-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SH4yeepCc6/rdVzby1unuDgDO8Ylj9mZMVAk36g4UI9Ns3VfZ7igRh7s5EiAnR7Y tvft9cY2kGLAFJpwDXPxAA== 0001005477-98-001532.txt : 19980514 0001005477-98-001532.hdr.sgml : 19980514 ACCESSION NUMBER: 0001005477-98-001532 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDFORD BANCORP INC CENTRAL INDEX KEY: 0001049895 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 043384928 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23435 FILM NUMBER: 98617726 BUSINESS ADDRESS: STREET 1: 29 HIGH ST CITY: MEDFORD STATE: MA ZIP: 02155 BUSINESS PHONE: 6173957700 MAIL ADDRESS: STREET 1: 29 HIGH ST CITY: MEDFORD STATE: MA ZIP: 02155 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter period ended March 31, 1998 -------------- 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 0-23435 ------- MEDFORD BANCORP, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3384928 ------------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 29 High Street Medford, Massachusetts 02155 ---------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (781) 395-7700 -------------- 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 Medford Bancorp, Inc.'s common stock, $0.50 par value per share, as of March 31, 1998 was 4,540,098. TABLE OF CONTENTS PART I FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PAGE Consolidated Balance Sheets................................. 1 Consolidated Statements of Income 2-3 Consolidated Statements of Changes in Stockholders' Equity.. 4 Consolidated Statements of Cash Flows....................... 5-6 Notes to Consolidated Financial Statements.................. 7-8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 9-23 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................................. 24 PART II OTHER INFORMATION ITEM 1 - Legal Proceedings............................................ 25 ITEM 2 - Changes in Securities and Use of Proceeds.................... 25 ITEM 3 - Defaults Upon Senior Securities.............................. 25 ITEM 4 - Submission of Matters to a Vote of Security Holders.......... 25 ITEM 5 - Other Information............................................ 25 ITEM 6 - Exhibits and Reports on Form 8-K............................. 25 SIGNATURES................................................... 26 Exhibit Index............................................... 26 PART I FINANCIAL INFORMATION ITEM 1 - Financial Statements MEDFORD BANCORP, INC. CONSOLIDATED BALANCE SHEETS March 31, December 31, 1998 1997 -------------------------- (In thousands) ASSETS Cash and due from banks $ 12,351 $ 13,376 Short-term investments 2,645 2,804 ----------- ----------- Cash and cash equivalents 14,996 16,180 ----------- ----------- Investment securities available for sale 409,149 402,723 Investment securities held to maturity 79,801 103,823 Restricted equity securities 7,936 6,872 Loans 578,461 577,577 Less allowance for loan losses (6,786) (6,733) ----------- ----------- Loans, net 571,675 570,844 ----------- ----------- Banking premises and equipment, net 11,236 10,738 Accrued interest receivable 9,793 9,472 Goodwill and deposit-based intangibles 5,464 5,748 Other assets 10,290 9,172 ----------- ----------- TOTAL ASSETS $ 1,120,340 $ 1,135,572 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 821,842 $ 821,706 Short-term borrowings 76,886 95,670 Long-term debt 111,445 110,109 Accrued taxes and expenses 4,774 3,988 Other liabilities 1,909 2,589 ----------- ----------- Total liabilities 1,016,856 1,034,062 ----------- ----------- Stockholders' equity: Serial preferred stock, $.50 par value, 5,000,000 shares authorized; none issued; -- -- Common stock, 15,000,000 shares authorized; $.50 par value, 4,550,098 and 4,541,148 shares issued, respectively 2,275 2,271 Additional paid-in capital 29,207 28,977 Retained earnings 71,276 68,938 ----------- ----------- 102,758 100,186 Treasury Stock, at cost (10,000 shares) (426) -- Accumulated other comprehensive income 1,152 1,324 ----------- ----------- Total stockholders' equity 103,484 101,510 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,120,340 $ 1,135,572 =========== =========== See accompanying notes to consolidated financial statements. 1 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 1998 1997 ----------------- (Dollars in thousands, except per share data) Interest and dividend income: Interest and fees on loans $11,618 $11,289 Interest on debt securities 7,612 6,678 Dividends on equity securities 115 155 Interest on short-term investments 45 47 ------- ------- Total interest and dividend income 19,390 18,169 ------- ------- Interest expense: Interest on deposits 7,758 7,438 Interest on short-term borrowings 1,117 1,063 Interest on long-term debt 1,710 1,246 ------- ------- Total interest expense 10,585 9,747 ------- ------- Net interest income 8,805 8,422 Provision for loan losses 75 75 ------- ------- Net interest income, after provision for loan losses 8,730 8,347 ------- ------- Other income: Customer service fees 479 500 Gain on sales of securities, net 513 265 Gain on sale of loans 158 -- Miscellaneous 201 236 ------- ------- Total other income 1,351 1,001 ------- ------- Operating expenses: Salaries and employee benefits 2,668 2,565 Occupancy and equipment 595 607 Data Processing 356 330 Professional fees 131 109 Amortization of intangibles 298 304 Advertising and marketing 117 143 Other general and administrative 545 566 ------- ------- Total operating expenses 4,710 4,624 ------- ------- Income before income taxes 5,371 4,724 Provision for income taxes 2,123 1,893 ------- ------- Net income $ 3,248 $ 2,831 ======= ======= (continued) See accompanying notes to consolidated financial statements. 2 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (concluded) Three Months Ended March 31, 1998 1997 --------------------- (Dollars in thousands, except per share data) Earnings per share: Basic $0.71 $0.62 Diluted $0.68 $0.60 Cash dividends declared per share $0.20 $0.18 Weighted average shares outstanding Basic 4,544,977 4,538,537 Diluted 4,800,791 4,755,969 See accompanying notes to consolidated financial statements. 3 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Accumulated Additional Other Comprehensive Common Paid In Retained Comprehensive Treasury Income Stock Capital Earnings Income Stock Total ------ ----- ------- -------- ------ ----- ----- (In thousands) Balance at December 31, 1997 $2,271 $28,977 $68,938 $1,324 $ -- $101,510 Comprehensive income: Net income $3,248 -- -- 3,248 -- -- 3,248 Unrealized gain (loss) on available for-sale securities, net of tax and reclassification adjustment (172) -- -- -- (172) -- (172) ------ Comprehensive income $3,076 ====== Issuance of common stock under stock option plan and related income tax benefits 4 230 -- -- -- 234 Cash dividends declared ($.20 per share) -- -- (910) -- -- (910) Repurchase of treasury stock -- -- -- -- (426) (426) ------ ------- ------- ------ ----- -------- Balance at March 31, 1998 $2,275 $29,207 $71,276 $1,152 ($426) $103,484 ====== ======= ======= ====== ===== ======== Accumulated Additional Other Comprehensive Common Paid In Retained Comprehensive Treasury Income Stock Capital Earnings Income Stock Total ------ ----- ------- -------- ------ ----- ----- (In thousands) Balance at December 31, 1996 $2,267 $28,848 $61,634 ($228) $ -- $92,521 Comprehensive income: Net income $2,831 -- -- 2,831 -- -- 2,831 Unrealized gain (loss) on available for-sale securities, net of tax and reclassification adjustment (1,867) -- -- -- (1,867) -- (1,867) ------ Comprehensive income $964 ==== Issuance of common stock under stock option plan and related income tax benefits 3 69 -- -- -- 72 Cash dividends declared ($.18 per share) -- -- (817) -- -- (817) ------ ------- ------- ------- ---- ------- Balance at March 31, 1997 $2,270 $28,917 $63,648 $(2,095) $ -- $92,740 ====== ======= ======= ======= ==== =======
See accompanying notes to consolidated financial statements. 4 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 1997 ---------------------- (In thousands) Cash flows from operating activities: Net income $3,248 $2,831 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan losses 75 75 Depreciation and amortization, net 514 401 Foreclosed real estate (gains), losses and provisions, net -- (1) Gain on sales of securities, net (513) (265) Gain on sales of loans (158) -- Increase in accrued interest receivable and other assets (1,350) (198) Decrease in accrued taxes and expenses and other liabilities 1,004 728 -------- -------- Net cash provided by operating activities 2,820 3,571 -------- -------- Cash flows from investing activities: Maturities of investment securities available for sale 15,000 14,485 Purchases of investment securities available for sale (62,901) (52,341) Sales of investment securities available for sale 35,481 7,891 Maturities of investment securities held to maturity 24,050 11,000 Purchases of investment securities held to maturity and FHLBB stock (1,065) (250) Principal amortization of mortgage-backed investments available for sale 6,170 1,445 Proceeds from sale of loans, net 5,166 -- Loans originated and purchased, net of amortization and payoffs (5,848) (3,108) Purchases of bank premises and equipment, net (745) 189 Sales of, and principal payments received on, foreclosed real estate -- 128 -------- -------- Net cash provided by (used in) investing activities 15,308 (20,561) -------- --------
(continued) See accompanying notes to consolidated financial statements. 5 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
Three Months Ended March 31, 1998 1997 ---------------------- (In thousands) Cash flows from financing activities: Net increase in deposits 136 6,674 Net decrease in borrowings with maturities of three months or less (18,784) (17,057) Proceeds from long-term debt 1,336 25,000 Issuance of common stock 60 26 Payments to acquire treasury stock (426) -- Cash dividends paid (1,634) (1,451) -------- -------- Net cash (used in) provided by financing activities (19,312) 13,192 -------- -------- Net change in cash and cash equivalents (1,184) (3,798) Cash and cash equivalents, beginning of period 16,180 16,429 -------- -------- Cash and cash equivalents, end of period $14,996 $12,631 ======== ========
See accompanying notes to consolidated financial statements. 6 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Note 1. Basis of Presentation General: Certain amounts have been reclassified in the March 31, 1997 financial statements to conform to the 1998 presentation. The consolidated interim financial statements of Medford Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the "Bank") presented herein are intended to be read in conjunction with the consolidated financial statements presented in the Company's annual report for the year ended December 31, 1997. The consolidated financial information for the three months ended March 31, 1998 and 1997 is unaudited. In the opinion of management, however, the consolidated financial information reflects all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation in accordance with generally accepted accounting principles. Interim results are not necessarily indicative of results to be expected for the entire year. Comprehensive Income: In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain FASB statements, however, require entities to report specific changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. SFAS No. 130 requires that all items of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Additionally, SFAS No. 130 requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company has adopted these disclosure requirements for the quarter ended March 31, 1998 and retroactively for the quarter ended March 31, 1997. 7 Earnings per share: In February 1997, FASB issued SFAS No. 128, "Earnings per Share," which requires that earnings per share be calculated on a basic and a dilutive basis. Basic earnings per share represents income available to common stock divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed conversion. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. The assumed conversion of outstanding dilutive stock options would increase shares outstanding but would not require an adjustment to income as a result of the conversion. SFAS No. 128 is effective for interim and annual periods ending after December 15, 1997, and requires the restatement of all prior-period earnings per share data presented. Accordingly, the Company has restated all earnings per share data presented herein. Note 2. Commitments At March 31, 1998 the Company had outstanding commitments to originate new residential and commercial real estate mortgage loans totalling approximately $11.3 million, which are not reflected on the consolidated balance sheet. Unadvanced funds on equity lines were $25.6 million, unadvanced construction loan funds were $11.5 million, and unadvanced funds on commercial lines of credit were $7.7 million at March 31, 1998. (Remainder of this page intentionally left blank) 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL This form 10-Q contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general national or regional economic conditions, changes in loan default and charge off rates, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in interest rates, changes in the size and nature of the Company's competition, and changes in the assumptions used in making such forward-looking statements. Consolidated net income was $3,248,000, or $0.71 per share ($0.68 on a diluted basis) for the three months ended March 31, 1998, a 14.7% increase, compared to $2,831,000 or $0.62 per share ($0.60 on a diluted basis) earned during the same quarter in 1997. For the first quarter of 1998, the annualized return on assets was 1.17% and the annualized return on equity was 12.80%, compared to 1.09% and 12.29% for the comparable period in 1997. The increased earnings for the three months ended March 31, 1998 compared to the 1997 period resulted from improved net interest income due to higher average earning assets, controlled operating expenses, and an increase in the net gain on sales of assets. Net interest income totalled $8,805,000 for the quarter ended March 31, 1998, up $383,000 or 4.5% from the comparable 1997 period, and represented a net interest margin of 3.23% compared to 3.29% for the quarter ended March 31, 1997. The net gain on sales of assets totalled $671,000 for the quarter as compared to $265,000 for the same quarter in 1997. (The remainder of this page intentionally left blank.) 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Total operating expenses were $4,710,000 for the first quarter of 1998, up $86,000 or 1.9% from the $4,624,000 during the comparable period in 1997. The provision for loan losses for each of the three month periods ended March 31, 1998 and 1997 was $75,000. Total non-performing assets were $1,425,000 or 0.13% of total assets at March 31, 1998 compared to $1,774,000 or 0.16%, respectively, at December 31, 1997. The allowance for loan losses at March 31, 1998 was $6,786,000, representing 477% of non-performing assets and 1.17% of total loans. At December 31, 1997, the allowance for loan losses was $6,733,000, representing 380% of non-performing assets and 1.17% of total loans. Other real estate owned remained unchanged from December 31, 1997 to March 31, 1998 at $48,000. The Company had total assets of $1.12 billion and deposits of $821.8 million at March 31, 1998, and its capital ratio was 9.24%, exceeding all regulatory requirements. As compared to reported balances at December 31, 1997, investment securities decreased $16.5 million or 3.22% to $497 million, total loans increased $884,000 or 0.2% to $578 million, deposits increased $136,000 or 0.02% to $822 million, and borrowings decreased $17.4 million, or 8.5% to $188 million. A more detailed discussion and analysis of the Company's financial condition and results of operations follows. (The remainder of this page intentionally left blank.) 10 INVESTMENT SECURITIES Investment securities consist of the following: March 31, December 31, 1998 1997 ---- ---- (In thousands) Securities available for sale, at fair value $409,149 $402,723 Securities held to maturity, at amortized cost 79,801 103,823 Restricted equity securities: Federal Home Loan Bank stock 6,822 5,758 Massachusetts Savings Bank Life Insurance stock 1,114 1,114 -------- -------- $496,886 $513,418 ======== ======== The amortized cost and fair value of investment securities, excluding restricted securities, at March 31, 1998 and December 31, 1997 with gross unrealized gains and losses, follows: March 31, 1998 -------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In thousands) Securities Available for Sale Debt securities: Corporate bonds $186,446 $1,073 $(226) $187,293 Mortgage - backed 144,987 742 (214) 145,515 U.S. Government and federal agency 73,995 344 (117) 74,222 -------- ------ ----- -------- Total debt securities 405,428 2,159 (557) 407,030 Marketable equity securities 1,840 279 -- 2,119 -------- ------ ----- -------- Total securities available for sale $407,268 $2,438 $(557) $409,149 ======== ====== ===== ======== Securities Held to Maturity U.S. Government and federal agency $ 74,068 $ 268 $ (33) $ 74,303 Corporate bonds 5,733 4 -- 5,737 -------- ------ ----- -------- Total securities held to maturity $ 79,801 $ 272 $ (33) $ 80,040 ======== ====== ===== ======== 11 December 31, 1997 -------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In thousands) Securities Available for Sale Debt securities: Corporate bonds $176,093 $1,102 $(107) $177,088 Mortgage - backed 121,964 641 (158) 122,447 U.S. Government and federal agency 95,277 482 (232) 95,527 -------- ------ ----- -------- Total debt securities 393,334 2,225 (497) 395,062 Marketable equity securities 7,233 482 (54) 7,661 -------- ------ ----- -------- Total securities available for sale $400,567 $2,707 $(551) $402,723 ======== ====== ===== ======== Securities Held to Maturity U.S. Government and federal agency $ 95,052 $ 326 $ (59) $ 95,319 Corporate bonds 8,771 12 -- 8,783 -------- ------ ----- -------- Total securities held to maturity $103,823 $ 338 $ (59) $104,102 ======== ====== ===== ======== The amortized cost and fair value of debt securities by contractual maturity at March 31, 1998 are as follows: March 31, 1998 --------------------------------------------- Available for Sale Held to Maturity ------------------ ---------------- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- (In thousands) Within 1 year $ 56,366 $ 56,300 $45,690 $45,696 After 1 year through 5 years 201,082 202,189 34,111 34,344 After 5 years through 10 years 2,993 3,026 -- -- -------- -------- ------- ------- 260,441 261,515 79,801 80,040 Mortgage - backed securities 144,987 145,515 -- -- -------- -------- ------- ------- $405,428 $407,030 $79,801 $80,040 ======== ======== ======= ======= 12 The amortized cost and fair value of debt securities by contractual maturity at December 31, 1997 are as follows: December 31, 1997 --------------------------------------------- Available for Sale Held to Maturity ------------------ ---------------- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- (In thousands) Within 1 year $ 46,073 $ 46,107 $ 69,689 $ 69,730 After 1 year through 5 years 217,230 218,451 34,134 34,372 After 5 years through 10 years 8,067 8,057 -- -- -------- -------- -------- -------- 271,370 272,615 103,823 104,102 Mortgage - backed securities 121,964 122,447 -- -- -------- -------- -------- -------- $393,334 $395,062 $103,823 $104,102 ======== ======== ======== ======== Investment securities decreased $16.5 million from $513.4 million at December 31, 1997 to $496.9 million at March 31, 1998. During the quarter, management continued its program to improve portfolio yield by reducing U.S. Government securities approximately $42 million as they matured or were sold and by increasing mortgage-backed securities and corporate bonds approximately $23 million and $7 million, respectively. Holdings of marketable equity securities declined $5.5 million during the quarter to $2.1 million at March 31, 1998, reflecting sales during the quarter. Sales of U.S. Treasuries produced gains of $287,000 while sales of equities produced gains of $226,000 during the quarter. The net decline in investments was offset by reduced short-term borrowings as minimal spreads did not justify the interest rate risk. At March 31, 1998, the securities portfolio classified as "available for sale" reflected a $1.9 million appreciation in market value as a result of fluctuations in market rates as compared to $2.2 million at December 31, 1997. In accordance with the Company's asset-liability strategies, investment securities are generally short-term with maturities of five years or less. (The remainder of this page intentionally left blank.) 13 LOANS A summary of the Company's outstanding loan balances as of the dates indicated are as follows: March 31, December 31, 1998 1997 ---- ---- (In thousands) Mortgage loans on real estate: Residential 1-4 family $397,432 $389,593 Commercial 123,012 124,094 Construction 22,832 21,989 Second mortgages 1,391 1,539 Equity lines of credit 21,789 22,146 -------- -------- 566,456 559,361 Less: Unadvanced construction loan funds (11,520) (10,711) -------- -------- 554,936 548,650 -------- -------- Other loans: Commercial loans 13,296 14,941 Personal loans 2,225 2,432 Education and other 6,926 10,499 -------- -------- 22,447 27,872 -------- -------- Add: Premium on loans acquired 255 270 Net deferred fees 823 785 -------- -------- Total loans 578,461 577,577 Less: Allowance for loan losses (6,786) (6,733) -------- -------- Loans, net $571,675 $570,844 ======== ======== While total loans outstanding at March 31, 1998 were essentially flat to the December 31, 1997 level, total real estate mortgage loans increased $6.3 million, led by the residential 1-4 family category, up $7.8 million. Total new volume in this residential 1-4 family category amounted to $34.5 million, including substantial refinancings. This new volume was comprised of $16.9 million fixed rate and $17.6 million adjustable rate mortgages. During the quarter, the Company sold $4.9 million of education loans, producing a gain of $158,000 as the Company continues to sell education loans in the repayment stage as conditions warrant. All other loan categories remained essentially stable during the quarter as new loan originations replaced amortization and payoffs, and as the Company continues to experience intense competition for loans within its geographic region. 14 NON-PERFORMING ASSETS Total non-performing assets were $1.4 million, including $48,000 other real estate owned, at March 31, 1998, as compared to $1.7 million and $48,000, respectively, at December 31, 1997. As a percentage of assets, these non-performing assets equalled 0.13% and 0.16% at March 31, 1998 and December 31, 1997, respectively. It is the Company's general policy to place loans on a non-accrual basis when such loans become 90 days contractually delinquent or when the collectability of principal or interest payments becomes doubtful. When a loan is placed in non-accrual status, its interest income accrual ceases and all income previously accrued but unpaid is reversed. In accordance with SFAS No. 114, a loan is considered impaired when, based on current information and events, it is probable that the borrower will be unable to meet principal or interest payments as agreed in the original loan contract. The principal balance of impaired loans at March 31, 1998 was $1.4 million, all of which were included in the $1.4 million non-performing assets referenced in the preceding paragraph. The loan loss reserve allocated to these impaired loans was $141,000 at March 31, 1998. ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses follows: Three Months Ended ------------------ March 31, March 31, 1998 1997 ------ ----- (In thousands) Balance at the beginning of the period $ 6,733 $ 7,231 Provisions 75 75 Recoveries 8 28 Less: Charge-offs (30) (392) -------- -------- Balance at the end of the period $ 6,786 $ 6,942 ======== ======== The allowance for loan losses is established via provisions for loan losses charged through the statement of income. Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based on management's evaluation of the amount required to absorb estimated losses inherent in the loan portfolio after weighing various factors. Among the factors that management considers are the quality and underlying collateral values of specific loans, risk characteristics of the loan portfolio generally, the level of non-performing loans, current economic conditions, and current trends in delinquency and chargeoffs. Ultimate loan losses may vary significantly from current estimates. 15 The allowance for loan losses was $6.8 million at March 31, 1998, a reserve coverage of 482% of non-accrual loans and 1.17% of total loans. At December 31, 1997, the allowance for loan losses was $6.7 million representing 390% of non-accrual loans and 1.17% of total loans. Management considers the allowance for loan losses to be adequate at March 31, 1998, although there can be no assurance that the allowance is adequate or that additional provisions will not be necessary. DEPOSITS Total deposits increased $136,000 from December 31, 1997 levels to equal $821.8 million at March 31, 1998. Generally, the Company's strategy is to maintain stable deposit rates and to increase deposit levels through selective core deposit and term deposit promotions. To retain core deposits, the Company has been promoting its "ComboPlus" account which combines a statement savings and a demand account into one convenient account. This account has contributed to an increase in both savings and demand deposits. During the quarter the Company elected not to offer special rates on its term deposit products in view of the current interest rate environment. Term deposits therefore declined $12.6 million or 3.2% from $392.8 million at December 31, 1997 to $380.2 million at March 31, 1998, while all other account categories increased. The following table indicates the balances in various deposit accounts at the dates indicated. March 31, December 31, 1998 1997 ---- ---- (In thousands) Demand accounts $ 45,475 $ 44,196 NOW accounts 62,453 59,368 Savings & money market accounts 333,674 325,340 Term certificates 380,240 392,802 -------- -------- $821,842 $821,706 ======== ======== 16 BORROWED FUNDS Historically, the Company has selectively engaged in long-term borrowings to fund loans and has entered into short-term repurchase agreements to fund investment securities purchases. With the reductions in the investment portfolio during the first quarter of 1998, short-term borrowed funds have also decreased such that total borrowed funds were $188.3 million at March 31, 1998, down $17.5 million from $205.8 million at December 31, 1997. STOCKHOLDERS' EQUITY The Company's capital to assets ratio was 9.24% at March 31, 1998 as compared to 8.94% at December 31, 1997. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and/or the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Holding companies, such as the Company, are not subject to prompt corrective action provisions. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined) to average assets (as defined). As of December 31, 1997, the Company and the Bank met all capital adequacy requirements to be categorized as well capitalized. No conditions or events occurred during the first quarter 1998 that management believes have changed the Company's or the Bank's category. Therefore, management believes as of March 31, 1998 that the Company and the Bank met all capital adequacy requirements to continue to be categorized as well capitalized. The Company's book value at March 31, 1998 was $22.79 per share, compared with $22.35 per share at December 31, 1997. 17 RESULTS OF OPERATIONS NET INTEREST INCOME Interest and dividend income from loans and investments increased $1.2 million or 6.7% to $19.4 million for the first quarter in 1998 when compared to the same quarter in 1997. Average earning assets increased $67.5 million, or 6.7%, between March 31, 1997 and March 31, 1998, with $55.2 million of that increase coming from short and long-term investment securities and $12.3 million coming from loans. The yield on earning assets was unchanged at 7.19% for the first quarter in 1998 and 1997. The yield on investment securities was 6.24% for the first quarter 1998 as compared to 6.22% for the first quarter 1997. The Company purchased higher yielding mortgage-backed securities to replace matured and sold U.S. Government securities. Investments contributed $892,000 of additional interest and dividend income when comparing the first quarter of 1998 to the first quarter of 1997. The increase in the average balance on loans, coupled with an increase in the weighted average yield on loans to 8.01% from 7.95%, resulted in $329,000 of additional interest income on loans. An increase in residential mortgage loan volume contributed $298,000 to that amount while all other loans contributed $31,000. Total interest expense for the three months ended March 31, 1998 was $10.6 million reflecting an increase of $839,000 or 8.6% over the same period in 1997. This resulted, in part, from the increase of $53.3 million in average interest bearing liabilities over the comparable prior year period. This period-to-period increase can be attributed to average deposit growth of $19.4 million, and an average borrowed funds increase of $33.9 million. The Company experienced disintermediation from the lower rate passbook savings deposit category into the higher rate "ComboPlus" statement savings deposit category. This coupled with an increase in the rate paid on high balance money market accounts increased the overall cost of deposits 7 basis points from the 1997 period to 4.05%. Overall, interest expense on deposits increased $321,000 to $7.8 million. To manage interest expense on deposits, the Company elected not to offer premium term deposit products during the first quarter 1998. Interest expense on borrowed funds increased $518,000 in the first quarter of 1998 when compared to the first quarter in 1997. The overall cost of interest bearing liabilities increased to 4.41% from 4.29% when comparing the two quarters. Net interest income increased 4.5% or $383,000 to $8.8 million when comparing the first quarter in 1998 to the same quarter in 1997, despite a decline in the interest rate spread and net interest margin. This is primarily due to increased levels of earning assets. While the yield on earning assets was unchanged when comparing the first quarter in 1998 to the first quarter in 1997, the cost of interest bearing liabilities increased by 12 basis points. This resulted in a reduction of the net interest margin and interest rate spread to 3.23% and 2.78% respectively for the three months ended March 31, 1998, compared with 3.29% and 2.90% for the three months ended March 31, 1997. 18 MEDFORD BANCORP, INC. INTEREST RATE SPREAD Three Months Ended March 31, --------- 1998 1997 ---- ---- Weighted average yield earned on: Short-term investments 5.39% 5.01% Investment securities 6.24 6.22 Loans 8.01 7.95 ---- ---- All earning assets 7.19% 7.19% ----- ----- Weighted average rate paid on: Deposits 4.05% 3.98% Borrowed funds 5.82 5.77 ---- ---- All interest-bearing liabilities 4.41% 4.29% ----- ----- Weighted average rate spread 2.78% 2.90% ----- ----- Net interest margin 3.23% 3.29% ===== ===== (Remainder of this page intentionally left blank.) 19 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 is determined by management on the basis of many factors including the quality of specific loans, risk characteristics of the loan portfolio generally, the level of non-performing loans, current economic conditions, trends in delinquency and charge-offs, and value of the underlying collateral. Management considers the allowance for loan losses to be adequate at March 31, 1998, although there can be no assurance that the allowance is adequate or that additional provisions to the allowance for loan losses will not be necessary. The Company recorded a provision for loan losses for the first quarter of 1998 of $75,000, equal to that provided for the first quarter of 1997. Net loan charge-offs for the three months ended March 31, 1998 totalled $22,000 compared to $364,000 for the same period in 1997. OTHER INCOME Other income, such as customer service fees and gains and losses on sales of assets increased $350,000 to $1,351,000 in the first quarter of 1998 as compared to the first quarter of 1997. See related discussions under "Investment Securities" and "Loans" included in "Management's Discussion and Analysis" in Item 2 of Part I of this report. OPERATING EXPENSES Operating expenses were $4.7 million, an increase of $86,000 or 1.9% for the three months ended March 31, 1998 when compared to $4.6 million for the same period in 1997. The most significant increases were in salaries and employee benefits, up 4.0% when comparing the three months ended March 31, 1998 to the same period in 1997. Increased data processing costs were, in part, offset by lower occupancy and equipment costs as the Company continues to manage for operating efficiencies. The Company's annualized expense ratio, which is the ratio of non-interest expense to average assets was 1.70% for the three months ended March 31, 1998, as compared to 1.78% for the prior year period. The Company continues to focus on cost containment with the intent to be a low cost provider of high quality banking products and services. 20 LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds are customer deposits, amortization and payoff of existing loan principal, and sales or maturities of various investment securities. The Company is a voluntary member of the Federal Home Loan Bank of Boston ("FHLBB"), and as such may take advantage of the FHLBB's borrowing programs to enhance liquidity and leverage its favorable capital position. The Company also may draw on lines of credit at the FHLBB and a large commercial bank, and it may pledge U.S. Government securities to borrow from certain investment firms and the Mutual Savings Central Fund of Massachusetts. These various sources of liquidity are used to fund withdrawals, new loans, and investments. Management continually seeks to optimize deposit growth while controlling the Company's cost of funds. Sales oriented programs to attract new depositors and the cross-selling of various products to its existing customer base are currently in place, although, as discussed above, not to the same extent as the first quarter of last year. Management reviews, on an ongoing basis, possible new products, with particular attention to products and services which will assist retention of the Company's base of lower-costing deposits. Maturities and sales of investment securities provide significant liquidity to the Company. The Company's policy of purchasing debt instruments generally maturing within five years reduces market risk in the bond portfolio while providing significant cash flow. For the three months ended March 31, 1998, cash flow from maturities and sales of securities was $74.5 million compared to $33.4 million for the three months ended March 31, 1997. Principal payments received on mortgage-backed investments during the three months ended March 31, 1998 and 1997 totalled $6.2 million and $1.4 million, respectively. During periods of high interest rates, maturities in the bond portfolio have provided significant liquidity at a lower cost than borrowings. Amortization and pay-offs of the loan portfolio also contribute significant liquidity to the Company. Traditionally, the amortization and payoffs have been reinvested into loans. When payoff rates exceed origination rates, excess liquidity from loan payoffs is shifted into the investment portfolio. The Company also uses borrowed funds as a source of liquidity. These borrowings generally contribute toward funding over-all loan growth. At March 31, 1998 the Company's outstanding borrowings from the FHLBB were $121.4 million, as compared to $112.2 million at December 31, 1997. The Company also utilizes repurchase agreements as a source of funding when management deems market conditions to be conducive to such activities. Repurchase agreements totalled $66.1 million at March 31, 1998 as compared to $93.6 million at December 31, 1997. Commitments to originate residential and commercial real estate mortgage loans at March 31, 1998, excluding unadvanced construction funds of $11.5 million, were $11.3 million. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. 21 LIQUIDITY AND CAPITAL RESOURCES (continued) Purchases of securities during the three months ended March 31, 1998 totalled $64.0 million consisting of debt instruments generally maturing in less than five years and equities. This compares with purchases of $52.6 million for the three months ended March 31, 1997. Residential and commercial real estate mortgage loan originations for the three months ended March 31, 1998 totalled $38.0 million, compared with $13.5 million for the three months ended March 31, 1997. The Company's capital position (total stockholders' equity) was $103.5 million or 9.24% of total assets at March 31, 1998 compared with $101.5 million or 8.94% of total assets at December 31, 1997. The Company's capital position exceeds all regulatory requirements. (The remainder of this page intentionally left blank.) 22 ASSET-LIABILITY MANAGEMENT Through the Company's Asset-Liability Management Committee ("ALCO"), which is comprised of certain senior and middle management personnel, the Company monitors the level and general mix of interest rate-sensitive assets and liabilities. The primary objective of the Company's ALCO program is to manage the assets and liabilities of the Company to provide for optimum profitability and capital at prudent levels of liquidity and interest rate, credit, and market risk. It is ALCO's general policy to closely match the maturity or rate sensitivity of its assets and liabilities. In accordance with this policy, certain strategies have been implemented to improve the match between interest rate sensitive assets and liabilities. These strategies include, but are not limited to: daily monitoring of the Company's changing cash requirements, with particular concentration on investment in short term securities; originating adjustable and fixed rate mortgage loans for the Company's own portfolio; managing the cost and structure of deposits; and generally using matched borrowings to fund specific purchases of loan packages and large loan origination. Occasionally, management may choose to deviate from specific matching of maturities of assets and liabilities, if an attractive opportunity to enhance yields becomes available. The Company actively manages its liability portfolio in order to effectively plan and manage growth and maturities of deposits. Management recognizes the need for strict attention to all deposits. Accordingly, plans for growth of all deposit types are reviewed regularly. Programs are in place which are designed to build multiple relationships with customers and to enhance the Company's ability to retain deposits at controlled rates of interest, and management has adopted a policy of reviewing interest rates on an ongoing basis on all deposit accounts, in order to control deposit growth and interest costs. In addition to attracting deposits, the Company has selectively borrowed funds using advances from the FHLBB and upon occasion, reverse repurchase agreements. These funds have generally been used to purchase loans typically having a matched repricing date. IMPACT OF INFLATION The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all assets of a financial institution are monetary in nature. As a result, interest rates have a more significant effect on a financial institution's performance than the effect 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. 23 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk For a discussion of the Company's management of market risk exposure, see "Asset-Liability Management" in Item 2 of Part I of this report and Item 7A of Part II of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Annual Report"). For quantitative information about market risk, see Item 7A of Part II of the Company's 1997 Annual Report. There have been no material changes in the quantitative and qualitative disclosures about market risk as of March 31, 1998 from those presented in the Company's 1997 Annual Report. 24 PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings There are no material legal proceedings to which the Company is a party or to which any of its property is subject, although the Company is a party to ordinary routine litigation incidental to its business. ITEM 2 - Changes in Securities and Use of Proceeds Not applicable. ITEM 3 - Defaults Upon Senior Securities Not applicable. ITEM 4 - Submission of Matters to a Vote of Security Holders Not applicable. ITEM 5 - Other Information On February 25, 1998 the Board of Directors of the Company announced that the Company has been authorized to repurchase from time to time up to a total of 5% of the shares of the Company's currently outstanding Common Stock at prevailing market prices. The Board has authorized certain Officers of the Company to determine when and if such repurchase or repurchases will occur, the exact number of shares of Common Stock to be acquired through any such repurchase, and the exact price for the shares of Common Stock to be acquired through any such repurchase. ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Description ------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the three month period ended March 31, 1998. 25 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. MEDFORD BANCORP, INC. Date: May 8, 1998 /s/ Arthur H. Meehan ------------------------------ Arthur H. Meehan Chairman, President and Chief Executive Officer Date: May 8, 1998 /s/ Phillip W. Wong ------------------------------ Phillip W. Wong Executive Vice President, Treasurer and Chief Financial Officer EXHIBIT INDEX Exhibit Description ------- ----------- 27 Financial Data Schedule 26 EX-27 2 FDS
9 1,000 3-MOS DEC-31-1998 MAR-31-1998 12,351 1 2,644 0 409,149 79,801 0 578,461 (6,786) 1,120,340 821,842 76,886 6,683 111,445 2,275 0 0 101,209 1,120,340 11,618 7,727 45 19,390 7,758 10,585 8,805 75 513 4,710 5,371 5,371 0 0 3,248 0.71 0.68 7.19 1,377 0 0 0 6,733 30 8 6,786 0 0 0
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