3% from $41.9 million in 1996. Origination volumes are sensitive to interest rates and are affected by the interest rate environment. The prevailing low interest rates in 1997 encouraged many borrowers to refinance. This resulted in higher mortgage loan originations for the Bank.
The Bank also originates mortgage loans secured by commercial or investment property such as multifamily housing, strip shopping centers, office buildings and retail buildings. At December 31, 1997, commercial and multifamily real estate mortgages and construction loans totaled approximately $4.3 million, or 1.6% of the total loan portfolio, compared to $5.5 million, or 2.2% of the total loan portfolio, at December 31, 1996. In 1997, commercial and multifamily real estate mortgage loan originations amounted to $0.3 million.
Mortgage Lending (continued)
The total amount of first mortgage loans held by the Bank at December 31, 1997 was $248.8 million as indicated in the maturity distribution table appearing on the previous page. Of this amount, $53.9 million was subject to interest rate adjustments. The remaining $194.9 million in fixed rate mortgage loans represents 21.1% of the Company's total assets.
Fees received for originating loans and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method.
The Bank also receives fees and charges relating to existing loans, primarily late charges and prepayment penalties.
Other Loans. The Bank makes a variety of consumer loans and had a consumer loan portfolio of approximately $23.5 million at December 31, 1997 representing 8.6% of the Bank's total loan portfolio. Of this amount $8.9 million or 3.3% of the total loan portfolio are education loans made under the Massachusetts Higher Education Assistance Corporation. The Bank may sell education loans in the future.
The balance of the Bank's consumer loan portfolio consists of home equity lines of credit and installment consumer credit contracts such as automobile loans, home improvement loans and other secured and unsecured financings. These loans totaled $14.5 million at December 31, 1997, representing 5.3% of the Bank's total loan portfolio.
At December 31, 1997, the Bank had only $36 thousand in outstanding loans to commercial enterprises not secured by real estate.
Loan Approval. The Bank's loan approval process for all loans generally includes a review of an applicant's financial statements, credit history, banking history and verification of employment. For mortgage loans, the Bank generally obtains an independent appraisal of the subject property. The Bank has a formal lending policy approved by the Board of Directors of the Bank which delegates levels of loan approval authority to Bank personnel. All loans in excess of established limits require approval of the Bank's Board of Directors.
The Bank issues commitments to prospective borrowers to make loans subject to certain conditions for generally up to 60 days. The interest rate applicable to the committed loans is usually the rate in effect at the time the application fee is paid. At December 31, 1997, the Bank had issued commitments on residential first mortgage loans totaling $4,090,000, and had commitments to advance funds on construction loans and unused credit lines, including unused portions of home equity lines of credit, of $496,000 and $19,445,000, respectively.
Loan Delinquencies. It is the Bank's policy to manage its loan portfolio so as to recognize problem loans at an early stage and thereby minimize loan losses. Loans are considered delinquent when any payment of principal or interest is 30 days or more past due. The Bank generally commences collection procedures, however, when accounts are 15 days past due. It is the Bank's practice to generally discontinue accrual of interest on all loans for which payments are more than 90 days past due. Loans delinquent for 90 or more days, as shown in the table on the following page, totaled $1,771,000 at December 31, 1997.
Real Estate Acquired through Foreclosure. Real estate acquired through foreclosure is comprised of foreclosed properties where the Bank has actually received title and loans determined to be substantially repossessed. Real estate loans that are substantially repossessed include only those loans for which the Bank has taken possession of the collateral but has not completed legal foreclosure proceedings. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Real estate acquired through foreclosure is recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received, less estimated costs to sell the property following foreclosure. Operating expenses and any subsequent provisions to reduce the carrying value to fair value are charged to current period earnings. Gains and losses upon disposition are reflected in earnings as realized. As of year-end 1997, MASSBANK had zero real estate acquired through foreclosure on its balance sheet.
Non-Performing Assets
The following table shows the composition of non-performing assets at the dates shown:
The reduction in interest income associated with nonaccrual loans is as follows:
Allowance for Loan Losses. The allowance for loan losses is increased by provisions charged to operations based on management's assessment of many factors including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may affect the borrower's ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the information available in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management.
The following table sets forth the activity in the allowance for loan losses during the years indicated:
Investment Activities
The Bank believes that investment opportunities in United States Government, corporate and other securities are at times more attractive than the opportunities present in the loan market. As compared to loans, these investments of the Bank are generally shorter-term and hence more liquid, are subject to lower risk of loss, and present an opportunity for appreciation. In addition, these investments often permit the Bank to better match the maturities of its assets and its liabilities.
The Bank's investment portfolio is managed by its officers in accordance with an investment policy approved by the Bank's Board of Directors. The objectives of that policy are to provide a level of liquidity, earnings and diversification consistent with the exercise of prudent investment judgment. The policy authorizes the senior management of the Bank to make and execute investment decisions and requires that those persons report all investment transactions to the Bank's Board of Directors at each of its regular meetings. In addition, management is required to report all gains or losses on all securities transactions at each meeting of the Bank's Board of Directors. Purchases and sales of securities by the Bank are generally required to be made on a competitive basis and all investments must be permitted by applicable law.
The Bank invests in a wide variety of securities and obligations, including: Federal funds sold (which are sold only to institutions included on the Bank's internally-prepared approved list of adequately capitalized institutions); commercial paper and bankers' acceptances; United States Treasury and Government agency obligations; United States agency guaranteed and other mortgage-backed securities; investment grade corporate debt securities (generally limited to those rated A or better by Standard & Poor's); mutual funds; and equity securities traded on a national securities exchange or quoted on the NASDAQ System.
Under the investment policy management determines the appropriate classification of securities at the time of purchase. Those securities that the Company has the intent and the ability to hold to maturity are classified as securities held to maturity and are carried at amortized historical cost.
Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital and other similar factors. Income on debt securities available for sale is accrued and included in interest and dividend income. The specific identification method is used to determine realized gains and losses on sales of securities available for sale which are also reported in non-interest income under the caption "gains (losses) on securities." When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings.
Investment Activities (continued)
Investments classified as trading securities are stated at market with unrealized gains or losses included in earnings. Income on debt trading securities is accrued and included in interest and dividend income. All of the Company's mortgage-backed securities are currently classified as available for sale. At times of low loan demand, short-term mortgage-backed securities may be used as substitutes for loans as certain of their financial characteristics are very similar to short-term mortgage loans.
At December 31, 1997, the Company's investments, which consists of securities held to maturity, securities available for sale (including mortgage-backed securities), trading securities, short-term investments, term federal funds sold and interest-bearing deposits in banks totaled $635.7 million, representing 68.7% of the Company's total assets.
The following table sets forth the composition of the Company's investment portfolio as of the dates indicated:
Investment Portfolio
(a) At amortized cost. (b) At market value.
The following tables present the carrying value of debt securities held to maturity and available for sale at December 31, 1997 maturing within stated periods with the weighted average interest yield from securities falling within the range of maturities:
Debt Securities Held to Maturity
Debt Securities Available for Sale
(1) Yields on tax exempt obligations have been computed on a tax equivalent basis.
(2) Mortgage-backed securities are shown at their contractual maturity, but are expected to have shorter lives due to scheduled payments and prepayments.
At December 31, 1997, the Company did not have an investment in any issuer (other than securities of the U.S. government) in excess of 10% of stockholders equity.
Deposits and Other Sources of Funds
General. Deposits have been the primary source of funds of the Bank for making investments and loans. In addition to deposits, the Bank's other major sources of funds are derived from amortization and prepayment of loans and mortgage-backed securities, from sales or maturities of securities, and from operations. Deposit flows can vary significantly and are influenced by prevailing interest rates, money market conditions, economic conditions and competition. The Bank can respond to changing market conditions and competition through the pricing of its deposit accounts. Management can control the level of its deposits to a significant degree through its pricing policies. Another important factor in attracting deposits is convenience. In addition to the Bank's fifteen conveniently located banking offices, customers can access accounts through the Bank's ATM network. The Bank is a member of the Transaxion ("TX"), New York Cash Exchange ("NYCE") and CIRRUS System, Inc. ("CIRRUS") networks which allow access to ATMs in over 100,000 locations worldwide.
Deposits. A substantial amount of the Bank's deposits are derived from customers who live or work within the Bank's market area. The Bank does not solicit deposits through any outside agents. The Bank's deposits consist of regular, silver and smart savings accounts, special notice accounts, NOW and Super NOW accounts, business checking accounts, money market deposit accounts, IRA and Keogh accounts, and term deposit accounts.
The Bank's deposits increased by $21.5 million or 2.7% during the twelve months ended December 31, 1997, from $788.4 million at year end 1996 to $809.9 million at the end of 1997. The increase is attributable to the $29.8 million in deposits acquired in connection with the Glendale purchase. Also, in 1997, the Bank experienced some modest deposit outflow due to the strong performance of the stock market and mutual funds which were both fierce competitors for the savers' dollars.
Borrowed Funds. From time to time the Bank has obtained funds through repurchase agreements with its customers and federal funds purchased. The Bank also has the ability, although it has never exercised it, to borrow from the Federal Reserve Bank and The Depositors Insurance Fund, Inc. The Company did not have any borrowed funds in 1997 or 1996.
DEPOSITS
The following table shows the composition of the deposits as of the dates indicated:
In the following table the average amount of deposits and average rate is shown for each of the years as indicated.
Investment Management and Trust Services
The Bank's Trust and Investment Services Division offers a variety of investment, trust and estate planning services and also serves as Trustee, Executor, and Executor's Agent for bank customers.
As of December 31, 1997 the Trust Division had approximately $30.2 million (market value) of assets in custody and under management.
Competition
The Bank faces substantial competition both in originating loans and in attracting deposits. Competition in originating loans comes primarily from other thrift institutions, commercial banks, credit unions and mortgage banking companies. The Bank competes for loans principally on the basis of interest rates and loan fees, the types of loans originated and the quality of services provided to borrowers.
In attracting deposits, the Bank's primary competitors are other thrift institutions, commercial banks, mutual funds and credit unions located in its market area. The Bank's attraction and retention of deposits depend on its ability to provide investment opportunities that satisfy the requirements of customers with respect to rate of return, liquidity, risk and other factors. The Bank attracts a significant amount of deposits through its branch offices primarily from the communities in which those branch offices are located. The Bank competes for these deposits by offering competitive rates, convenient branches and ATM locations and convenient business hours.
Supervision and Regulation of the Company and its Subsidiaries
The Bank is in a heavily regulated industry. As a Massachusetts-chartered savings bank whose deposits are insured by the FDIC and The Depositors Insurance Fund, the Bank is subject to regulation, supervision and examination by federal and state regulatory authorities, including, but not limited to the FDIC, the Massachusetts Commissioner of Banks and The Depositors Insurance Fund. This Federal and State regulation is for the benefit of borrowers, depositors and the respective deposit insurance funds and is not for the benefit of the Bank, the Company or its stockholders.
The Bank is subject to extensive federal and state statutes, regulations, policies and standards regarding virtually all aspects of its operations, including capital adequacy, reserves, liquidity, payment of dividends, transactions with affiliates, loans to officers, directors, principal shareholders and their related interests, mergers, acquisitions and changes in controlling ownership, establishment, relocation and closure of branch banking offices, community reinvestment, fair lending, fair credit reporting, real estate settlement procedures, funds availability, disclosure to consumers and financial accounting, reporting and recordkeeping. In the event the Bank did not operate in accordance with FDIC statutes, regulations or policies, the FDIC has authority to terminate insurance of the Bank's deposit accounts and the FDIC and the Commissioner of Banks have authority to impose other sanctions for such non-compliance. For a discussion of the Bank's capital adequacy, see Note 15 of Notes to Consolidated Financial Statements appearing in the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference.
In addition, as a bank holding company, the Company is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System and is subject to statutes, regulations and policies relating to, among other things, mergers, acquisitions and changes in controlling ownerships, non-bank activities and subsidiaries, capital adequacy, the payment of dividends, the tying of the sale or pricing of products or services of bank and nonbank subsidiaries, and the provision of financial and managerial support of its subsidiary bank.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") made significant changes in federal laws governing depository institutions and the FDIC. Among other changes, FDICIA requires federal bank regulatory agencies to take "prompt corrective action" with respect to banks that do not meet applicable regulatory capital requirements. In addition, FDICIA prohibits state chartered banks from engaging, as principals, in activities such as equity investments and insurance underwriting, which are not permissible for national banks, unless the FDIC has determined that the activity would pose no significant risk to the Bank Insurance Fund and the state bank is in compliance with applicable capital standards. An insured state bank, such as MASSBANK, may to the extent permitted by the FDIC, acquire and retain ownership of common or preferred stock listed on a national securities exchange, provided that the insured state bank made or maintained an investment in such securities during the period beginning on September 30, 1990 and ending on November 26, 1991, which MASSBANK did, and provided further that the aggregate amount of the investment does not exceed 100 percent of the Bank's capital. At December 31, 1997, the Bank had marketable equity securities and investment in mutual funds with a market value of approximately $21.4 million, representing 21.3% of the Bank's equity capital. In addition, FDICIA limits the aggregate amount a bank may lend to its directors, executive officers and principal shareholders and their related interests, prohibits depository institutions that are not well capitalized from accepting brokered deposits without an express waiver from the FDIC, requires uniform disclosures to consumers of the terms of bank deposit accounts, and requires banks to give regulators and bank customers advance notice of branch closings. FDICIA also establishes a system of risk-based deposit insurance assessments that takes a bank's capital level and supervisory risk characteristics into account in calculating the amount of its federal deposit insurance assessment.
FDICIA imposes annual audit and reporting requirements on banking organizations with more than $500 million in total assets. Finally, the FDICIA requires the FDIC and the other Federal bank regulatory agencies to issue regulatory standards to govern various aspects of bank operations including real estate lending, executive compensation, loan documentation, credit underwriting, interest rate risk exposure, and asset growth.
In 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate Banking Act") was enacted. The Interstate Banking Act's provisions, among other things: (i) permit bank holding companies, under certain circumstances, to acquire control of banks in any state, subject to (a) specified maximum national and state deposit concentration limits; (b) any applicable state law provisions requiring that the acquired bank has to have been in existence for a specified period of up to 5 years; (c) any applicable nondiscriminatory state provisions that make an acquisition of a bank contingent upon a requirement to hold a portion of such bank's assets available for call by a state-sponsored housing entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by banks in different states, including branching through bank mergers, beginning June 1, 1997, subject to the provisions noted in (i) and to any state laws that "opt-in" as of an earlier date or "opt-out" of the provisions entirely; (iii) authorize states to enact legislation permitting interstate de novo branching; and (iv) provide for parity of treatment for foreign bank branch activities.
In 1996, Massachusetts enacted legislation implementing the provisions of the Interstate Banking Act. In the new legislation, Massachusetts authorized immediate "opt-in" to interstate banking. Thus, the 1996 legislation substantially facilitates the geographic expansion of banking by Massachusetts and out-of-state banks.
The 1996 legislation also allows out-of-state banks to establish and maintain branches through a merger or consolidation with or the purchase of assets or stock of any Massachusetts bank or through de novo branch establishment or purchase of a branch without purchase of the bank which owns the branch, in Massachusetts, provided that such out-of-state bank is expressly authorized to do so by the laws of the state under which it is organized. The 1996 legislation also allows Massachusetts banks to establish and maintain branches through a merger or consolidation with or by the purchase of the whole or any part of the assets or stock of any out-of-state bank or through de novo branch establishment in any other state other than Massachusetts. Finally, the 1996 legislation prohibits the establishment of bank holding companies and acquisition of banks and bank holding companies by Massachusetts and out-of-state bank holding companies if the Massachusetts bank to be acquired has been in existence less than 3 years or if, after such acquisition, the bank holding company would control 28% of the deposits in Massachusetts (until 1998, when the deposit limitation is increased to 30%).
From time to time the U.S. Congress and the Massachusetts Legislature adopt legislation and the Federal and State bank regulatory agencies issue regulations and policies that may significantly affect the operations of the Bank and the Company. No assurance can be given as to whether additional legislation will be enacted or whether additional regulations or policies will be issued or as to the effect any such legislation, regulations or policies may have on the Bank or the Company.
Employees
MASSBANK Corp. utilizes the support staff of the Bank from time to time without the payment of any fees. No separate compensation is being paid to the executive officers of MASSBANK Corp., all of whom are executive officers of the Bank and receive compensation as such. As of December 31, 1997, the Bank had 150 full-time employees, including 30 officers, and 62 part-time employees. None of the Bank's employees is represented by a collective bargaining group, and management believes that its employee relations are good. The Bank provides its employees with formal training in product knowledge, sales techniques, fair lending, and motivation. In addition, each supervisor at the Bank receives management training before assuming his or her supervisory duties and periodically thereafter. The Bank maintains a comprehensive employee benefit program for qualified employees that includes a qualified pension plan, an Employee Stock Ownership Plan (ESOP), health and dental insurance, life and long-term disability insurance and tuition assistance.
Subsidiaries
The Bank has three wholly-owned subsidiaries: Readibank Investment Corporation, Melbank Investment Corporation, and Readibank Properties, Inc.
Readibank Investment Corporation and Melbank Investment Corporation were established for the purpose of managing portions of the Bank's investment portfolio. Assets of Readibank Investment Corporation and Melbank Investment Corporation totaled $66.8 million and $63.7 million, at December 31, 1997, respectively.
Readibank Properties, Inc. incorporated primarily for the purpose of real estate development, had total assets of $631 thousand at December 31, 1997.
Executive Officers of the Registrant
The executive officers of the Company and the Bank and the age of each officer as of March 13, 1998 are as follows:
Name Age Office - ---- --- ------
Gerard H. Brandi 49 Chairman of the Board of Directors, President and Chief Executive Officer of the Company and the Bank
Raymond A. Brearey 62 Vice President and Senior Trust Officer of the Bank
David F. Carroll 50 Vice President of the Bank
Reginald E. Cormier 50 Vice President, Treasurer and Chief Financial Officer of the Company and the Bank
Donald R. Washburn 54 Senior Vice President of the Bank
Donna H. West 52 Senior Vice President of the Bank and Assistant Secretary of the Company
Gerard H. Brandi. Mr. Brandi has served in various capacities with MASSBANK since he joined the Bank in 1975 as Vice President of the Lending Division. He served as Senior Vice President from 1978 to 1981, Executive Vice President and Senior Lending Officer from 1981 to 1983, and Executive Vice President and Treasurer from 1983 to 1986. Mr. Brandi was named President of the Company and the Bank in 1986, Chief Executive Officer in 1992 and Chairman in 1993.
Raymond A. Brearey. Mr. Brearey is Vice President and Senior Trust Officer of the Bank. Prior to joining the Bank in 1992, Mr. Brearey was a Senior Trust Officer of the Malden Trust Company in Malden, Massachusetts.
David F. Carroll. Mr. Carroll has been employed by the Bank since 1983 and has been Vice President of Operations since 1984. He served as Vice President of the Lending Division for a year before becoming Vice President of Operations.
Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in September, 1987 and has served in this capacity until his promotion to Vice President, Treasurer and Chief Financial Officer in January, 1995.
Donald R. Washburn. Mr. Washburn joined the Bank in 1973 as a Loan Officer. He became an Assistant Vice President in January, 1977 and a Vice President in the Lending Division in June, 1980. Mr. Washburn served as Vice President of the Operations Division from February, 1983 to January, 1984, as Vice President of the Community Banking Division from January, 1984 to January, 1986 and as Vice President of the Lending Division from January, 1986 until his promotion to Senior Vice President of the Lending Division in June, 1994.
Donna H. West. Mrs. West has been employed by the Bank since 1979 and has served as Vice President of the Community Banking Division since October, 1987. Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West became a Branch Manager in 1981, an Assistant Treasurer and Branch Manager in 1982, an Assistant Treasurer and Regional Branch Administrator in 1984 and an Assistant Vice President and Regional Branch Administrator in 1986. She served in this capacity until her October, 1987 promotion to Vice President of the Community Banking Division. In June, 1994, Mrs. West was promoted to Senior Vice President of the Community Banking Division.
Item 2.
Item 2. Properties
The main office of MASSBANK Corp. and MASSBANK is located at 123 Haven Street, Reading, Massachusetts. Additionally, the Bank has fourteen branches and three operations facilities. The Bank owns its main office, two operations facilities and seven of its branches. All of the remaining branches and other facilities are leased under various leases. At December 31, 1997, management believes that the Bank's existing facilities are adequate for the conduct of its business.
The following table sets forth certain information relating to the Bank's existing facilities.
(1) Bank has option to purchase in year 2000.
Item 3.
Item 3. Legal Proceedings
From time to time, MASSBANK Corp. and/or the Bank are involved as a plaintiff or defendant in various legal actions incident to their business. As of December 31, 1997, none of these actions individually or in the aggregate is believed by management to be material to the financial condition of MASSBANK Corp. or the Bank.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information contained under the caption "MASSBANK Corp. and Subsidiaries Stockholder Data" in the Registrant's 1997 Annual Report to Stockholders is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data
The information contained under the caption "MASSBANK Corp. and Subsidiaries - Selected Consolidated Financial Data" in the Registrant's 1997 Annual Report to Stockholders is incorporated herein by reference.
This selected consolidated financial data should be read in conjunction with the consolidated statements and related notes thereto appearing in the Registrant's 1997 Annual Report to Stockholders which are incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1997 Annual Report to Stockholders is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Registrant's consolidated financial statements and notes thereto, together with the report of KPMG Peat Marwick LLP, contained in the Registrant's 1997 Annual Report to Stockholders are incorporated herein by reference. The unaudited quarterly financial data set forth on page 65 of such Annual Report is incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information appearing under the caption "Election of Directors" and "Compliance with Section 16(A) of the Exchange Act" in the Registrant's definitive proxy statement relating to its 1998 Annual Meeting of Stockholders is incorporated herein by reference. Information required by this item concerning the Executive Officers of the Registrant is contained in Part I of this Form 10-K.
Item 11.
Item 11. Executive Compensation
The information appearing under the caption "Executive Compensation" in the Registrant's definitive proxy statement relating to its 1998 Annual Meeting of Stockholders is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing under the captions "Election of Directors" and "Principal Stockholders" in the Registrant's definitive proxy statement relating to its 1998 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information contained in Note 5 of the Consolidated Financial Statements under the caption "Loans" in the Registrant's 1997 Annual Report to Stockholders is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following financial statements and financial statement schedules are contained herein or are incorporated herein by reference:
(a)1. Financial Statements Reference to 1997 Annual Report to Stockholders (Pages)
Independent Auditors' Report 37 Consolidated balance sheets at December 31, 1997 and 1996 38 Consolidated statements of income for the three years ended December 31, 1997 39 Consolidated statements of cash flows for the three years ended December 31, 1997 40-41 Consolidated statements of changes in stockholders' equity for the three years ended December 31, 1997 42 Notes to consolidated financial statements 43-65
2. Financial Statement Schedules
All schedules are omitted as the required information is either not applicable or is included in the consolidated financial statements or related notes.
3. Exhibits
Exhibit No. Description of Exhibit
3.1 Restated Certificate of Incorporation of the Registrant - incorporated by reference to Exhibit 3.1 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916).
3.2 By-Laws of the Registrant - incorporated by reference to Exhibit 3 of the Registrant's Form 10-Q for the quarter ended September 30, 1991.
4.1 Shareholder Rights Agreement dated as of January 16, 1990, between the Company and The First National Bank of Boston, as Rights Agent - incorporated herein by reference to the Exhibit to the Company's Current Report on Form 8-K dated as of January 16, 1990.
10.1 MASSBANK Corp. 1986 Stock Option Plan, as amended - incorporated by reference to Exhibit 28.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-11949).
10.1.2 Amendment to MASSBANK Corp. 1986 Stock Option Plan dated April 19, 1991 - incorporated by reference to Exhibit 10.1.2 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992.
10.1.3 MASSBANK Corp. 1994 Stock Incentive Plan - incorporated by reference to Exhibit 10.1 to the Registrant's Form S-8 Registration Statement (Reg. No. 33-82110).
10.1.4 Amendment to MASSBANK Corp. 1994 Stock Incentive Plan is attached hereto as Exhibit 10.1.4 to this Annual Report.
10.2 MASSBANK for Savings Employees' Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2 of the Registrant's Form S-4 Registration Statement (Reg. No. 33-7916).
10.2.1 Amendments to the MASSBANK for Savings Employee's Stock Ownership Plan and Trust Agreement - incorporated by reference to Exhibit 10.2.1 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993.
10.2.2 Amendments to the MASSBANK for Savings Employee's Stock Ownership Plan and Trust Agreement are attached hereto as Exhibit 10.2.2 to this Annual Report.
10.3 Form of Employment Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.3 of the Registrant's annual report on Form 10-K for the year ended December 31, 1986 and Exhibit 10.3.1 of the Registrant's annual report on Form 10-K for the year ended December 31, 1989.
10.3.2 Amendment to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.2 of the Registrant's annual report on Form 10-K for the year ended December 31, 1990.
Exhibit No. Description of Exhibit
10.3.3 Second amendment dated as of February 1, 1993 to the Employment Agreement with Gerard H. Brandi - incorporated by reference to Exhibit 10.3.3. to the Registrant's annual report on Form 10-K for the year ended December 31, 1992.
10.3.4 Form of Employment Agreement with Raymond A. Brearey dated June 22, 1992 - incorporated by reference to Exhibit 10.3.4 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992.
10.3.5 First amendment dated as of February 1, 1993 to the Employment Agreement with Raymond A. Brearey incorporated by reference to Exhibit 10.3.5 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992.
10.3.6 Second amendment dated as of February 1, 1993 to the Employment Agreement with Raymond A. Brearey incorporated by reference to Exhibit 10.3.6 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992.
10.3.7 Form of Employment Agreement with David F. Carroll dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.7 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992.
10.3.8 Form of Employment Agreement with Reginald E. Cormier dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.8 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992.
10.3.9 Form of Employment Agreement with Donald R. Washburn dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.9 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992.
10.3.10 Form of Employment Agreement with Donna H. West dated as of February 1, 1993 - incorporated by reference to Exhibit 10.3.10 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992.
10.3.11 Executive Severance Agreement with Gerard H. Brandi dated as of January 18, 1994 - incorporated by reference to exhibit 10.3.11 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993.
10.3.12 Executive Severance Agreement with David F. Carroll dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.12 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993.
10.3.13 Executive Severance Agreement with Reginald E. Cormier dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.13 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993.
Exhibit No. Description of Exhibit
10.3.14 Executive Severance Agreement with Donald R. Washburn dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.14 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993.
10.3.15 Executive Severance Agreement with Donna H. West dated as of December 23, 1993 - incorporated by reference to exhibit 10.3.15 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993.
10.4 Form of Executive Supplemental Retirement Agreement, as amended, with Gerard H. Brandi - incorporated by reference to Exhibit 10.4 of Registrant's annual report on Form 10-K for the year ended December 31, 1986.
10.4.1 Amendments to the Executive Supplemental Retirement Agreement with Gerard H. Brandi are incorporated by reference to Exhibit 10.4.1 of the Registrant's annual report on Form 10-K for the year ended December 31, 1996.
12 Statement re: Computation of Ratios - Not applicable as MASSBANK Corp. does not have any debt securities registered under Section 12 of the Securities Exchange Act of 1934.
13 1997 Annual Report to Stockholders - except for those portions of the 1997 Annual Report to Stockholders which are expressly incorporated by reference in this report, such 1997 Annual Report to Stockholders is furnished for the information of the SEC and is not to be deemed "filed" with the SEC.
22 Subsidiaries of the Registrant - A list of subsidiaries of the Registrant is attached hereto as Exhibit 22 to this Annual Report.
23 Consent of Independent Auditors.
(b) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this Form 10-K.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as stated in the Index to Exhibits.
(d) Not applicable.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MASSBANK CORP.
/s/Gerard H. Brandi ------------------- Gerard H. Brandi Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Gerard H. Brandi Chairman, President, - ------------------------- Chief Executive Officer and Gerard H. Brandi Director March 11, 1998
/s/ Reginald E. Cormier Vice President, Treasurer - ------------------------- and Chief Financial Officer Reginald E. Cormier (Principal Financial and Accounting Officer) March 11, 1998
/s/ Samuel Altschuler Director March 18, 1998 - ------------------------- Samuel Altschuler
/s/ Mathias B. Bedell Director March 11, 1998 - ------------------------- Mathias B. Bedell
Director - ------------------------- Allan S. Bufferd
Director - ------------------------- Peter W. Carr
/s/ Alexander S. Costello Director March 19, 1998 - ------------------------- Alexander S. Costello
/s/ Robert S. Cummings Director March 11, 1998 - ------------------------- Robert S. Cummings
/s/ Louise A. Hickey Director March 18, 1998 - ------------------------- Louise A. Hickey
Director - ------------------------- Leonard Lapidus
/s/ Stephen E. Marshall Director March 11, 1998 - ------------------------- Stephen E. Marshall
/s/ Arthur W. McPherson Director March 18, 1998 - ------------------------- Arthur W. McPherson
/s/ Herbert G. Schurian Director March 11, 1998 - ------------------------- Herbert G. Schurian
/s/ Donald B. Stackhouse Director March 11, 1998 - ------------------------- Donald B. Stackhouse