MASSBANK Corp. Reports Third Quarter 2006 Earnings of $1.73 Million or $0.40 Per Share

Business Wire, Oct 20, 2006

READING, Mass. -- MASSBANK Corp. (NASDAQ - MASB), the Holding Company for MASSBANK, today reported net income of $1,731,000 or $0.40 in basic and diluted earnings per share for the third quarter 2006, compared with net income of $1,884,000 or $0.43 in basic and diluted earnings per share in the same quarter of 2005. For the nine months ended September 30, 2006 the Company reported net income of $5,296,000 or $1.21 in diluted earnings per share ($1.22 in basic earnings per share). This compares to $5,435,000 or $1.22 in diluted earnings per share ($1.24 in basic earnings per share) for the nine months ended September 30, 2005.

Income Statement

The Company's net income in the third quarter of 2006, compared to the same quarter of 2005, was negatively impacted by a decrease in net interest income. This resulted from a decrease in average earning assets due to a lower deposit base, partially offset by an improvement in net interest margin.

Net interest income for the recent quarter decreased by $288,000 or 5.3% as the bank continued to be challenged by the current inverted yield curve environment (an environment where short-term rates actually exceed long-term rates). The market for deposits has become more competitive as financial institutions have been aggressive in pricing their deposit products to retain deposits. MASSBANK has chosen not to match these competitors' rates in order to protect its net interest margin. The Company's net interest margin in the recent quarter improved 9 basis points to 2.53% from 2.44% in the third quarter of 2005. This is the eighth consecutive quarter that the Company has reported a year-over-year improvement in net interest margin. Average earning assets for the recent quarter declined $75.4 million to $822.2 million, from $897.6 million in the third quarter of last year. Average total deposits were $741.0 million for the third quarter 2006 compared to $809.6 million for the same quarter of 2005.

The provision for loan losses was $82,000 for the recent quarter compared to no provision in the same quarter last year. This, however, is offset by a credit of $107,000 to the bank's provision for off-balance sheet credit exposures, which is included in non-interest expense. As loan commitments made to customers are drawn down, loss reserves against such commitments are reduced and loss reserves against outstanding loans are generally increased.

The Company's earnings in the third quarter 2006 also reflect a decrease in non-interest income of $107,000 due primarily to lower securities gains compared to the same quarter last year.

Non-interest expenses in the recent quarter decreased $247,000 or 7.8% to $2,929,000 from $3,176,000 in the same quarter last year. This is due to the credit provision for off-balance sheet credit exposures recorded in the recent quarter (reducing loan loss reserves against outstanding loan commitments) and cost containment measures implemented by the bank's management.

Return on average assets and return on average equity for the third quarter 2006 were 0.82% and 6.72%, respectively, compared to 0.82% and 7.06%, respectively, for the third quarter of 2005.

Balance Sheet

The Company's total assets decreased $74.5 million to $845.9 million at September 30, 2006 from $920.4 million at September 30, 2005. Deposits decreased $73.2 million or 9.1% year-over-year from $802.6 million at September 30, 2005 to $729.4 million at September 30, 2006. Stockholders' equity increased to $105.9 million at September 30, 2006, from $105.3 million at September 30, 2005. This represents a book value per share of $24.55 at September 30, 2006, up $0.17 from $24.38 per share at September 30, 2005.

The Company's non-accrual loans are at historical lows totaling only $5,000 at September 30, 2006 compared to $267,000 at September 30, 2005. At September 30, 2006, the Bank's allowance for loan losses totaled $1.395 million representing 0.65% of total loans compared to $1.253 million representing 0.54% of total loans at September 30, 2005. In addition, the Bank's allowance for loan losses on off-balance sheet credit exposures totaled $336,000 at September 30, 2006 compared to $588,000 a year earlier. This is intended to protect the bank against losses on loan commitments made to customers that have not yet been drawn down.

MASSBANK Corp. is the holding company for MASSBANK a Massachusetts chartered savings bank. The Bank operates fifteen banking offices in Reading, Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Stoneham, Tewksbury, Westford and Wilmington, providing a variety of deposit, lending and trust services.

ADDITIONAL INFORMATION

Dividend Declaration

The Company's Board of Directors has recently announced an increase in the Company's quarterly cash dividend to stockholders, from $0.27 to $0.28 per common share. The increase will raise the annualized dividend from $1.08 to $1.12 per share. This, the Company's eighty-first consecutive dividend, will be payable on November 16, 2006 to stockholders of record at the close of business on November 1, 2006.