-----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, OcXZQYT6pQZLEkzk35KRLws8fL93fbEYh+osEcIpCaJ+gTD9YXsUfSL9kph5pTXn NvLmRbQ+iduAvSEyf5LBBQ== 0001005477-01-002222.txt : 20010329 0001005477-01-002222.hdr.sgml : 20010329 ACCESSION NUMBER: 0001005477-01-002222 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 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-K405 SEC ACT: SEC FILE NUMBER: 000-23435 FILM NUMBER: 1581986 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-K405 1 0001.txt MEDFORD BANCORP, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 0-23435 Medford Bancorp, Inc. (Exact name of registrant as specified in its charter) Massachusetts 04-3384928 (State or other jurisdiction of (I.R.S. Employer 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 ------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.50 per share 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 |_| Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on March 5, 2001, on the Nasdaq National Market was $128,650,947. Although directors and executive officers of the registrant were assumed to be "affiliates" of the registrant for the purposes of this calculation, this classification is not to be interpreted as an admission of such status. As of March 5, 2001, there were 7,822,664 shares of the registrant's common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Medford Bancorp, Inc. Definitive Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on April 30, 2001 are incorporated by reference into Part III of this Form 10-K. PART I The discussions set forth below and elsewhere herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Company may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors and employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," estimate," "assume," "will," "should," and other expressions which predict or indicate future events or trends and which do not relate to historical matters. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, the risk factors below, changes in volume of loan originations, fluctuations in prevailing interest rates, increases in costs to borrowers of loans held, increases in costs of funds, and changes in assumptions used in making such forward-looking statements. Readers should carefully review the factors described under "Risk Factors and Risk Factors Affecting Forward Looking Statements" and should not place undue reliance on our forward looking statements. The Company assumes no obligations to update any forward-looking statements. ITEM 1. BUSINESS General Medford Bancorp Inc., (the "Company") was organized in 1997 as a Massachusetts corporation to be the holding company for Medford Savings Bank (the "Bank"). Established as a Massachusetts savings bank in 1869, the Bank converted from mutual to stock form on March 18, 1986 and issued 3,680,000 shares of common stock. The Bank is principally engaged in the business of attracting deposits from the general public, originating residential and commercial real estate mortgages, consumer and commercial loans, and investing in securities on a continuous basis. For a detailed description of the Company's business and financial information, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this report. The Bank is headquartered in Medford, Massachusetts, which is located approximately seven miles north of downtown Boston. The Bank principally offers its products and services through a network of eighteen banking offices located in Medford, Malden, Arlington, Belmont, Burlington, North Reading, Somerville, Tewksbury, Waltham, and Wilmington. The Bank's primary market area includes these communities as well as other cities and towns in Middlesex County and the surrounding area north of Boston. The Bank presently has one wholly-owned subsidiary, Medford Securities Corporation ("MSC"), which became operational on March 1, 1995. MSC engages exclusively in the buying, selling, dealing in, and holding of securities. Supervision and Regulation General. The Company is a Massachusetts corporation and a bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and files with the Federal Reserve Board an annual report and such additional reports as the Federal Reserve Board may require. The Company is also subject to the jurisdiction of the Commissioner of Banks of the Commonwealth of Massachusetts (the "Commissioner"). As a bank holding company, the Company's activities are limited to the business of banking and activities closely related or incidental to banking. Provided that it does not become a "financial holding company" under the recently enacted Gramm-Leach-Bliley Act (as discussed below), the Company may not directly or indirectly acquire the ownership or control of more than 5 percent of any class of voting shares or substantially all of the assets of any company that is not engaged in activities determined by the Federal Reserve Board prior to November 12, 1999 by order or regulation to be closely related to banking, and also generally must provide notice to or obtain approval of the Federal Reserve Board in connection with any such acquisition. As a Massachusetts-chartered savings bank, the Bank is subject to comprehensive regulation and examination by the Federal Deposit Insurance Corporation (the "FDIC") which insures its deposits to the maximum extent permitted by law, and by the Commissioner. The Bank is also subject to certain requirements established by the Federal Reserve Board and is a member of the Federal Home Loan Bank of Boston (the "FHLBB"). 1 Federal Deposit Insurance Corporation. The FDIC insures the Bank's deposit accounts to the $100,000 maximum per separately insured account. As a state-chartered, FDIC-insured nonmember savings bank, the Bank is subject to regulation, examination, and supervision by the FDIC, and to reporting requirements of the FDIC. The FDIC has adopted requirements setting minimum standards for capital adequacy. Pursuant to FDIC requirements, the Bank must maintain a Tier 1 capital to risk-weighted assets ratio of 4.00% and a total capital to risk-weighted assets ratio of 8.00%. The FDIC also imposes a minimum leverage capital ratio of at least 3.00% for the most highly rated banks and a minimum leverage capital ratio of 4.00% for all other banks. The Bank exceeded all applicable requirements at December 31, 2000. Furthermore, under the capital standards established pursuant to the FDIC Improvement Act of 1991 ("FDICIA"), the Bank is currently well-capitalized. International bank supervisory organizations, principally the Basel Committee on Banking Supervision, currently are considering changes to the risk-based capital adequacy framework, which ultimately could affect the FDIC's guidelines. Federal Home Loan Bank System. The Federal Home Loan Bank System functions as a reserve credit source for its member financial institutions and is governed by the Federal Housing Finance Board ("FHFB"). The Bank is a voluntary member of the FHLBB. Members of the FHLBB are required to own capital stock that is directly proportionate to the member's home mortgage loans and borrowings from the FHLBB outstanding from time to time. FHLBB advances must be secured by specific types of collateral and may be obtained principally for the purpose of providing funds for residential housing finance. Federal Reserve Board Regulations. Regulation D promulgated by the Federal Reserve Board requires all depository institutions, including the Bank, to maintain reserves against its transaction accounts (generally, demand deposits, NOW accounts and certain other types of accounts that permit payments or transfer to third parties) or non-personal time deposits (generally, money market deposit accounts or other savings deposits held by corporations or other depositors that are not natural persons, and certain other types of time deposits), subject to certain exemptions. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the amount of the institution's interest-bearing assets. Massachusetts Commissioner of Banks and Board of Bank Incorporation. The Bank is also subject to regulation, examination and supervision by the Commissioner and to the reporting requirements promulgated by the Commissioner. Massachusetts statutes and regulations govern, among other things, investment powers, lending powers, deposit activities, maintenance of surplus and reserve accounts, the distribution of earnings, the payment of dividends, issuance of capital stock, branching, acquisitions and mergers and consolidation. Any Massachusetts bank that does not operate in accordance with the regulations, policies and directives of the Commissioner may be subject to sanctions for noncompliance. The Commissioner may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the Bank's business in a manner which is unsafe, unsound or contrary to the depositor's interest, or been negligent in the performance of their duties. In response to a Massachusetts law enacted in 1996, the Commissioner finalized rules in 1997 and 2000 that give Massachusetts banks, and their subsidiaries, many powers equivalent to those of national banks. The Commissioner also has adopted procedures expediting branching by strongly capitalized banks. Depositors Insurance Fund. Massachusetts-chartered savings banks are required to be members of the Depositors Insurance Fund ("DIF"), a corporation created by the Commonwealth of Massachusetts for the purpose of insuring savings bank deposits not covered by federal deposit insurance. To the extent the Bank's deposit accounts are not insured by federal insurance, such deposits are insured by the DIF. Federal Deposit Insurance Corporation Improvement Act of 1991. FDICIA made extensive changes to the federal banking laws. Among other things, FDICIA requires federal bank regulatory agencies to take prompt corrective action to address the problems of, and imposes significant restrictions on, under-capitalized banks. With certain exceptions, FDICIA prohibits state banks from making equity investments and engaging, as principals, in activities which are not permissible for national banks, such as insurance underwriting. FDICIA also amends federal statutes governing extensions of credit to directors, executive officers and principal shareholders of banks, savings associations and their holding companies, limits the aggregate amount of depository institutions' loans to insiders to the amount of the institution's unimpaired capital and surplus, restricts depository institutions that are not well-capitalized from accepting brokered deposits without an express waiver from the FDIC, and imposes certain advance notice requirements before closing a branch office. Pursuant to the FDICIA, the FDIC has adopted a framework of risk-based deposit insurance assessments that take into account different categories and concentrations of bank assets and liabilities. Effective January 1999, the FDIC revised its regulations relating to FDICIA to generally ease the ability of state nonmember banks and their subsidiaries to engage in certain activities not permissible for a national bank, such as real estate development. 2 Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal"), different types of interstate transactions and activities are permitted. Interstate transactions and activities provided for under the law include: (i) bank holding company acquisitions of separately held banks in a state other than a bank holding company's home state; (ii) mergers between banks with different home states, including consolidations of affiliated banks; (iii) establishment of interstate branches either de novo or by branch acquisition; and (iv) affiliate banks acting as agents for one another for certain banking functions without being considered a "branch". In general, subject to certain limitations, nationwide interstate acquisitions are now permissible, irrespective of state law limitations other than limitations related to deposit concentrations and bank age requirements. Interstate mergers also are permissible. Affiliated banks may act as agents for one another. Each of the transactions and activities must be approved by the appropriate federal bank regulator, with separate and specific criteria established for each category. In 1996, Massachusetts enacted interstate banking laws in response to Riegle-Neal. The laws permit, subject to certain deposit and other limitations, interstate acquisitions, mergers and branching on a reciprocal basis. The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act is intended, in part, to permit bank holding companies that qualify and elect to be treated as a financial holding company to engage in a significantly broader range of financial activities. At this time, the Company has not determined whether it will become a financial holding company. More specifically, the Gramm-Leach-Bliley Act repeals provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of banks with firms "engaged principally" in specified securities activities, and Section 32, which restricted officer, director, or employee interlocks between a bank and any company or person "primarily engaged" in specified securities activities. Moreover, the general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system, such as the Company, to engage in a full range of financial activities through a new entity known as a financial holding company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Generally, the Gramm-Leach-Bliley Act and its implementing regulations: o repeal historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; o permit investment in non-financial enterprises, subject to significant operational, holding period and other restrictions; o provide a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; o broaden the activities that may be conducted by national banks (and, derivatively, state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries; o require all financial institutions to provide notice of their privacy policies at specified times to their retail customers and consumers of their financial products or services and permits retail customers and consumers, under certain circumstances, to prohibit financial institutions from sharing certain nonpublic personal information pertaining to them by opting out of such sharing; o adopt a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system; o modify the laws governing the implementation of the Community Reinvestment Act of 1977; and o address a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions; and o establish guidelines for safeguarding the security, confidentiality and integrity of customer information. 3 In order to elect to become a financial holding company and engage in the new activities, a bank holding company, such as the Company, must meet certain tests and file an election form with the Federal Reserve Board that generally is acted on within thirty days. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities each of the bank holding company's banks must have been rated "satisfactory" or better in its most recent federal Community Reinvestment Act evaluation. Furthermore, a bank holding company that elects to be treated as a financial holding company may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the Federal Reserve Board that imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. Further, the Gramm-Leach-Bliley Act, which includes new sections of the National Bank Act and the Federal Deposit Insurance Act governing the establishment and operation of financial subsidiaries permits national banks and state banks, to the extent permitted under state law, to engage in certain new activities which are permissible for subsidiaries of a financial holding company. In addition, the Gramm-Leach-Bliley Act expressly preserves the ability of national banks and state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a national bank or state bank must be well-capitalized, and such banks would be subject to certain capital deduction, risk management and affiliate transaction rules. Also, the FDIC recently issued final rules governing the establishment of financial subsidiaries by insured state nonmember banks. The final rules restate the FDIC's position that activities that a national bank could only engage in through a financial subsidiary, such as securities underwriting, only may be conducted in a financial subsidiary by a state nonmember bank. However, activities that a national bank could not engage in through a financial subsidiary, such as real estate development or investment, will continue to be governed by the FDIC's standard activities rules. Moreover, to mirror the FRB's actions with respect to state member banks, the final rules provide that a state bank subsidiary that engages only in activities that the bank could engage in directly (regardless of the nature of the activities) will not be deemed a financial subsidiary. Federal Securities Laws. Pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), the Company files annual, quarterly, and periodic reports with the Securities and Exchange Commission (the "SEC"). The Company is also subject to the insider trading requirements of Sections 16(a) and 16(b) of the Exchange Act, as administered by the SEC. The Gramm-Leach-Bliley Act also amended the federal securities laws to, effective May 2001, eliminate the blanket exceptions that banks traditionally have had from the definition of broker-dealer and investment adviser. Accordingly, banks not falling within the specific exemptions provided by the new law may have to register with the SEC as a broker-dealer and/or investment adviser, as appropriate, and become subject to SEC jurisdiction. Other Activities The Bank owns stock in The Savings Bank Life Insurance Company of Massachusetts ("SBLI"). The Bank sells life insurance and tax-deferred annuities and sold over $2.1 million in SBLI annuities in 2000, making it the top seller of this product in Massachusetts. The Bank provides safe deposit services at nine of its branches. The Bank periodically originates 30-year, fixed-rate, residential 1-4 family loans in correspondent relationships with third parties such as Plymouth Mortgage Company and Federal Home Loan Mortgage Corporation (FHLMC), whereby the Bank originates loans in exchange for an origination fee. The Bank does not retain the servicing rights for these loans. Competition The Company faces substantial competition for loan origination and for the attraction and retention of deposits. Competition for loan origination arises primarily from commercial banks, other thrift institutions, credit unions and mortgage companies. The Company competes for loans on the basis of product variety and flexibility, competitive interest rates and fees, service quality and convenience. Competition for the attraction and retention of deposits arises primarily from commercial banks, other thrift institutions, and credit unions having a presence within and around the market area served by the Bank's main office and its community branch and ATM network. There are approximately 200 of these financial institutions in the Bank's market area. In addition, the Company competes with regional and national firms which offer stocks, bonds, mutual funds and other investment alternatives to the general public. The Company competes on its ability to satisfy such requirements of savers and investors as product alternatives, competitive rates, liquidity, service quality, convenience, and safety against loss of principal and earnings. 4 Moreover, under the Gramm-Leach-Bliley Act, as of March 11, 2000, securities firms, insurance companies and other financial services providers that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which the Company and its subsidiaries conduct business. See "Supervision and Regulation--The Gramm-Leach-Bliley Act" above. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. Management believes that the Company's emphasis on personal service and convenience, coupled with active involvement within the communities it serves, contributes to its ability to compete successfully. Risk Factors and Factors Affecting Forward Looking Statements In addition to the other information contained or incorporated by reference in this Annual report on Form 10-K, you should consider the following factors relating to the business of the Company. Interest Rate Volatility May Reduce The Bank's Profitability The Bank's profitability depends to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest bearing liabilities, such as deposits and borrowed funds. Significant changes in market interest rates may adversely affect both the Bank's profitability and its financial condition. Since market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. (See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional discussion on interest rate risk.) The Bank's Allowance for Loan Losses May Not Be Adequate to Cover Actual Loan Losses The Bank makes various assumptions and judgments about the collectibility of its loan portfolio and provides an allowance for potential losses based on a number of factors. If the Bank's assumptions are wrong, its allowance for loan losses may not be sufficient to cover its losses, which would have an adverse effect on its operating results, and may also cause the Bank to increase the allowance in the future. Further, the Bank's net income would decrease if it had to add additional amounts to its allowance for loan losses. Geographic Credit Concentration The Bank is exposed to real estate and economic factors in the greater Boston metropolitan area and eastern Massachusetts because virtually all of its loan portfolio is concentrated among borrowers in this market. Further, because a substantial portion of its loan portfolio is secured by real estate in this area, the value of the Bank's collateral is also subject to regional real estate market conditions. A downturn in the economy in the Bank's primary lending area may likely adversely affect the Bank's operations. Strong Competition within the Bank's Market Area Competition in the banking and financial services industry is strong. In its market area, the Bank competes for loans and deposits with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally as well as nationally. Many of these competitors have substantially greater resources and lending limits than the Bank and may offer services that the Bank does not or cannot provide. The Bank's long-term success depends on the ability of the Bank to compete successfully with other financial institutions in their service areas. (See information under the caption "Competition" for additional discussion.) In addition, as the Company strives to compete with other financial institutions, it may expand into new areas, and there is no assurance that it will be successful in these efforts. 5 Employees As of December 31, 2000, the Bank employed 215 full-time staff, including 51 officers, and 93 part-time staff. None of the Bank's employees is represented by a labor union. The Company has no officers or employees separate from the Bank. Executive Officers of the Company and Bank The executive officers of the Company and/or the Bank, their positions with the Company and/or the Bank and their ages as of February 28, 2001 are as follows:
Name Age Position Arthur H. Meehan 65 President and Chief Executive Officer of the Company and the Bank; Chairman of the Board of Directors of the Company and the Bank Phillip W. Wong 51 Executive Vice President, Chief Financial Officer and Treasurer of the Company; Executive Vice President and Chief Financial Officer of the Bank George A. Bargamian 52 Executive Vice President of the Bank (Retail) Eric B. Loth 58 Senior Vice President of the Bank (Lending) William F. Rivers 45 Senior Vice President of the Bank (Administration)
Arthur H Meehan. Mr. Meehan commenced his employment with the Bank in February 1992. Prior to this date, Mr. Meehan served as Executive Vice President of the Bank of New England Corporation. Phillip W. Wong. Mr. Wong commenced his employment with the Bank as Senior Vice President in December 1992 and was promoted to Executive Vice President in 1997. Previously, Mr. Wong served as Chief Financial Officer of Guaranty-First Trust Co. in Waltham, Massachusetts. George A. Bargamian. Mr. Bargamian was hired by the Bank as Director of Marketing in January 1988, and was promoted to Senior Vice President in 1988 and Executive Vice President of the Bank in 1999. Mr. Bargamian formerly served as Assistant Vice President of Marketing for First Mutual of Boston. Eric B. Loth. Mr. Loth commenced his employment with the Bank as Senior Vice President in August 1994. Prior to this date, Mr. Loth served as Vice President of Lending at Sterling Bank in Waltham, Massachusetts. William F. Rivers. Mr. Rivers commenced his employment with the Bank in January 1974, served as Assistant Treasurer from 1980-1985, Vice President from 1985-1988, and was promoted to Senior Vice President in 1988. 6 ITEM 2. PROPERTIES All of the Bank's branches located in Medford (except for the West Medford branch), the branch located in Arlington, the Malden Center, Maplewood and Oak Grove branches located in Malden, and the Tewksbury branch, located in Tewksbury, are owned by the Bank. All other branches are leased from unrelated third parties. The Company also owns an office building currently housing the Company's lending and certain administrative offices. Additional space in this operations center is leased to third parties. Subject to the foregoing, the Company believes that its properties are adequate for its present needs. ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is quoted on the Nasdaq National Market System under the symbol "MDBK." The following table sets forth cash dividends declared on common stock and the high and low closing prices for the quarters indicated. All prices set forth below are based on information provided by the National Association of Securities Dealers, Inc. Common Stock Sale Prices Dividends Declared ------------------------ ------------------ High Low Per Share ---- --- --------- 2000 1st quarter $16 1/2 $12 1/8 $0.12 2nd quarter 15 5/8 13 3/4 0.12 3rd quarter 16 1/8 13 7/8 0.12 4th quarter 15 5/8 13 3/8 0.16 1999 1st quarter $18 13/16 $17 $0.11 2nd quarter 18 7/16 15 1/4 0.11 3rd quarter 19 1/4 15 0.11 4th quarter 17 5/8 15 3/4 0.18 At March 5, 2001, according to the Company's transfer agent, the Company had approximately 1,046 record holders of its common stock. The number of holders of record does not reflect the number of persons or entities who or which held their stock in nominee or "street" name through various brokerage firms or other entities. The declaration of future dividends to the Company's stockholders is subject to future operating results, financial conditions, tax and legal considerations and other factors, such as the Bank's ability to declare and pay dividends to the Company. As the principal asset of the Company, the Bank currently provides the only source of payment of dividends by the Company. FDICIA limits the ability of undercapitalized insured banks to pay dividends. Moreover, under Massachusetts law, a stock-form savings bank may pay dividends no more frequently than quarterly only out of its net profits and only to the extent such dividends do not impair the Bank's capital stock, as defined; and the Commissioner's approval may be required under certain circumstances. Under Federal Reserve Board and FDIC regulations, the Company and the Bank would be prohibited from declaring dividends if, among other things, they were not in compliance with applicable regulatory capital requirements. Funds held by the Company are available for various corporate uses, including the payment of future dividends. 8 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
At December 31, ------------------------------------------------------------------------------ (Dollars in thousands, except per share data) 2000 1999 1998 1997 1996 ------------- ------------- ------------- ------------- ------------ BALANCE SHEET DATA Total assets $ 1,309,690 $ 1,224,912 $ 1,151,188 $ 1,135,572 $ 1,039,098 Investment securities (includes FHLB stock) 582,964 534,713 511,534 512,304 423,852 Loans, net 668,747 626,751 580,665 570,844 560,855 Deposits 975,857 911,328 871,702 821,706 792,141 Borrowed funds 223,843 215,724 170,116 205,779 148,464 Stockholders' equity 104,965 90,870 102,267 101,510 92,521 Book value per share 12.89 10.84 11.74 11.18 10.20 Stockholders' equity to total assets 8.01% 7.42% 8.88% 8.94% 8.90% Number of offices 18 17 17 16 16 - ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, ------------------------------------------------------------------------------ (Dollars in thousands, except per share data) 2000 1999 1998 1997 1996 ------------- ------------- ------------- ------------- ------------ STATEMENT OF OPERATIONS DATA Interest and dividend income $ 86,050 $ 77,849 $ 76,802 $ 75,332 $ 68,711 Interest expense 49,914 43,109 42,613 41,349 36,462 ------------- ------------- ------------- ------------- ------------ Net interest income 36,136 34,740 34,189 33,983 32,249 ------------- ------------- ------------- ------------- ------------ Provision for loan losses 175 - 75 125 215 Other income: Gain (loss) on sales of securities, net (1,031) 1,522 1,670 835 413 All other income 7,781 2,680 3,088 3,007 2,902 ------------- ------------- ------------- ------------- ------------ Total other income 6,750 4,202 4,758 3,842 3,315 ------------- ------------- ------------- ------------- ------------ Operating expenses 19,991 19,301 19,074 19,054 18,075 ------------- ------------- ------------- ------------- ------------ Income before income taxes 22,720 19,641 19,798 18,646 17,274 Provision for income taxes 8,951 6,990 7,546 7,256 6,845 ------------- ------------- ------------- ------------- ------------ Net income $ 13,769 $ 12,651 $ 12,252 $ 11,390 $ 10,429 ============= ============= ============= ============= ============ Basic earnings per share $ 1.69 $ 1.51 $ 1.38 $ 1.25 $ 1.15 ============= ============= ============= ============= ============ Diluted earnings per share $ 1.64 $ 1.44 $ 1.31 $ 1.19 $ 1.10 ============= ============= ============= ============= ============ Cash dividends declared per share $ 0.52 $ 0.51 $ 0.50 $ 0.45 $ 0.42 ============= ============= ============= ============= ============ SELECTED RATIOS Return on average assets 1.09% 1.07% 1.09% 1.05% 1.05% Return on average equity 15.06 13.52 11.99 11.81 11.72 Average equity to average assets 7.23 7.88 9.07 8.91 8.98 Weighted average rate spread 2.49 2.63 2.72 2.84 3.00 Net yield on average earning assets 2.93 3.03 3.16 3.26 3.39 Dividend payout ratio - basic earnings per share 30.77 33.77 36.23 36.00 36.52 - ------------------------------------------------------------------------------------------------------------------------------------
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussions set forth below and elsewhere herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Company may make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "will," "should," and other expressions which predict or indicate future events or trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: 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 laws and regulations; changes in the size and nature of the Company's competition; and changes in the assumptions used in making such forward-looking statements. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences, including, among others, the factors listed under "Risk Factors and Factors Affecting Forward Looking Statements," beginning on page 5. Readers should carefully review the factors described under "Risk Factors and Factors Affecting Forward Looking Statements" and should not place undue reliance on our forward-looking statements. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. GENERAL The Company's net income is primarily attributable to its level of net interest income, which represents the difference between interest and dividend income earned on earning assets and interest paid on deposits and other borrowed money. The main components of the Company's earning assets are loans, investment securities and short-term investments. Interest-bearing deposits include NOW, savings, money market and term certificates of deposit. The net interest income performance of the Company is significantly affected by general economic conditions, by the Company's corporate strategies, its asset/liability management, tactical programs and by the policies of regulatory authorities. Sources of non-interest income such as loan servicing fees, gains on sales of securities and other fees derived from various banking services contribute positively to the Company's results. The principal operating expenses of the Bank are salaries and employee benefits, occupancy and equipment expenses, data processing expenses, amortization of intangibles, advertising and marketing and other general and administrative expenses. 2000 marks the eighth consecutive year that the Company achieved record earnings, with net income of $13.8 million, an increase of $1,118,000, or 8.8%, compared to net income of $12.7 million for 1999. Earnings per share for 2000 were $1.69 ($1.64 on a diluted basis) compared with $1.51 ($1.44 on a diluted basis) for 1999, an increase of 20 cents on a diluted basis or 13.9% compared to the previous year. At December 31, 2000, total assets were $1.3 billion, an increase of 6.9% from the prior year. Total loans increased 6.7% to $675.7 million at December 31, 2000. Investment securities, including FHLB stock, increased 9.0% to $583.0 million at December 31, 2000 while total deposits increased $64.5 million, or 7.1%, to $975.9 million, and borrowed funds increased 3.8% to $223.8 million. Stockholders' equity totaled $105.0 million at December 31, 2000, representing a book value of $12.89 per share, compared to $10.84 per share at December 31, 1999. Stockholders' equity to total assets was 8.01% at December 31, 2000, exceeding all regulatory requirements. 10 FINANCIAL CONDITION Investment Portfolio The investment policy of the Company is structured to provide an adequate level of liquidity in order to meet anticipated deposit outflows, normal working capital needs and expansion of the loan portfolio within guidelines approved by the Board of Directors, while earning market returns. Accordingly, the majority of securities are in shorter-term Government, agency, or high-quality (rated "A" or better) corporate securities. Debt securities purchased generally have maturities or call dates within three years or less. Although the emphasis on short-term and medium-term investments reduces the overall yield, this strategy is in accordance with the Company's desire to minimize interest rate risk. Investment securities, including FHLB stock, were higher than 1999 year-end levels, at $583.0 million at December 31, 2000 versus $534.7 million at December 31, 1999. During 2000, the Company continued to modify the mix of the investment portfolio to generate higher levels of interest income. The strategy included replacing U.S. Government and federal agency securities as they matured or were sold with mortgage-backed securities and corporate bonds. Investments in corporate bonds consisted primarily of "A" or better rated or bonds with maturities of three years or less. At December 31, 1998, U.S. Government and federal agency securities represented 18% of total investment securities, and mortgage-backed securities represented 43%. At December 31, 1999, U.S. Government and federal agency securities equaled 12% of total investment securities while mortgage-backed securities represented 40%. At December 31, 2000, U.S. Government and federal agency securities were reduced to 1.3% of total investment securities while mortgage-backed securities and corporate bonds increased to 43% and 54%, respectively. The mortgage-backed securities pools added to this portfolio throughout 1999 and 2000 consisted primarily of fixed-rate, low-coupon, government-backed securities that have limited extension or contraction risk. Consideration is given to the underlying collateral, the impact of rising or falling rates on the average life of these securities and other factors associated with the Bank's investment policies and strategies. Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and reflected at amortized cost. All other marketable securities are classified as "available for sale" and reflected on the balance sheet at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in other comprehensive income (loss) in stockholders' equity. As of December 31, 2000, the net unrealized gain on investments classified as "available for sale" was $651,000 as compared to the net unrealized loss of $15.4 million as of December 31, 1999. The Bank also holds limited amounts of equity securities subject to the investment limitations imposed by FDICIA and the Commissioner. The following table sets forth certain information concerning the investment securities portfolio at carrying value:
At December 31, --------------------------------------------- 2000 1999 1998 ------------- ------------- ------------ (In thousands) Debt securities: U.S. Government and federal agency $ 7,806 $ 62,127 $ 93,735 Mortgage-backed securities 249,452 214,456 218,197 Corporate bonds 312,315 246,767 190,019 Equity securities 1,971 1,680 2,261 ------------- ------------- ------------ Total marketable securities 571,544 525,030 504,212 Federal Home Loan Bank stock 11,420 9,683 7,322 ------------- ------------- ------------ Total investment securities $ 582,964 $ 534,713 $ 511,534 ============= ============= ============
11 The following table sets forth the maturity distribution of debt securities (excluding mortgage-backed securities) at carrying value, with related weighted average yields: At December 31, 2000 ------------------------------------------------------- Weighted Weighted Within Average Over 1 Year Average 1 Year Yield to 5 Years Yield ------------- ----------- ------------ ----------- (Dollars in thousands) U.S. Government and federal agency $ - 0.00% $ 7,806 7.16% Corporate bonds 83,942 6.46 228,373 6.34 ------------- ------------ $ 83,942 6.46% $ 236,179 6.37% ============= ============ Loan Portfolio The Company offers a variety of lending products, including fixed-rate and adjustable-rate residential mortgages, equity lines of credit, fixed-rate and adjustable-rate commercial mortgages, construction loans, consumer loans and commercial business loans. As a portfolio lender, the Company generally retains all newly originated loans. From time to time, the Company originates and retains 30-year, fixed-rate residential loans. More frequently, however, the 30-year, fixed-rate residential loan product is generally offered whereby the Bank originates these loans for correspondent banks and collects origination fees therefrom. Real estate and commercial loan originations are initiated by the Bank's officers and lending personnel from a number of sources, including referrals from realtors, builders, attorneys, and customers. Direct mail to existing and potential customers is used to solicit other loan services. Advertising media is also used to promote loans. The Bank employs on-the-road originators and pays them commissions for loan originations. Applications for residential and consumer loans are accepted at all of the Bank's locations and are referred to the main office for processing. The Company has lending policies in place which are intended to control credit risk inherent in the origination and retention of loans in portfolio. Among other considerations, these policies delineate the Bank's geographic market region, and establish credit procedures and acceptable loan-to-value ratios for all loans. Additional specific policies are in effect for commercial and commercial real estate loans. Total loans increased to $675.7 million at December 31, 2000 compared to $633.5 million at December 31, 1999. The increase in loans was primarily in residential mortgages, with year-to-year growth of $22.4 million, or 4.8%. Commercial real estate loans increased $12.1 million, or 10.8%, to $124.2 million from $112.1 million in 1999. Outstanding commercial and residential construction loans were $19.9 million and $13.5 million at December 31, 2000 and 1999, respectively, reflecting an increase of 47.4%. In 1999, the Company bolstered its staff of commercial real estate lenders whose successful efforts have led to the combined $18.5 million growth in both commercial real estate and construction loans. All other loan categories remained relatively stable from December 31, 1999. The Company expects continued intense competition for loans within its geographic region. Within this framework, management continues intense marketing efforts for loans. 12 The following table shows the composition of the loan portfolio by type of loan:
At December 31, ------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------- ------------ ------------- ------------- ------------ (In thousands) Commercial loans $ 17,219 $ 18,124 $ 17,358 $ 14,941 $ 11,014 Loans secured by real estate: Residential 487,964 465,618 421,685 389,863 380,981 Construction loans, net of unadvanced funds 19,913 13,504 13,073 11,278 8,719 Commercial 124,201 112,050 109,561 124,094 123,158 Second mortgages 699 774 1,111 1,539 1,928 Equity lines of credit 21,609 19,394 20,606 22,146 21,169 Consumer loans 2,925 2,912 3,145 (1) 12,931 20,548 ------------- ------------ ------------- ------------- ------------ 674,530 632,376 586,539 576,792 567,517 Add: Net deferred origination costs 1,167 1,154 1,002 785 569 Less: Allowance for loan losses (6,950) (6,779) (6,876) (6,733) (7,231) ------------- ------------ ------------- ------------- ------------ Loans, net $ 668,747 $ 626,751 $ 580,665 $ 570,844 $ 560,855 ============= ============ ============= ============= ============
(1) The Bank sold $11.0 million of education loans in 1998 thereby exiting this business due to profitability concerns. The following table presents the maturity distribution of commercial and construction loans at December 31, 2000: Maturities ---------------------------------------------------------- 1 Year Over 1 Year Over or Less to 5 Years 5 Years Total ----------- -------------- ----------- ----------- (In thousands) Commercial loans $11,809 $4,676 $ 734 $17,219 Construction loans 5,842 7,211 6,860 19,913 Generally, construction loans provide for payments of interest only during the construction period, and then payments of principal and interest throughout the remaining life of the loans. In all cases, these construction loans have adjustable interest rates. Commercial loans with maturities of over one year are subject to interest rate adjustment or maturity according to the following schedule: Scheduled Maturity or Rate Adjustment ----------------------------------------------- Over 1 Year Over to 5 Years 5 Years Total -------------- ------------- ------------- (In thousands) Predetermined rates $ 2,648 $ - $ 2,648 Adjustable rates 2,028 734 2,762 -------------- ------------- ------------- $ 4,676 $ 734 $ 5,410 ============== ============= ============= 13 Non-performing Assets It is the Bank's policy to discontinue the accrual of interest on loans 90 days or more past due. Interest accrual ceases, and all previously accrued but unpaid interest is reversed, when a loan is placed on non-accrual status. At the option of management, a loan may be placed on non-accrual status prior to being 90 days past due if the collection of future interest and principal is, in the opinion of management, doubtful. Non-accrual loans are generally classified as impaired loans. The Bank recognizes impaired loans based on Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." Under this Statement, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All of the Bank's loans, which have been identified as impaired, have been measured by the fair value of existing collateral. Impaired loans are generally placed on non-accrual status whereby interest income is recognized only when received. The Bank does not apply SFAS No. 114 to individual consumer loans which are collectively evaluated for impairment. The following table sets forth information with respect to impaired and non-accrual loans and foreclosed real estate, at the dates indicated. There were no loans 90 days or more past due and still accruing at the dates indicated.
At December 31, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- --------- ---------- --------- ---------- (In thousands) Impaired loans accounted for on a non-accrual basis $ 1,047 $ 2,482 $ 1,766 $ 1,726 $ 2,752 Other loans accounted for on a non-accrual basis - 18 47 - 687 Foreclosed real estate - - 119 48 276 ---------- --------- ---------- --------- ---------- $ 1,047 $ 2,500 $ 1,932 $ 1,774 $ 3,715 ========== ========= ========== ========= ==========
For non-accrual loans at December 31, 2000, gross interest income of $354,000 would have been recorded during the year had the loans remained current in accordance with original terms. The amount of interest income on such loans that was included in net income for the period was $219,000. Allowance for Loan Losses The allowance for loan losses is established through a provision 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. Ultimate losses may vary significantly from current estimates. Quarterly reviews of the loan portfolio are performed to identify loans for which specific allowance allocations are considered prudent. The Bank also engages an independent third party to review and ascertain the underlying quality of targeted portfolio segments, three times a year, to support a comprehensive analysis of the overall portfolio. These review processes identify weaknesses as well as improvements in lending relationships since the last review. Management utilizes the results in its evaluation of the adequacy of its allowance for loan losses. Specific allocations include the results of measuring impaired loans under SFAS No. 114. General risk allocations are determined by formula whereby the loan portfolio is stratified by loan type and by risk rating category. Loss factors are then applied to each category based on various considerations including historical loss experience, delinquency trends, current economic conditions, industry standards and regulatory guidelines. Any remaining unallocated portion is reviewed for adequacy in relation to the overall loan portfolio and in recognition of estimates inherent in the calculation methodology. 14 An analysis of the allowance for loan losses is presented in the following table:
Years Ended December 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- ---------- --------- ---------- --------- (In thousands) Allowance for loan losses, beginning of year $ 6,779 $ 6,876 $ 6,733 $ 7,231 $ 7,466 --------- ---------- --------- ---------- --------- Loans charged-off --- Residential real estate (20) (2) (24) (38) (64) --- Commercial real estate (5) (16) - (720) (656) --- Consumer (28) (25) (33) (42) (89) --- Commercial (6) (121) (108) (31) (21) Recoveries --- Residential real estate 36 11 20 26 7 --- Commercial real estate 7 24 204 147 348 --- Consumer 10 19 9 25 8 --- Commercial 2 13 - 10 17 --------- ---------- --------- ---------- --------- Net recoveries (charge-offs) (4) (97) 68 (623) (450) --------- ---------- --------- ---------- --------- Provision for loan losses, charged to operations 175 - 75 125 215 --------- ---------- --------- ---------- --------- Allowance for loan losses, end of year $ 6,950 $ 6,779 $ 6,876 $ 6,733 $ 7,231 ========= ========== ========= ========== ========= Ratio of net charge-offs (recoveries) to average loans 0.00% 0.02% (0.01)% 0.11% 0.08% ========= ========== ========= ========== =========
An analysis of the allocation of the allowance for loan losses is presented in the following table:
At December 31, --------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------- ------------------------- Percent Percent Percent of Loans of Loans of Loans to Total to Total to Total Amount Loans Amount Loans Amount Loans --------- ----------- ---------- ------------ ---------- ----------- (Dollars in thousands) Residential real estate $ 2,002 75.66% $ 1,858 76.86% $ 1,683 75.64% Commercial real estate 4,179 18.41 4,121 17.69 4,433 18.65 Construction 398 2.95 270 2.13 261 2.22 Consumer 44 0.43 41 0.46 42 0.54 Commercial 327 2.55 489 2.86 457 2.95 --------- ----------- ---------- ------------ ---------- ----------- Total $ 6,950 100.00% $ 6,779 100.00% $ 6,876 100.00% ========= =========== ========== ============ ========== =========== ----------------------------------------------------- 1997 1996 ------------------------- ------------------------- Percent Percent of Loans of Loans to Total to Total Amount Loans Amount Loans ---------- ------------ ---------- ----------- Residential real estate $ 1,067 71.73% $ 1,179 71.23% Commercial real estate 5,220 21.49 5,711 21.68 Construction 169 1.95 131 1.53 Consumer 48 2.24 44 3.62 Commercial 229 2.59 166 1.94 ---------- ------------ ---------- ----------- Total $ 6,733 100.00% $ 7,231 100.00% ========== ============ ========== ===========
While management considers the allowance for loan losses to be adequate at December 31, 2000, there is no assurance that additional charge-offs and provisions will not be necessary in 2001. The unallocated allowance component has been allocated principally to commercial real estate for purposes of the above presentation. The provision for loan losses during 2001 will depend primarily on market conditions and the Bank's actual experience. Loan Concentrations Other than the focus of the Bank's lending activities to its market area, the Bank does not have a concentration of loans exceeding 10% of total loans at the end of 2000. 15 Deposits Deposits historically have been the Bank's primary source of funds. The Bank offers a wide variety of deposit products to attract both short-term and long-term deposits from individuals, partnerships and corporations, non-profits and municipalities. Deposit products include regular savings accounts, NOW accounts, money market deposit accounts, individual retirement accounts, term certificates, and retail and commercial demand deposit accounts. The Bank also solicits corporate and municipal jumbo term deposits. To maintain stable deposit rates and manage interest rate risk, the Bank's strategy has been to attract deposits through selective promotions. To increase core deposits, the Bank continues to promote its "ComboPlus" account, which combines a statement savings account and checking account into one convenient account offered at a competitive rate which exceeds the regular statement and passbook savings account rates. This account type has contributed significantly to the increase in savings and demand deposits. Total deposits increased $64.5 million, or 7.1%, to $975.9 million at December 31, 2000 from $911.3 million at December 31, 1999. As retail checking customers sought alternative banking relationships in a consolidating market, demand deposits increased $11.9 million or 23.3%, when compared to the prior year. NOW deposits increased 7.1%, savings and money market deposits increased 1.5% and term certificates increased 10.2%. In the rising rate environment during the first half of 2000, the Bank offered a competitive rate product to attract term certificates with maturities in excess of one year. This program played a significant role in the $42.6 million, or 10.2%, increase in term certificates. The following table indicates the balances in various deposit accounts at the end of each year: At December 31, ---------------------------------------------- 2000 1999 1998 -------------- ------------- ------------ (In thousands) Demand accounts $ 63,122 $ 51,202 $ 51,936 NOW accounts 65,106 60,811 64,888 Savings and money market accounts 388,655 382,970 351,047 Term certificates 458,974 416,345 403,831 -------------- ------------- ------------ $ 975,857 $ 911,328 $ 871,702 ============== ============= ============ The following table sets forth the average deposits of the Bank with related average rates paid during each year:
Years Ended December 31, -------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------- -------------------------- -------------------------- Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid ----------- ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) Demand $ 55,244 -% $ 47,409 -% $ 41,272 -% NOW 59,674 0.58 60,931 0.56 60,111 0.98 Savings and money market deposits 391,883 3.20 375,169 3.08 337,456 3.02 Term certificates 440,761 5.36 415,643 5.02 393,493 5.39
Included in term certificates of deposit are certificates having balances of $100,000 or more. At December 31, 2000, such term certificates had the following maturities:
At December 31, 2000 - ---------------------------------------------------------------------------------------- 3 Months Over 3 Months Over 6 Months Over or Less to 6 Months to 12 Months 12 Months Total - -------------- --------------- ----------------- -------------- ------------- (In thousands) $ 53,142 $ 12,180 $ 23,034 $ 13,050 $ 101,406
16 Borrowed Funds The Bank is a voluntary member of the FHLBB. As such, the Bank may borrow up to the amount of its qualified collateral, as defined by the FHLBB. The Bank has selectively borrowed long-term funds from the FHLBB to fund large commercial real estate loans in addition to purchases of mortgage-backed securities. Short-term borrowings are generally used to meet the Bank's daily liquidity needs. The Bank also enters into repurchase or reverse repurchase agreements with a number of authorized brokers as an alternative source of funds. Securities sold under agreements to repurchase are borrowings that mature within one year and are secured by U.S. government obligations. Total borrowed funds increased to $223.8 million at December 31, 2000 from $215.7 million at December 31, 1999. The following table presents, by category, information pertaining to the Bank's borrowings:
At December 31, ---------------------------------------------- 2000 1999 1998 ------------- ------------ ------------- (Dollars in thousands) Short-term borrowings: FHLBB advances $ 20,000 $ 45,000 $ - Federal Reserve Bank of Boston advances 443 844 114 Securities sold under agreements to repurchase - 21,227 38,349 ------------- ------------ ------------- Total short-term borrowings $ 20,443 $ 67,071 $ 38,463 ============= ============ ============= Weighted average rate 6.53% 5.35% 4.01% Average balance of short-term borrowings during the year $ 37,441 $ 48,265 $ 60,215 Weighted average rate paid on short-term borrowings during the year 6.17% 5.07% 5.33% Maximum amount outstanding at any month-end during the year $ 66,480 $ 75,991 $ 82,514 Long-term debt: FHLBB advances $ 203,400 $ 148,653 $ 131,653 ============= ============ ============= Weighted average rate 6.32% 5.62% 5.74% Average balance of long-term debt during the year $ 180,747 $ 139,034 $ 123,358 Weighed average rate paid on long-term debt during the year 6.13% 5.69% 6.02% Maximum amount outstanding at any month-end during the year $ 212,117 $ 148,653 $ 136,653
Stockholders' Equity Stockholders' equity to total assets was 8.01% at December 31, 2000, compared to 7.42% at December 31, 1999. Stockholders' equity at December 31, 2000 and 1999 exceeded all regulatory requirements. Book value at December 31, 2000 was $12.89 per share, compared with $10.84 per share at December 31, 1999. (See "Liquidity and Capital Resources.") 17 RESULTS OF OPERATIONS General In 2000, the Company reported consolidated net income of $13.8 million or $1.69 per share (basic), as compared to net income of $12.7 million or $1.51 per share in 1999, and net income of $12.3 million or $1.38 per share in 1998. Diluted earnings per share were $1.64, $1.44, and $1.31 for 2000, 1999 and 1998, respectively. Consolidated net income in 2000 increased 8.8% over 1999 and consolidated net income in 1999 increased 3.3% over 1998. Diluted earnings per share in 2000 increased 13.9% over 1999, and diluted earnings per share in 1999 increased 9.9% over 1998. The Company's return on assets was 1.09% for 2000, as compared to 1.07% in 1999 and 1.09% in 1998. The return on equity increased to 15.06% in 2000 from 13.52% in 1999 and 11.99% in 1998. Net Interest Income Net interest income was $36.1 million in 2000, an increase of $1.4 million or 4.0% from 1999. Average earning assets in 2000 increased $85.6 million as compared to an increase of $71.5 million in interest-bearing liabilities. As a result, the excess of earning assets over interest-bearing liabilities increased 13.1% to $123.0 million from $108.8 million in 1999. Net interest income was $34.7 million in 1999, an increase of $551,000 or 1.6% from $34.2 million in 1998. Average earning assets in 1999 increased $65.3 million as compared to an increase of $64.4 million of increased interest-bearing liabilities. As a result, the excess of earning assets over interest-bearing liabilities increased 0.83% to $108.8 million from $107.9 million in 1998. The Company's most integral challenge is managing net interest income through various interest rate environments. In 2000, rates increased in the first half and the yield curve inverted during the second half. Management continues to focus on minimizing net interest margin compression by monitoring its mix of earning assets and funding costs under varying market rate environments to maximize yield. During 2000, average loan balances represented 53.3% of average earning assets, as compared with 52.5% in 1999 and 53.7% in 1998. The average short-term investments and investment securities balances were 46.7% of average earning assets in 2000 as compared to 47.5% in 1999 and 46.3% in 1998. Management utilizes borrowings as an alternative to deposits when pricing or availability is more advantageous. Average deposits represented 80.4%, and average borrowings represented 19.6%, of total interest bearing liabilities in 2000, as compared to 82.0% and 18.0%, respectively, in 1999, and 81.2% and 18.8%, respectively in 1998. Although the Company improved its yield on earning assets by modestly increasing its percentage of loans to assets coupled with rising rates in year 2000, the more significant rise in the cost of term certificates and borrowings more than offset this increase. As earning asset yields increased 20 basis points from 6.78% in 1999 to 6.98% in 2000, costs of interest bearing liabilities increased 34 basis points in the same comparable period from 4.15% to 4.49%. This resulted in compression of the Company's net interest margin from an average of 3.03% in 1999 to 2.93% in year 2000. Interest and Dividend Income Interest and dividend income totalled $86.0 million for 2000, an increase of $8.2 million or 10.5% from 1999. Interest and dividend income totalled $77.8 million for 1999, an increase of $1.0 million or 1.4% from 1998. The weighted average yield on earning assets was 6.98% in 2000, compared to 6.78% in 1999 and 7.09% in 1998. Interest income on loans increased 11.1%, or $5.0 million, to $50.0 million in 2000, as a result of increases in the average loans outstanding and an increase in the average yield on loans to 7.61%. Increased residential 1-4 family loan volume contributed $3.3 million of additional interest income. The average yield on residential 1-4 family loans rose to 7.18% when compared with the 7.06% earned in 1999. Interest income on commercial and industrial loans increased $224,000 as a result of greater volume and higher yields. The yield on commercial and industrial loans increased to 9.56% when compared to 8.51% in 1999, as a result of increases in the prime rate during 2000. Commercial real estate loans contributed $1.5 million of additional interest income in 2000 as outstanding loans increased and the yield decreased to 8.91% from 8.94% in 1999. Interest income on loans was $45.0 million in 1999 compared with $45.7 million in 1998. Increases in the average loans outstanding were more than offset by a reduction in the average yield on loans to 7.48%. Interest income on residential 1-4 family loans increased $1.0 million in 1999 compared to 1998 levels as loan volume increased. Interest income on commercial loans increased $53,000 while the yield declined to 8.51% when compared to 9.41% in 1998. 18 Interest income on investments increased $3.2 million to $36.0 million in 2000 compared with $32.8 million in 1999. The $3.2 million increase in investment interest income is accounted for by a $30.0 million increase in the average balance and the increase in yield from 6.03% in 1999 to 6.26% in 2000. Interest income on investments was $32.8 million in 1999 compared with $31.1 million in 1998. The $44.0 million increase in the average balance of investment securities contributed $2.7 million of interest income in 1999, offset by a $929,000 decrease as a result of the decline in the yield on investment securities to 6.03% in 1999 from 6.20% in 1998. Interest Expense Interest expense was $49.9 million in 2000 compared to $43.1 million in 1999. The increase in interest expense is primarily attributable to increases in both volume and rates on term certificates, savings deposits and MMDA, and long-term borrowings. As a result, the cost of funds in 2000 increased to 4.49% from 4.15% in 1999. Interest expense on deposits was $36.5 million in 2000, compared with $32.8 million in 1999. Average interest-bearing deposits increased $40.7 million and rates increased from 3.85% to 4.09%, resulting in an increase in interest expense of $3.8 million. Interest expense on borrowings was $13.4 million in 2000, compared with $10.4 million in 1999. The increase in interest expense is a result of a $30.9 million increase in the average balance of borrowings and an increase in the cost of borrowings from 5.53% to 6.14%. Interest expense was $43.1 million in 1999, an increase of $496,000 or 1.2% from 1998. Interest expense on deposits was $32.8 million and interest on borrowed funds was $10.4 million in 1999, compared with $32.0 million and $10.6 million, respectively, in 1998. The cost of funds decreased to 4.15% from 4.37% in 1998 principally as a result of declining rates paid on term certificates and borrowings. Rate/Volume Analysis The following table presents, for the periods indicated, changes in interest and dividend income and changes in interest expense attributable to changes in interest rates and volumes of interest-bearing assets and liabilities. Changes attributable to both rate and volume have been allocated proportionally to the two categories.
2000 Compared to 1999 1999 Compared to 1998 Increase (Decrease) Increase (Decrease) ------------------------------------------- ------------------------------------------- Volume Rate Total Volume Rate Total ----------- ------------- ----------- ----------- ------------- ----------- (In thousands) INTEREST AND DIVIDEND INCOME Short-term investments $ - $ 85 $ 85 $ 136 $ (10) $ 126 Mortgage-backed investments (52) 289 237 3,867 (607) 3,260 Other investment securities 1,916 958 2,874 (1,329) (312) (1,641) Loans 4,218 787 5,005 1,639 (2,337) (698) ----------- ------------- ----------- ----------- ------------- ----------- Total interest and dividend income 6,082 2,119 8,201 4,313 (3,266) 1,047 ----------- ------------- ----------- ----------- ------------- ----------- INTEREST EXPENSE NOW deposits (7) 8 1 8 (252) (244) Savings deposits and MMDA 525 482 1,007 1,157 185 1,342 Term certificates 1,302 1,462 2,764 1,156 (1,478) (322) Short-term borrowings (609) 472 (137) (611) (153) (764) Long-term debt 2,520 650 3,170 907 (423) 484 ----------- ------------- ----------- ----------- ------------- ----------- Total interest expense 3,731 3,074 6,805 2,617 (2,121) 496 ----------- ------------- ----------- ----------- ------------- ----------- Net interest income $ 2,351 $ (955) $ 1,396 $ 1,696 $ (1,145) $ 551 =========== ============= =========== =========== ============= ===========
19 Distribution of Assets and Liabilities; Interest Rates and Interest Differential The following presents an analysis of average yields earned and rates paid for the years indicated. Average balances are computed using daily averages except for average stockholders' equity for which month-end balances are used.
Years Ended December 31, 2000 December 31, 1999 - ------------------------------------------------------------------------------ ------------------------------------ Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) ASSETS Earning assets: Short-term investments $ 6,719 $ 416 6.19% $ 6,696 $ 331 4.94% Mortgage-backed investments 234,064 14,476 6.18 234,928 14,239 6.06 Other investment securities 334,647 21,111 6.31 303,784 18,237 6.00 Loans (a) 658,041 50,047 7.61 602,429 45,042 7.48 - ---------------------------------------------------------------------------------------------------------------------- Total earning assets 1,233,471 86,050 6.98 1,147,837 77,849 6.78 Other assets 30,485 - - 39,696 - - - ---------------------------------------------------------------------------------------------------------------------- Total assets $1,263,956 - - $1,187,533 - - ====================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW deposits $ 59,674 $ 344 0.58% $ 60,931 $ 343 0.56% Savings deposits and MMDA 391,883 12,547 3.20 375,169 11,540 3.08 Term certificates 440,761 23,632 5.36 415,643 20,868 5.02 Short-term borrowings 37,441 2,309 6.17 48,265 2,446 5.07 Long-term debt 180,747 11,082 6.13 139,034 7,912 5.69 - ---------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,110,506 49,914 4.49 1,039,042 43,109 4.15 Other liabilities 62,012 - - 54,888 - - Stockholders' equity 91,438 - - 93,603 - - - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,263,956 - - $1,187,533 - - ====================================================================================================================== Net interest income $36,136 $34,740 Weighted average rate spread (b) 2.49% 2.63% Net yield on average earning assets (c) 2.93% 3.03% ====================================================================================================================== Years Ended December 31, 1998 - ------------------------------------------ ------------------------------------ Interest Average Average Earned/ Yield/ Balance Paid Rate ---------- ---------- ---------- ASSETS Earning assets: Short-term investments $ 3,941 $ 205 5.20% Mortgage-backed investments 171,581 10,979 6.40 Other investment securities 325,852 19,878 6.10 Loans (a) 581,154 45,740 7.87 - --------------------------------------------------------------------------------- Total earning assets 1,082,528 76,802 7.09 Other assets 44,518 - - - --------------------------------------------------------------------------------- Total assets $1,127,046 - - ================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW deposits $ 60,111 $ 587 0.98% Savings deposits and MMDA 337,456 10,198 3.02 Term certificates 393,493 21,190 5.39 Short-term borrowings 60,215 3,210 5.33 Long-term debt 123,358 7,428 6.02 - --------------------------------------------------------------------------------- Total interest-bearing liabilities 974,633 42,613 4.37 Other liabilities 50,194 - - Stockholders' equity 102,219 - - - --------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,127,046 - - ================================================================================= Net interest income $34,189 Weighted average rate spread (b) 2.72% Net yield on average earning assets (c) 3.16% =================================================================================
(a) Includes non-accrual loans. (b) Weighted average yield on earning assets less weighted average rate paid on interest-bearing liabilities. (c) Net interest income divided by average earning assets. 20 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, the level of non-performing loans, current economic conditions, trends in delinquency and charge-offs, and collateral values of the underlying security. Ultimate losses may vary from current estimates. The Bank recorded a provision for loan losses of $175,000 in 2000. This compares with no provision in 1999 and a provision of $75,000 in 1998. Gross loans charged-off declined to $59,000 in 2000 versus $164,000 and $165,000 in 1999 and 1998, respectively. Net loans charged-off totaled $4,000 and $97,000, respectively, in 2000 and 1999, while in 1998 the Company experienced net loan recoveries of $68,000. The loan portfolio increased $42.2 million during 2000 with $22.4 million related to residential real estate loans, which are assigned a relatively low risk rating as compared to other categories in the Company's loan portfolio. The impact of applying general risk allocations to the growth in residential and commercial real estate loans, as well as construction loans, was partially offset by the net improvement in the general risk ratings applicable to certain commercial lending relationships. While management considers the allowance for loan losses to be adequate at December 31, 2000, there is no assurance that additional charge-offs and provisions will not be necessary in 2001. The provision for loan losses during 2001 will depend primarily on market conditions and the Bank's actual experience. Other Income Total other income amounted to $6.8 million in 2000, as compared to $4.2 million in 1999 and $4.8 million in 1998. When comparing 2000 with 1999, the $4.8 million gain from the termination of the defined benefit plan was partially offset by the net change in securities gains and losses of $2.5 million. The Company recorded a net loss on sales of securities of $1.0 million in 2000 as compared to a net gain on sales of securities of $1.5 million in 1999. The net loss on sales of securities in 2000 is reflective of a portfolio restructuring, whereby securities totaling $40.2 million and yielding 5.02% were sold and the proceeds were reinvested in securities yielding approximately 7.0%. The $556,000 decrease in other income when comparing year 1999 with 1998 can be primarily accounted for by the change in level of gains recorded from sales of assets. Gains on sales of assets in 1999 totaled $1.5 million, compared with $2.0 million in 1998, representing a decrease of $500,000. In 1999, customer service fees declined $27,000 from 1998, in part reflecting lower revenues on deposit accounts as customers migrated to deposit products with lower or no service fees. Operating Expenses Operating expenses were $20.0 million for 2000, up $690,000 or 3.6% over 1999 operating expenses of $19.3 million. This increase in operating expenses was driven by staff related costs to support Company growth, which were partially offset by a net overall decline of $336,000 in defined benefit pension and 401(k) plan expense. This decline is a result of the Bank's termination of its defined benefit pension plan effective February 29, 2000. Operating expenses were $19.3 million for 1999, up $227,000 or 1.2% over 1998 operating expenses of $19.1 million. Occupancy, equipment and data processing rose $287,000 or 7.7% when compared to 1998 as a result of additional operating expenses associated with reopening and opening of branch sites. Professional fees increased $132,000 or 25% over 1998 as a result of expenses applicable to shareholder matters. Provision for Income Taxes The Bank's effective tax rate for the year ended December 31, 2000 was 39.4% as compared with 35.6% and 38.1% for 1999 and 1998, respectively. The effective tax rates exceeded the statutory federal tax rate of 35.0% (for taxable income exceeding $10.0 million) due to state taxes, and in 2000, due principally to a tax of $639,000 related to the pension plan settlement. 21 IMPACT OF INFLATION The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, 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 Bank 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. LIQUIDITY AND CAPITAL RESOURCES The Bank's principal sources of funds are customer deposits, amortization and payoff of existing loan principal, and sales or maturities of various investment securities. The Bank is a voluntary member of the FHLBB and, as such, may take advantage of the FHLBB's borrowing programs to enhance liquidity and leverage its favorable capital position. The Bank also may draw on lines of credit at the FHLBB and a large commercial bank or enter into repurchase or reverse repurchase agreements with authorized brokers. These various sources of liquidity are used to fund withdrawals, new loans, and investments. Management seeks to promote deposit growth while controlling the Bank'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. Management reviews, on an ongoing basis, possible new products, with particular attention to products and services which will aid in retaining the Bank's base of lower-costing deposits. Maturities and sales of investment securities provide significant liquidity to the Bank. The Bank's policy of purchasing shorter-term debt securities reduces market risk in the bond portfolio while providing significant cash flow. In 2000, cash flow from maturities of securities was $70.0 million and proceeds from sales of securities totaled $55.2 million, compared to maturities of securities of $66.3 million and proceeds from sales of securities of $105.4 million in 1999. Principal payments on mortgage-backed securities in 2000 and 1999 totaled $32.4 million and $47.4 million, respectively. Purchases of securities during 2000 and 1999 totaled $190.9 million and $261.7 million, respectively. These purchases consisted primarily of short-term debt instruments. During periods of high interest rates or active mortgage origination, maturities in the bond portfolio have provided significant liquidity to the Bank, generally at a lower cost than borrowings. Amortization and pay-offs of the loan portfolio contribute significant liquidity to the Bank. Traditionally, amortization and pay-offs are reinvested into loans. Excess liquidity is invested in short-term debt instruments. The Bank has also used borrowed funds as a source of liquidity. At December 31, 2000, the Bank's outstanding borrowings from the FHLBB were $223.4 million. The Bank also utilizes repurchase agreements to fund loan purchases or to leverage the balance sheet. At December 31, 2000, there were no securities sold under agreements to repurchase. Residential and commercial mortgage loan originations for 2000, 1999 and 1998 totaled $139.2 million, $147.9 million and $159.5 million, respectively. Commitments to originate commercial and residential real estate mortgages at December 31, 2000 were $4.9 million, excluding unadvanced construction funds totaling $16.3 million. Unadvanced funds on equity and commercial lines of credit aggregated $33.1 million at December 31, 2000. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. The Bank's capital position (total stockholders' equity) was $105.0 million, or 8.01% of total assets at December 31, 2000, compared with $90.9 million, or 7.42% of total assets at December 31, 1999. In 2000, the Company utilized the holding company structure to exercise greater control in managing capital with the completion of a 5% stock repurchase plan. A total of 423,100 shares of common stock were repurchased. In addition, the Company announced in November 2000 another stock repurchase plan of up to 5% of outstanding shares. The FDIC imposes capital guidelines on the Bank. The guidelines define core or "tier 1" capital and supplementary or "tier 2" capital and assign weights to broad categories of assets and certain off-balance sheet items. Ratios of tier 1 and tier 1 plus tier 2 capital to assets are then calculated. Banks must maintain a tier 1 capital to risk-weighted assets ratio of 4.00% and a total capital to risk-weighted assets ratio of 8.00%. The consolidated Company's and the Bank's tier 1 risk-based capital ratios, as defined, at December 31, 2000 were 12.1% and 11.6%, respectively, which exceeds both risk-based capital requirements. Massachusetts-chartered savings banks insured by the FDIC are required to maintain minimum leverage capital (tier 1 capital) of 3.0% or 4.0% of total assets, as adjusted, depending on an individual bank's rating. The Bank's leverage capital ratio at December 31, 2000, as defined by the FDIC, was 7.5%, which exceeds the FDIC's requirements. 22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Through the Bank's Asset-Liability Management Committee ("ALCO"), which is comprised of certain senior and middle management personnel, the Bank closely monitors the level and general mix of interest rate-sensitive assets and liabilities. The primary objective of the Bank's ALCO program is to manage the assets and liabilities of the Bank to enhance profitability and capital at prudent levels of liquidity, interest rate, credit and market risk. Market risk is the risk of loss from adverse changes in market prices and interest rates. The Bank's market risk arises primarily from interest rate risk inherent in lending, investing in marketable securities, deposit taking, and borrowing activities. To that end, management actively monitors and manages its interest rate risk exposure. In addition, the Bank is exposed to equity price risk associated with investing in marketable equity securities, which is not material. The Bank's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Bank's net interest income and capital, while adjusting the Bank's asset-liability mix to achieve the maximum yield to cost spread from the mix. However, a sudden and substantial increase or decrease in interest rates may adversely impact the Bank's earnings to the extent that interest sensitive assets and liabilities do not change at the same speed, to the same extent, or on the same basis. It is ALCO's general policy to closely match the maturity or rate sensitivity of its assets and liabilities. Strategies implemented to improve the match between interest-rate sensitive assets and liabilities include, but are not limited to: daily monitoring of the Bank's changing cash requirements, with particular concentration on investment in shorter-term securities; a general policy of originating adjustable-rate and fifteen-year, fixed-rate mortgage loans for the Bank's own portfolio, monitoring the cost and composition of deposits; and generally using matched borrowings to fund specified purchases of loan packages and large loan originations. Occasionally, management may choose to deviate somewhat from specific matching of maturities of assets and liabilities to take advantage of an opportunity to enhance yields. The Bank seeks to manage its liability portfolio in order to effectively plan and manage growth and maturities of deposits. Plans designed to achieve growth of different deposit types are reviewed regularly. Programs which are designed to build multiple relationships with customers and to enhance the Bank's ability to retain deposits at controlled rates of interest have been implemented. Management has also adopted a policy of reviewing interest rates on an ongoing basis on all deposit accounts in order to monitor deposit growth and interest costs. In addition to attracting deposits, the Bank has selectively borrowed funds using advances from the FHLBB and reverse repurchase agreements. 23 The following table presents, as of December 31, 2000, interest-rate sensitive assets and liabilities categorized by expected maturity and weighted average rate. Expected maturities are contractual maturities adjusted for amortization and prepayments of principal. For adjustable-rate instruments, contractual maturity is deemed to be the earliest possible interest rate adjustment date.
(Dollars in thousands) Overnight 0-1 yr. 1-2 yrs. 2-3 yrs. -------------- ------------- ------------ ------------ Rate-sensitive assets: Short-term investments $ 5,353 $ - $ - $ - 6.29% Mortgage-backed investments - 64,719 52,786 44,573 6.33% 6.33% 6.33% Other investment securities - 84,062 103,071 100,569 6.42% 6.23% 6.19% Adjustable-rate mortgages 21,609 151,907 75,767 77,450 9.43% 8.41% 7.61% 7.49% Fixed-rate mortgages - 22,984 22,656 20,915 7.40% 7.35% 7.23% All other loans 14,446 2,664 1,319 790 10.10% 10.00% 10.18% 10.38% - ----------------------------------------------------------------------------------------------------- Total rate-sensitive assets 41,408 326,336 255,599 244,297 - ----------------------------------------------------------------------------------------------------- Rate-sensitive liabilities: NOW accounts 831 - 32,137 32,138 0.72% 0.58% 0.58% Savings accounts 80,824 - 80,824 80,824 3.09% 3.09% 3.09% Money market accounts 16,339 - 16,339 16,339 3.96% 3.96% 3.96% Term certificates - 375,579 58,691 13,432 5.70% 6.08% 5.83% Borrowings - 133,443 60,000 30,000 6.13% 6.78% 6.28% - ----------------------------------------------------------------------------------------------------- Total rate-sensitive liabilities 97,994 509,022 247,991 172,733 - ----------------------------------------------------------------------------------------------------- (Dollars in thousands) 3-4 yrs. 4-5 yrs. 5+ yrs. Total ------------ ------------ ------------ ------------ Rate-sensitive assets: Short-term investments $ - $ - $ - $ 5,353 Mortgage-backed investments 33,041 23,123 32,392 250,634 6.33% 6.33% 6.33% Other investment securities 30,272 - - 317,974 6.98% Adjustable-rate mortgages 57,901 48,563 16,147 449,344 7.19% 7.74% 6.91% Fixed-rate mortgages 21,867 19,393 97,343 205,158 7.25% 7.15% 7.21% All other loans 862 43 24 20,148 8.68% 11.62% 7.00% - -------------------------------------------------------------------------------------------------- Total rate-sensitive assets 143,943 91,122 145,906 1,248,611 - -------------------------------------------------------------------------------------------------- Rate-sensitive liabilities: NOW accounts - - - 65,106 Savings accounts 80,826 - - 323,298 3.09% Money market accounts 16,340 - - 65,357 3.96% Term certificates 5,773 5,392 107 458,974 4.86% 4.85% 5.30% Borrowings - 400 - 223,843 5.61% - -------------------------------------------------------------------------------------------------- Total rate-sensitive liabilities 102,939 5,792 107 1,136,578 - --------------------------------------------------------------------------------------------------
The prepayment experience reflected is based on the Bank's historical experience. Based on the Bank's experience, partial or full payment prior to contractual maturity can be expected and is reflected. Loans and mortgage-backed securities reflect regular amortization of principal and pre-payment estimates. When adjustable-rate loans reprice at the rate adjustment date, they are generally indexed to the one-, three-, or five-year Treasury rate with an average spread of 275 basis points, with average period caps of 2.0% and life-time caps of 6.0%. The table does not include loans which have been placed on non-accrual status. Assets and liabilities that immediately reprice are placed in the overnight column. These financial instruments do not have a contractual maturity date. Although NOW, savings and money market deposit accounts are subject to immediate repricing or withdrawal, based on the Bank's history, management considers these liabilities to have longer lives and less interest rate sensitivity than term certificates. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Independent Auditors' Report..................................................26 Consolidated Balance Sheets at December 31, 2000 and 1999.....................27 Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998.........................................28 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998.....................29 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998......................................30-31 Notes to Consolidated Financial Statements.................................32-55 25 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Medford Bancorp, Inc.: We have audited the consolidated balance sheets of Medford Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Medford Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Wolf & Company, P.C. Boston, Massachusetts January 19, 2001 26 MEDFORD BANCORP, INC. CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- 2000 1999 ----------- ----------- (In thousands) ASSETS Cash and due from banks $ 16,905 $ 17,043 Interest-bearing deposits 5,353 3,867 ----------- ----------- Cash and cash equivalents 22,258 20,910 Securities available for sale 528,690 520,030 Securities held to maturity 42,854 5,000 Federal Home Loan Bank of Boston stock, at cost 11,420 9,683 Loans 675,697 633,530 Less allowance for loan losses (6,950) (6,779) ----------- ----------- Loans, net 668,747 626,751 ----------- ----------- Banking premises and equipment, net 10,884 11,566 Accrued interest receivable 10,211 9,162 Goodwill and deposit-based intangibles 2,588 3,679 Other assets 12,038 18,131 ----------- ----------- Total assets $ 1,309,690 $ 1,224,912 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 975,857 $ 911,328 Short-term borrowings 20,443 67,071 Long-term debt 203,400 148,653 Accrued taxes and expenses 2,278 3,920 Other liabilities 2,747 3,070 ----------- ----------- Total liabilities 1,204,725 1,134,042 ----------- ----------- Commitments and contingencies (Notes 4 and 9) 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, 9,122,596 shares issued 4,561 4,561 Additional paid-in capital 22,705 24,839 Retained earnings 94,697 85,153 Treasury stock, at cost (980,048 and 739,344 shares, respectively) (17,422) (14,278) Shares held in rabbi trust, at cost 1,071 930 Deferred compensation obligation (1,071) (930) Accumulated other comprehensive income (loss) 424 (9,405) ----------- ----------- Total stockholders' equity 104,965 90,870 ----------- ----------- Total liabilities and stockholders' equity $ 1,309,690 $ 1,224,912 =========== ===========
See accompanying notes to consolidated financial statements. 27 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ----------------------------------------- 2000 1999 1998 -------- ------- ------- (In thousands, except per share data) Interest and dividend income: Interest and fees on loans $ 50,047 $45,042 $45,740 Interest on debt securities 34,686 31,827 30,331 Dividends on equity securities 901 649 526 Interest on short-term investments 416 331 205 -------- ------- ------- Total interest and dividend income 86,050 77,849 76,802 -------- ------- ------- Interest expense: Interest on deposits 36,523 32,751 31,975 Interest on short-term borrowings 2,309 2,446 3,210 Interest on long-term debt 11,082 7,912 7,428 -------- ------- ------- Total interest expense 49,914 43,109 42,613 -------- ------- ------- Net interest income 36,136 34,740 34,189 Provision for loan losses 175 - 75 -------- ------- ------- Net interest income, after provision for loan losses 35,961 34,740 34,114 -------- ------- ------- Other income: Customer service fees 1,968 1,851 1,878 Gain (loss) on sales of securities, net (1,031) 1,522 1,670 Gain on sale of loans - - 370 Pension plan curtailment and settlement gains 4,799 - - Miscellaneous 1,014 829 840 -------- ------- ------- Total other income 6,750 4,202 4,758 -------- ------- ------- Operating expenses: Salaries and employee benefits 11,069 10,673 10,788 Occupancy and equipment 2,611 2,488 2,296 Data processing 1,553 1,512 1,417 Professional fees 497 657 525 Amortization of intangibles 1,091 1,128 1,171 Advertising and marketing 690 654 545 Other general and administrative 2,480 2,189 2,332 -------- ------- ------- Total operating expenses 19,991 19,301 19,074 -------- ------- ------- Income before income taxes 22,720 19,641 19,798 Provision for income taxes 8,951 6,990 7,546 -------- ------- ------- Net income $ 13,769 $12,651 $12,252 ======== ======= ======= Weighted average shares outstanding: Basic 8,139 8,393 8,904 ======== ======= ======= Diluted 8,395 8,775 9,377 ======== ======= ======= Earnings per share: Basic $ 1.69 $ 1.51 $ 1.38 ======== ======= ======= Diluted $ 1.64 $ 1.44 $ 1.31 ======== ======= =======
See accompanying notes to consolidated financial statements. 28 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2000, 1999 and 1998
Common Stock Additional ------------------------- Paid-In Retained Shares Dollars Capital Earnings ------------- --------- ------------ ------------ (In thousands) Balance at December 31, 1997 4,541 $ 2,271 $ 28,977 $ 68,938 Comprehensive income: Net income - - - 12,252 Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects - - - - Total comprehensive income Cash dividends declared ($.50 per share) - - - (4,420) Stock split (2 for 1) 4,541 2,271 (2,271) - Repurchase of treasury stock - - - - Issuance of common stock under option plan 40 19 (527) - Income tax benefits on options exercised - - 210 - ------------- --------- ------------ ------------ Balance at December 31, 1998 9,122 4,561 26,389 76,770 Comprehensive income: Net income - - - 12,651 Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects - - - - Total comprehensive income Cash dividends declared ($.51 per share) - - - (4,268) Repurchase of treasury stock - - - - Issuance of common stock under option plan - - (1,550) - ------------- --------- ------------ ------------ Balance at December 31, 1999 9,122 4,561 24,839 85,153 Comprehensive income: Net income - - - 13,769 Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects - - - - Total comprehensive income Cash dividends declared ($.52 per share) - - - (4,225) Repurchase of treasury stock - - - - Issuance of common stock under option plan - - (2,790) - Income tax benefits on options exercised - - 656 - ------------- --------- ------------ ------------ Balance at December 31, 2000 9,122 $ 4,561 $ 22,705 $ 94,697 ============= ========= ============ ============ Accumulated Treasury Stock Other --------------------------- Comprehensive Shares Dollars Income (Loss) Total ------------- ------------ ------------------ ------------- (In thousands) Balance at December 31, 1997 - $ - $ 1,324 $ 101,510 ------------- Comprehensive income: Net income - - - 12,252 Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects - - 1,734 1,734 ------------- Total comprehensive income 13,986 ------------- Cash dividends declared ($.50 per share) - - - (4,420) Stock split (2 for 1) - - - - Repurchase of treasury stock (454) (9,378) - (9,378) Issuance of common stock under option plan 41 867 - 359 Income tax benefits on options exercised - - - 210 ------------- ------------ ------------------ ------------- Balance at December 31, 1998 (413) (8,511) 3,058 102,267 ------------- Comprehensive income: Net income - - - 12,651 Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects - - (12,463) (12,463) ------------- Total comprehensive income 188 ------------- Cash dividends declared ($.51 per share) - - - (4,268) Repurchase of treasury stock (425) (7,689) - (7,689) Issuance of common stock under option plan 99 1,922 - 372 ------------- ------------ ------------------ ------------- Balance at December 31, 1999 (739) (14,278) (9,405) 90,870 ------------- Comprehensive income: Net income - - - 13,769 Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects - - 9,829 9,829 ------------- Total comprehensive income 23,598 ------------- Cash dividends declared ($.52 per share) - - - (4,225) Repurchase of treasury stock (423) (6,428) - (6,428) Issuance of common stock under option plan 182 3,284 - 494 Income tax benefits on options exercised - - - 656 ------------- ------------ ------------------ ------------- Balance at December 31, 2000 (980) $ (17,422) $ 424 $ 104,965 ============= ============ ================== =============
See accompanying notes to consolidated financial statements. 29 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Cash flows from operating activities: Net income $ 13,769 $ 12,651 $ 12,252 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 175 - 75 Depreciation and amortization, net 2,594 3,183 2,275 (Gain) loss on sales of securities, net 1,031 (1,522) (1,670) Gain on sale of loans - - (370) Deferred tax provision (benefit) 448 (100) (344) Decrease (increase) in accrued interest receivable and other assets (1,598) 549 (1,366) Increase (decrease) in accrued taxes and expenses and other liabilities (1,104) 367 629 -------- -------- -------- Net cash provided by operating activities 15,315 15,128 11,481 -------- -------- -------- Cash flows from investing activities: Activity in securities available for sale: Maturities 64,974 45,250 52,180 Sales 55,196 105,440 138,046 Purchases (144,649) (259,337) (297,537) Principal amortization of mortgage-backed securities 32,369 47,360 39,077 Activity in securities held to maturity: Maturities 4,997 21,000 74,803 Purchases (44,552) - - Purchases of Federal Home Loan Bank of Boston stock (1,737) (2,361) (1,564) Loans originated and purchased, net of amortization and payoffs (42,358) (46,460) (20,796) Proceeds from sales of loans - 77 11,336 Proceeds from sales of real estate - 431 70 Additions to banking premises and equipment, net (491) (1,036) (2,275) -------- -------- -------- Net cash used by investing activities (76,251) (89,636) (6,660) -------- -------- --------
(continued) See accompanying notes to consolidated financial statements. 30 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Years Ended December 31, ----------------------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Cash flows from financing activities: Net increase in deposits 64,529 39,626 49,996 Net decrease in short-term borrowings with maturities of three months or less (21,628) (16,392) (57,207) Proceeds from short-term borrowings with maturities in excess of three months 67,166 55,000 10,000 Repayment of short-term borrowings with maturities in excess of three months (92,166) (10,000) (10,000) Proceeds from long-term debt 123,000 67,000 68,536 Repayment of long-term debt (68,253) (50,000) (46,992) Issuance of common stock 494 372 359 Payments to acquire treasury stock (6,428) (7,689) (9,378) Cash dividends paid (4,430) (4,501) (4,313) -------- -------- -------- Net cash provided by financing activities 62,284 73,416 1,001 -------- -------- -------- Net change in cash and cash equivalents 1,348 (1,092) 5,822 Cash and cash equivalents at beginning of year 20,910 22,002 16,180 -------- -------- -------- Cash and cash equivalents at end of year $ 22,258 $ 20,910 $ 22,002 ======== ======== ======== Supplementary information: Interest paid on deposit accounts $ 36,486 $ 32,413 $ 31,835 Interest paid on borrowed funds 13,207 10,115 10,681 Income taxes paid, net of refunds 8,054 7,285 7,626
See accompanying notes to consolidated financial statements. 31 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000, 1999 and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation The consolidated financial statements include the accounts of Medford Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the "Bank"). The Bank's wholly-owned subsidiary, Medford Securities Corporation, engages in the buying, selling, dealing in, or holding of securities. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for losses on loans. Business and Operating Segments The Company is principally engaged in the business of attracting deposits from the general public, originating residential and commercial real estate mortgages and consumer and commercial loans, and investing in securities. The Company is headquartered in Medford, Massachusetts. It has a network of eighteen banking offices located in Medford, Malden, Arlington, Belmont, Burlington, North Reading, Somerville, Tewksbury, Waltham, and Wilmington. The Company's primary market area includes these communities as well as other cities and towns in Middlesex County and the surrounding area north of Boston. Management evaluates the Company's performance and allocates resources based on a single segment concept. Accordingly, there are no separately identified operating segments for which discrete financial information is available. The Company does not derive revenues from, or have assets located in, foreign countries, nor does it derive revenues from any single customer that represents 10% or more of the Company's total revenues. Cash and Cash Equivalents Cash and cash equivalents include cash, amounts due from banks and interest-bearing deposits that mature overnight or on demand. Securities Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and reflected at amortized cost. All other marketable securities are classified as "available for sale" and reflected on the consolidated balance sheet at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of related tax effects, in stockholders' equity. Purchase premiums and discounts on debt securities are amortized to earnings by the interest method over the terms of the securities. Declines in the value of securities that are deemed to be other than temporary are reflected in earnings when identified. Gains and losses on disposition of securities are recorded on the trade date and computed by the specific identification method. 32 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Loans The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in the eastern New England area. The ability of the Company's debtors to honor their obligations is dependent upon the real estate, construction, and general economic sectors of that region. Loans, as reported, have been increased by net deferred loan origination costs and reduced by the allowance for loan losses. Interest on loans is recognized on the interest method and is not accrued on loans which are ninety days or more past due. Loans may be placed on non-accrual status prior to becoming ninety days past due if the collection of principal and interest is, in the opinion of management, doubtful. Loans which are identified as impaired are generally placed on non-accrual status. Interest income previously accrued on such loans is reversed against current period earnings. Interest income on all non-accrual loans is recognized only to the extent of interest payments received. Net deferred loan origination costs are amortized as an adjustment of the related loan yield by the interest method over the contractual lives of the loans. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. An impaired loan is required to be measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. All of the Company's loans, which have been identified as impaired, have been measured by the fair value of existing collateral. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosure. Allowance for Loan Losses The allowance for loan losses is established, as losses are estimated to have occurred, through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the collectibility of the loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, known inherent risks in the nature and volume of the loan portfolio, levels of non-performing loans, adverse situations that may affect the borrower's ability to repay, trends in delinquencies and charge-offs, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Ultimate losses may vary from current estimates and future additions to the allowance may be necessary. The allowance consists of specific, general and unallocated loss components. Specific allocations include the results of measuring impaired loans under SFAS No. 114. General risk allocations are determined by formula whereby the loan portfolio is stratified by loan type and by risk rating category. Loss factors are then applied to each category based on various considerations including historical loss experience, delinquency trends, current economic conditions, industry standards and regulatory guidelines. Any remaining unallocated portion is reviewed for adequacy in relation to the overall loan portfolio and in recognition of estimates inherent in the calculation methodology. 33 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Banking Premises and Equipment Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Intangible Assets Intangible assets pertaining to core deposits acquired are amortized over 15 years on an accelerated basis, based on the expected run-off of the related deposits. Goodwill is amortized by the straight-line method over periods ranging from 10 to 15 years. Transfers of Financial Assets Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Income Taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes. The Company's base amount of its federal income tax reserve for loan losses is a permanent difference for which there is no recognition of a deferred tax liability. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if deemed realizable. Pension Plan The compensation cost of an employee's defined pension benefit is recognized on the net periodic pension cost method over the employee's approximate service period. The aggregate cost method is utilized for funding purposes. The defined benefit plan was terminated effective February 29, 2000. Stock Compensation Plans The Company measures compensation cost for its stock compensation plans using the intrinsic value based method of accounting, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company's stock option plans have no intrinsic value at the grant date and no compensation cost is recognized for them. The Company is required to make pro forma disclosures of net income and earnings per share as if compensation cost had been measured at the grant date based on the fair value of the award and recognized over the service period, which is usually the vesting period. Advertising Costs Advertising costs are charged to expense as incurred. 34 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) Earnings Per Share Basic earnings per share represents income available to common stockholders 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 stock options had been exercised. Additional common shares are determined using the treasury stock method. For the years ended December 31, 2000, 1999 and 1998, options applicable to 149,000 shares, 62,000 shares and 61,000 shares, respectively, were anti-dilutive and excluded from the diluted earnings per share computations. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income (loss). The components of other comprehensive income (loss) and related tax effects are as follows:
Years Ended December 31, --------------------------------------- 2000 1999 1998 ------------ ----------- ----------- (In thousands) Unrealized holding gains (losses) on securities available for sale $ 14,992 $(18,877) $ 4,541 Reclassification adjustment for (gains) losses realized in income 1,031 (1,522) (1,670) ------------ ----------- ----------- Net unrealized gains (losses) 16,023 (20,399) 2,871 Tax effects (6,194) 7,936 (1,137) ------------ ----------- ----------- Net-of-tax amount $ 9,829 $(12,463) $ 1,734 ============ =========== ===========
Subsequent Accounting Change In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. This Statement establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and requires that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative as a hedging instrument. The Statement generally provides for matching the timing of the recognition of the gain or loss on derivatives designated as hedging instruments with the recognition of the changes in the fair value of the item being hedged. Depending on the type of hedge, such recognition will be in either net income or other comprehensive income. For a derivative not designated as a hedging instrument, changes in fair value will be recognized in net income in the period of change. The Company adopted this Statement on January 1, 2001, with no impact on the consolidated financial statements. 35 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SECURITIES The amortized cost and fair value of securities, with gross unrealized gains and losses at December 31, 2000 and 1999, follows:
Gross Gross Amortized Unrealized Unrealized Fair December 31, 2000 Cost Gains Losses Value - ------------------------------------------------------- --------- ---------- ---------- -------- (In thousands) Securities Available for Sale Debt securities: Corporate bonds $310,165 $2,628 $ (478) $312,315 Mortgage-backed securities 212,589 668 (1,850) 211,407 Federal agency obligations 3,000 - (3) 2,997 -------- ------ -------- -------- Total debt securities 525,754 3,296 (2,331) 526,719 Marketable equity securities 2,285 81 (395) 1,971 -------- ------ -------- -------- Total securities available for sale $528,039 $3,377 $ (2,726) $528,690 ======== ====== ======== ======== Securities Held to Maturity Federal agency obligations $ 4,809 $ 210 $ - $ 5,019 Mortgage-backed securities 38,045 871 - 38,916 -------- ------ -------- -------- Total securities held to maturity $ 42,854 $1,081 $ - $ 43,935 ======== ====== ======== ======== Gross Gross Amortized Unrealized Unrealized Fair December 31, 1999 Cost Gains Losses Value - ------------------------------------------------------- --------- ---------- ---------- -------- (In thousands) Securities Available for Sale Debt securities: Corporate bonds $250,078 $ 42 $ (3,353) $246,767 Mortgage-backed securities 224,083 - (9,627) 214,456 U.S. Government and federal agency obligations 59,144 - (2,017) 57,127 -------- ------ -------- -------- Total debt securities 533,305 42 (14,997) 518,350 Marketable equity securities 2,097 6 (423) 1,680 -------- ------ -------- -------- Total securities available for sale $535,402 $ 48 $(15,420) $520,030 ======== ====== ======== ======== Securities Held to Maturity U.S. Government obligations $ 5,000 $ 6 $ - $ 5,006 ======== ====== ======== ========
36 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SECURITIES (concluded) The amortized cost and fair value of debt securities by contractual maturity at December 31, 2000 is as follows:
Available for Sale Held to Maturity ---------------------------- --------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------------- ------------- ------------ ------------ (In thousands) Within 1 year $ 84,062 $ 83,942 $ - $ - After 1 year through 5 years 229,103 231,370 4,809 5,019 ------------- ------------- ------------ ------------ 313,165 315,312 4,809 5,019 Mortgage-backed securities 212,589 211,407 38,045 38,916 ------------- ------------- ------------ ------------ $ 525,754 $ 526,719 $ 42,854 $ 43,935 ============= ============= ============ ============
At December 31, 2000, mortgage-backed securities with an amortized cost of $8,063,000 and a fair value of $8,002,000 have been pledged as collateral for a line of credit. Mortgage-backed securities with an amortized cost of $22,179,000 and a fair value of $21,851,000 have been pledged as collateral for a loan and credit agreement. At December 31, 1999, U.S. Government obligations with an amortized cost of $21,865,000 and a fair value of $20,965,000 were pledged as collateral for securities sold under agreements to repurchase. In addition, U.S. Government obligations with an amortized cost of $22,265,000 and a fair value of $21,022,000 were pledged as collateral for a loan and credit agreement. (See Note 6.) For the years ended December 31, 2000, 1999 and 1998, proceeds from the sales of securities available for sale amounted to $55,196,000, $105,440,000 and $138,046,000, respectively. Gross realized gains amounted to $3,000, $1,529,000 and $1,711,000, respectively. Gross realized losses amounted to $1,031,000, $7,000 and $52,000, respectively. For the years ended December 31, 2000 and 1998, proceeds from the sales of securities held to maturity that were sold within three months of maturity amounted to $4,997,000 and $15,003,000, respectively. Gross realized gains (losses) on these sales amounted to $(3,000) and $11,000 for the years ended December 31, 2000 and 1998, respectively. These sales have been included in the Statement of Cash Flows as maturities. Mortgage-backed securities consist of collateralized mortgage obligations and participation certificates guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association. 37 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LOANS A summary of the balances of loans follows: December 31, -------------------------------- 2000 1999 -------------- -------------- (In thousands) Mortgage loans on real estate: Residential 1 - 4 family $ 487,964 $ 465,618 Commercial 124,201 112,050 Construction 19,913 13,504 Second mortgages 699 774 Equity lines of credit 21,609 19,394 -------------- -------------- 654,386 611,340 -------------- -------------- Other loans: Commercial 17,219 18,124 Personal and other 2,925 2,912 -------------- -------------- 20,144 21,036 -------------- -------------- Net deferred loan origination costs 1,167 1,154 -------------- -------------- Total loans 675,697 633,530 Less allowance for loan losses (6,950) (6,779) -------------- -------------- Loans, net $ 668,747 $ 626,751 ============== ============== An analysis of the allowance for loan losses follows: Years Ended December 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (In thousands) Balance at beginning of year $ 6,779 $ 6,876 $ 6,733 Provision for loan losses 175 - 75 Recoveries 55 67 233 Loans charged-off (59) (164) (165) ----------- ----------- ----------- Balance at end of year $ 6,950 $ 6,779 $ 6,876 =========== =========== =========== Impaired loans at December 31, 2000 and 1999 amounted to $1,047,000 and $2,482,000, respectively, none of which required a corresponding valuation allowance. No additional funds are committed to be advanced in connection with impaired loans. For the years ended December 31, 2000, 1999 and 1998, the average recorded investment in impaired loans amounted to $1,593,000, $2,888,000 and $1,749,000, respectively. Impaired loans are generally placed on non-accrual status. The Bank recognized interest income on impaired loans, on a cash basis, of $6,000 in 2000, $52,000 in 1999 and $39,000 in 1998 during the periods that they were impaired. 38 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. BANKING PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation of banking premises and equipment follows: December 31, -------------------------- 2000 1999 ----------- ----------- (In thousands) Banking Premises: Land $ 2,068 $ 2,068 Buildings 10,321 10,235 Equipment 6,609 6,305 ----------- ----------- 18,998 18,608 Less accumulated depreciation (8,114) (7,042) ----------- ----------- $ 10,884 $ 11,566 =========== =========== Depreciation expense for the years ended December 31, 2000, 1999 and 1998 amounted to $1,173,000, $1,174,000 and $1,005,000, respectively. Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2000, pertaining to banking premises and equipment, future minimum rent commitments (in thousands) under various operating leases are as follows: Years Ending December 31, Amount --------------------- ----------- 2001 $ 398 2002 389 2003 373 2004 355 2005 146 Thereafter 136 ----------- $ 1,797 =========== The leases contain options to extend for periods from one to ten years. The cost of such rentals is not included above. Total rent expense for the years ended December 31, 2000, 1999 and 1998 amounted to $378,000, $332,000 and $285,000, respectively. 39 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. DEPOSITS A summary of deposit balances, by type, is as follows: December 31, ----------------------- 2000 1999 -------- -------- (In thousands) Demand $ 63,122 $ 51,202 NOW 65,106 60,811 Regular savings 323,298 314,353 Money market deposits 65,357 68,617 -------- -------- Total non-certificate accounts 516,883 494,983 -------- -------- Term certificates ($100,000 or more) 101,406 89,198 Other term certificates 357,568 327,147 -------- -------- Total term certificates 458,974 416,345 -------- -------- Total deposits $975,857 $911,328 ======== ======== A summary of term certificate accounts, by maturity, is as follows: December 31, 2000 December 31, 1999 -------------------- -------------------- Weighted Weighted Average Average Amount Rate Amount Rate -------- -------- -------- -------- (Dollars in thousands) Within 1 year $375,579 5.70% $251,711 4.85% Over 1 year to 3 years 72,123 6.03 154,537 5.24 Over 3 years to 5 years 11,165 5.45 9,994 4.97 Over 5 years 107 5.30 103 5.26 -------- -------- $458,974 5.75% $416,345 5.00% ======== ======== 6. SHORT-TERM BORROWINGS Short-term borrowings consist of the following:
December 31, 2000 December 31, 1999 ---------------------- ----------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------- -------- ------- -------- (Dollars in thousands) Securities sold under agreements to repurchase $ -- --% $21,227 5.11% Federal Reserve Bank of Boston advances 443 6.29 844 4.55 Federal Home Loan Bank of Boston advances 20,000 6.54 45,000 5.48 ------- ------- $20,443 6.53% $67,071 5.35% ======= =======
40 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. SHORT-TERM BORROWINGS (concluded) The Federal Home Loan Bank of Boston ("FHLBB") advances mature within five months. The Company also has an available line of credit with the FHLBB at an interest rate that adjusts daily. Borrowings under the line are limited to 2% of the Bank's total assets. All borrowings from the FHLBB are secured by a blanket lien on qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property and 90% of the market value of U.S. Government and federal agency securities. At December 31, 1999, securities sold under agreements to repurchase are borrowings that mature within one month and are secured by U.S. Government obligations. (See Note 2.) The amount of securities collateralizing the agreements to repurchase remains in securities and the obligation to repurchase securities sold is reflected as a liability in the consolidated balance sheets. The Company had a $3,000,000 and a $1,925,000 line of credit (treasury, tax and loan) with the Federal Reserve Bank of Boston ("FRB") at December 31, 2000 and 1999, of which $443,000 and $844,000, respectively, was advanced. The interest rate adjusts weekly and certain mortgage-backed securities and U.S. Government obligations have been pledged as collateral for the line of credit at December 31, 2000 and 1999, respectively. At December 31, 2000, the Company also had a loan and credit agreement with the FRB at an interest rate which adjusts daily. Borrowings under the agreement are limited to 95% of the fair value of pledged collateral. Certain mortgage-backed securities have been pledged as collateral for the loan and credit agreement. (See Note 2.) 7. LONG-TERM DEBT Long-term debt consists of FHLBB advances secured by a blanket lien on qualified collateral (see Note 6), as follows:
December 31, 2000 December 31, 1999 --------------------------- ---------------------------- Weighted Weighted Average Average Maturity Amount Rate Amount Rate - --------------------- ----------- ----------- ----------- ----------- (Dollars in thousands) 2000 $ -- --% $ 58,253 5.58% 2001 113,000 6.09 65,000 5.57 2002 60,000 6.78 5,000 6.36 2003 30,000 6.28 10,000 6.18 2004 - - 10,000 5.29 2005 400 5.61 400 5.61 ----------- ----------- $203,400 6.32% $148,653 5.62% =========== ===========
The advance maturing in 2005 is callable on a quarterly basis by the FHLBB. 41 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES Allocation of the provision for federal and state income taxes between current and deferred portions is as follows: Years Ended December 31, ----------------------------- 2000 1999 1998 ------- ------- ------- (In thousands) Current tax provision: Federal $ 7,928 $ 6,702 $ 7,051 State 575 388 839 ------- ------- ------- 8,503 7,090 7,890 ------- ------- ------- Deferred tax provision (benefit): Federal 335 (99) (296) State 113 (1) (48) ------- ------- ------- 448 (100) (344) ------- ------- ------- $ 8,951 $ 6,990 $ 7,546 ======= ======= ======= The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows: Years Ended December 31, ------------------------ 2000 1999 1998 ------ ------ ------ Statutory rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: State taxes, net of federal tax benefit 2.0 1.3 2.6 Tax on pension plan settlement 2.8 -- -- Other, net (.4) (.7) .5 ------ ------ ------ Effective tax rates 39.4% 35.6% 38.1% ====== ====== ====== 42 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES (continued) The components of the net deferred tax asset, included in other assets, are as follows: December 31, --------------------- 2000 1999 -------- ------- (In thousands) Deferred tax assets: Federal $ 3,914 $ 9,397 State 1,312 2,450 ------- ------- 5,226 11,847 ------- ------- Deferred tax liabilities: Federal (1,266) (1,203) State (347) (389) ------- ------- (1,613) (1,592) ------- ------- Net deferred tax asset $ 3,613 $10,255 ======= ======= The tax effects of each type of income and expense item that give rise to deferred taxes are as follows:
December 31, ---------------------- 2000 1999 -------- -------- (In thousands) Cash basis of accounting $ 401 $ 384 Investments: Net unrealized (gain) loss on securities available for sale (227) 5,967 Other (288) (288) Depreciation (961) (1,100) Allowance for loan losses 2,814 2,649 Employee benefit plans 669 1,356 Other 1,205 1,287 ------ ------- Net deferred tax asset $3,613 $10,255 ====== =======
43 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES (concluded) A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31, ----------------------------------- 2000 1999 1998 -------- -------- -------- Balance at beginning of year $10,255 $ 2,219 $ 3,012 Deferred tax effect of the change in net unrealized gains and losses on securities available for sale (6,194) 7,936 (1,137) Deferred tax (provision) benefit for the year (448) 100 344 ------- ------- ------- Balance at end of year $ 3,613 $10,255 $ 2,219 ======= ======= =======
The federal income tax reserve for loan losses at the Company's base year is $8,265,000. If any portion of the reserve is used for purposes other than to absorb the losses for which it was established, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the year in which used. As the Company intends to use the reserve only to absorb loan losses, a deferred income tax liability of $3,389,000 has not been provided. 9. OTHER COMMITMENTS AND CONTINGENCIES In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the consolidated financial statements. Employment and Special Termination Agreements The Company has entered into an employment agreement with the President and Chief Executive Officer that provides for a specified minimum annual compensation and the continuation of benefits currently received. However, such employment may be terminated for cause, as defined, without incurring any continuing obligations. The Company and/or the Bank have also entered into special termination agreements with the President and Chief Executive Officer and certain senior executives. The agreements generally provide for certain lump-sum severance payments within a three-year period following a "change in control," as defined in the agreements. Loan Commitments The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet. The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. 44 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. OTHER COMMITMENTS AND CONTINGENCIES (concluded) Loan Commitments (concluded) The following financial instruments were outstanding whose contract amounts represent credit risk: Contract Amount at December 31, ------------------- 2000 1999 ------- ------- (In thousands) Commitments to grant loans $ 4,856 $15,314 Unadvanced funds on equity lines of credit 23,322 25,182 Unadvanced funds on commercial lines of credit 9,765 10,734 Unadvanced funds on construction loans 16,271 11,735 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. Funds disbursed under these financial instruments are generally collateralized by real estate, except for the commercial lines of credit which are generally secured by the business assets of the borrower. Legal Contingencies Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will not have a material effect on the Company's consolidated financial statements. 10. STOCKHOLDERS' EQUITY Common Stock Repurchase On November 28, 2000, the Board of Directors approved a plan to repurchase 5% of the Company's outstanding shares of common stock. No repurchases have been made under this plan at December 31, 2000. Minimum Regulatory Capital Requirements 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 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 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 (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000 and 1999, that the Company and the Bank met all capital adequacy requirements to which they are subject. 45 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. STOCKHOLDERS' EQUITY (continued) Minimum Regulatory Capital Requirements (continued) As of December 31, 2000, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. As a well capitalized entity, the Bank is entitled to engage in specified activities on a more expedited basis than entities that are not well capitalized. There are no conditions or events that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios as of December 31, 2000 and 1999, are also presented in the tables.
Minimum Minimum To Be Categorized Capital as Well Actual Requirement Capitalized ------------------------ ------------------------ ----------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ------- ---------- ------- ---------- ------- (Dollars in thousands) December 31, 2000: Total Capital to Risk-Weighted Assets: Consolidated $108,719 13.0% $ 67,125 8.0% $ -- --% Bank 104,230 12.4 67,125 8.0 83,906 10.0 Tier 1 Capital to Risk-Weighted Assets: Consolidated 101,769 12.1 33,562 4.0 -- -- Bank 97,280 11.6 33,562 4.0 50,343 6.0 Tier 1 Capital to Average Assets: Consolidated 101,769 7.9 51,907 4.0 -- -- Bank 97,280 7.5 51,907 4.0 64,883 5.0 December 31, 1999: Total Capital to Risk-Weighted Assets: Consolidated $103,131 13.9% $ 59,429 8.0% $ -- --% Bank 100,346 13.6 59,429 8.0 74,286 10.0 Tier 1 Capital to Risk-Weighted Assets: Consolidated 96,352 13.0 29,714 4.0 -- -- Bank 93,567 12.7 29,714 4.0 44,572 6.0 Tier 1 Capital to Average Assets: Consolidated 96,352 8.0 36,461 4.0 -- -- Bank 93,567 7.7 36,461 4.0 60,768 5.0
46 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. STOCKHOLDERS' EQUITY (concluded) Restrictions on Dividends, Loans and Advances Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. Under Massachusetts law, stock savings banks such as the Bank, like national banks, may pay dividends no more often than quarterly, and only out of net profits and to the extent that such payments will not impair the Bank's capital stock, as defined. Moreover, prior Commissioner approval is required if the total dividends for a calendar year would exceed net profits for that year combined with retained net profits for the previous two years. These restrictions on the ability of the Bank to pay dividends to the Company may restrict the ability of the Company to pay dividends to its stockholders. Loans or advances are limited to 10% of the Bank's capital stock and surplus, as defined, (which for this purpose represents Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for loan losses excluded from Tier 2 capital) on a secured basis. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. At December 31, 2000, $67,125,000 of the Company's equity in the Bank was restricted and funds available for loans or advances amounted to $10,423,000. Shareholder Rights Plan The Company has a Shareholder Rights Plan under which one preferred stock purchase right was distributed for each outstanding share of common stock. Such rights only become exercisable, or transferable apart from the common stock, ten business days after a person or group acquires beneficial ownership of, or commences a tender or exchange offer for, 15% or more of the Company's common stock, or the declaration by the Board of Directors that any person is an Adverse Person. Each right may then be exercised to acquire one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock at an exercise price specified in the Company's Amended and Restated Shareholder Rights Agreement (the "Rights Agreement") subject to adjustment. If the Company is acquired in a merger or other business combination transaction, or 50% of the Company's assets or earning power is sold, the rights entitle holders to acquire common stock of the Acquiring Person (as defined in the Rights Agreement) having a value twice the exercise price of the rights. The rights may be redeemed in whole by the Company at $.01 per right at any time until the earliest of (i) the declaration of a person as an Adverse Person (as defined in the Rights Agreement), (ii) the tenth day following public announcement that a 15% position has been acquired, or (iii) the expiration date of the Rights Agreement. The rights will expire on September 22, 2003. Director Deferred Compensation Plan The Company has deferred compensation arrangements with certain members of the Board of Directors, whereby directors' fees earned are paid to a "Rabbi Trust" and used to purchase shares of the Company's common stock in the open market. The plan does not permit diversification of assets held, and the plan's obligation to each director must be settled by the delivery of the fixed number of shares of the Company's common stock purchased on the director's behalf. The cost of the Company's common stock held by the rabbi trust, and the related deferred compensation obligation offset, are reflected in stockholders' equity. 47 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. EMPLOYEE BENEFIT PLANS Pension Plan The Bank has provided basic and supplemental pension benefits for eligible employees through the Savings Banks Employees Retirement Association Pension Plan. Each employee reaching the age of 21 and having completed at least 1,000 hours of service in one twelve-month period beginning with such employee's date of employment, or any anniversary thereof, automatically became a participant in the pension plan. Participants were fully vested after three years of such service. Effective March 31, 2000, the Bank terminated its defined benefit pension plan and transferred plan assets to its vested employees who had the option to rollover into the Bank's 401(k) plan, or an IRA, or receive a cash payout in amounts that would effectively settle the plan's accumulated benefit obligation. As a result, the Company recognized settlement and curtailment gains totaling $4,799,000 in 2000. Information pertaining to activity in the plan is as follows:
Years Ended October 31, --------------------------------- 2000 1999 1998 ------- ------- ------- (In thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 5,106 $ 5,472 $ 4,965 Service cost -- 642 591 Interest cost 406 369 360 Amendment (409) -- -- Actuarial gain -- (1,010) (151) Benefits paid (5,103) (367) (293) ------- ------- ------- Benefit obligation at end of year -- 5,106 5,472 ------- ------- ------- Change in plan assets: Fair value of plan assets at beginning of year 6,879 5,464 4,830 Actual return on plan assets 1,420 1,076 395 Employer contribution -- 706 532 Benefits paid (5,103) (367) (293) Distribution to employer (3,196) -- -- ------- ------- ------- Fair value of plan assets at end of year -- 6,879 5,464 ------- ------- ------- Funded status -- 1,773 (8) Unrecognized net actuarial gain -- (3,242) (1,668) Transition asset -- (227) (247) ------- ------- ------- Accrued pension cost $ -- $(1,696) $(1,923) ======= ======= =======
Net periodic pension (income) expense for the plan years ended October 31, 2000, 1999 and 1998 consisted of the following: 2000 1999 1998 ----- ----- ----- (In thousands) Service cost $ -- $ 642 $ 591 Interest cost 406 369 360 Expected return on plan assets (498) (437) (386) Net amortization and deferral -- (20) (19) Net gain -- (75) (69) ----- ----- ----- Net periodic pension (income) expense $ (92) $ 479 $ 477 ===== ===== ===== 48 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. EMPLOYEE BENEFIT PLANS (concluded) Pension Plan (concluded) Total pension (income) expense for the years ended December 31, 2000, 1999 and 1998 amounted to $(131,000), $418,000 and $486,000, respectively. For the plan years ended October 31, 2000, 1999 and 1998, actuarial assumptions include an assumed discount rate on benefit obligations of 7.00%, 6.75% and 7.50%, respectively, and an expected long-term rate of return on plan assets of 6.00%, 8.00% and 8.00%. An annual salary increase of 4.50% and 5.00% was used for the years ended October 31, 1999 and 1998, respectively. 401(k) Plan The Bank maintains a 401(k) plan that provides for voluntary contributions by participating employees ranging from 1 percent to 15 percent of their compensation, subject to certain limits based on federal tax laws. Employees are eligible to participate in the plan upon hire and receive matching contributions after three months of service. Prior to January 1, 2000, the Bank made matching contributions equal to twenty-five percent (25%) of the first six percent (6%) of annual compensation contributed to the plan. Effective January 1, 2000, the Bank makes matching contributions equal to seventy-five percent (75%) of the first six percent (6%) of annual compensation contributed to the plan. For the years ended December 31, 2000, 1999 and 1998, expense attributable to the Plan amounted to $289,000, $76,000 and $83,000, respectively. Incentive Plan Short-term incentives can be earned through a discretionary bonus plan, administered by the Compensation and Options Committee of the Board of Directors. Senior executive officers as well as other officers are eligible to receive a bonus payable prior to the end of the first quarter of the following year if the Company or the Bank meets or exceeds certain base standards and individual performance warrants consideration. Incentive compensation expense amounted to $266,000, $136,000 and $195,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Executive Supplemental Benefit Agreement The Company has entered into supplemental executive retirement agreements with its President that are designed to provide benefits lost under defined benefit plans and to increase overall retirement benefits. The present value of future benefits is being accrued over the term of employment. Supplemental compensation expense for the years ended December 31, 2000, 1999 and 1998 amounted to $192,000, $240,000 and $239,000, respectively. 12. STOCK OPTION PLANS The Company has stock option plans for the benefit of directors, officers and full-time employees. The Medford Savings Bank 1986 Stock Option Plan covered 1,472,000 shares of common stock (the options under which have all been granted). Of the 400,000 options under the Medford Bancorp, Inc. 1993 Stock Option Plan, 384,500 have been granted. Both "Incentive Stock Options" and "Non-qualified Stock Options" may be granted under the plans, with a maximum option term of ten years. Under the terms of the plans, stock options may be granted as determined appropriate by the Compensation and Options Committee of the Board of Directors, and will have an exercise price equal to, or in excess of, the fair market value of a share of common stock of the Company on the date the option is granted. The plans also permit the inclusion of stock appreciation rights ("SARs") in any option granted which would permit the optionee to surrender an option (or portion thereof) for cancellation and to receive cash or common stock equal to the excess, if any, of the then fair market value of the common stock subject to such option or portion thereof over the option exercise price. No SARs have been granted to date. 49 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. STOCK OPTION PLANS (continued) The Company measures compensation cost for its stock option plans using the intrinsic value based method of accounting. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Years Ended December 31, ------------------------------- 2000 1999 1998 --------- --------- -------- (In thousands, except per share data) Net income: As reported $13,769 $12,651 $12,252 Pro forma 13,404 12,459 12,023 Basic earnings per share: As reported $ 1.69 $ 1.51 $ 1.38 Pro forma 1.65 1.48 1.35 Diluted earnings per share: As reported $ 1.64 $ 1.44 $ 1.31 Pro forma 1.60 1.42 1.28 In determining the pro forma amounts, the fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Years Ended December 31, -------------------------------- 2000 1999 1998 -------- -------- -------- Dividend yield 3.5% 3.1% 3.5% Expected life 10 years 10 years 10 years Expected volatility 54% 50% 52% Risk-free interest rate 5.2% 6.4% 5.3% 50 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. STOCK OPTION PLANS (concluded) Stock option activity under the plans is as follows:
Years Ended December 31, ---------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ----------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Amount Price Amount Price Amount Price ----------- ---------- ---------- ---------- ---------- ---------- Shares under option: Outstanding at beginning of year 674,632 $ 8.50 725,852 $ 7.37 761,352 $ 6.41 Granted 42,000 14.78 54,000 16.36 49,500 18.40 Cancelled (7,000) 4.55 (6,000) 20.25 (4,000) 19.75 Exercised (182,396) 2.71 (99,220) 3.75 (81,000) 4.43 ----------- ---------- ---------- Outstanding at end of year 527,236 11.06 674,632 8.50 725,852 7.37 =========== ========== ========== Exercisable at end of year 475,586 $10.60 589,732 $ 7.27 646,952 $ 6.04 =========== ========== ========== Weighted average fair value of options granted during the year $ 6.68 $ 8.07 $ 7.98 =========== ========== ==========
Information pertaining to options outstanding at December 31, 2000 is as follows:
Options Outstanding Options Exercisable ---------------------------------------------- ---------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- --------------- ------------- ----------- ------------- ----------- $3.06 - $5.44 137,956 1.8 years $ 4.75 137,956 $ 4.75 $6.13 - $7.22 26,000 3.1 6.95 26,000 6.95 $8.63 - $9.72 139,780 3.6 9.49 139,780 9.49 $10.38 - $10.88 18,000 5.1 10.54 18,000 10.54 $12.44 - $12.88 17,000 6.2 12.57 17,000 12.57 $14.13 - $14.94 42,000 9.9 14.78 4,000 14.13 $16.00 - $16.81 84,500 8.6 16.53 70,850 16.51 $19.75 - $21.63 62,000 7.1 20.11 62,000 20.11 --------------- ------------- Outstanding at end of year 527,236 4.9 years $11.06 475,586 $10.60 =============== =============
13. EMPLOYEES' STOCK OWNERSHIP PLAN The Company has an Employees' Stock Ownership Plan ("ESOP") for the benefit of each employee that has reached the age of 21 and has completed at least 500 hours of service with the Company in the previous twelve-month period. The Company may contribute to the ESOP cash or shares of common stock as voted by the Board of Directors, not to exceed the maximum amount deductible for federal income tax purposes. At December 31, 2000, the ESOP held 379,872 shares, all of which have been allocated to participants and included in outstanding shares for earnings per share calculations. Dividends on all shares held by the ESOP are allocated to participants on a pro rata basis. There were no contributions to the ESOP for the years ended December 31, 2000, 1999 or 1998. 51 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosures of estimated fair values of all financial instruments where it is practicable to estimate such values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values. Securities: Fair values for securities are based on quoted market prices. FHLBB stock: The carrying value of FHLBB stock approximates fair value based on stock redemption provisions. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposits: The fair values disclosed for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Borrowings: The carrying amounts of short-term borrowings maturing within ninety days approximate their fair values. Fair values of other borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Accrued interest: The carrying amounts of accrued interest approximate fair value. Off-balance sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing, and are not material. 52 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded) The estimated fair values, and related carrying amounts, of the Company's financial instruments are as follows:
December 31, -------------------------------------------------- 2000 1999 ---------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- (In thousands) Financial assets: Cash and cash equivalents $ 22,258 $ 22,258 $ 20,910 $ 20,910 Securities available for sale 528,690 528,690 520,030 520,030 Securities held to maturity 42,854 43,935 5,000 5,006 FHLBB stock 11,420 11,420 9,683 9,683 Loans, net 668,747 669,808 626,751 621,849 Accrued interest receivable 10,211 10,211 9,162 9,162 Financial liabilities: Deposits 975,857 976,783 911,328 911,051 Short-term borrowings 20,443 20,443 67,071 67,071 Long-term debt 203,400 204,465 148,653 147,525 Accrued interest payable 1,897 1,897 1,673 1,673
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY Financial information pertaining only to Medford Bancorp, Inc. is as follows: BALANCE SHEETS December 31, ---------------------- 2000 1999 -------- -------- (In thousands) Assets Short-term investments with Medford Savings Bank $ 4,812 $ 468 Investment in common stock of Medford Savings Bank 100,476 88,085 Due from Medford Savings Bank -- 3,500 Other assets 992 340 -------- -------- Total assets $106,280 $ 92,393 ======== ======== Liabilities and Stockholders' Equity Accrued expenses $ -- $ 2 Dividends payable on common stock 1,315 1,521 -------- -------- Total liabilities 1,315 1,523 Stockholders' equity 104,965 90,870 -------- -------- Total liabilities and stockholders' equity $106,280 $ 92,393 ======== ======== 53 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded) STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------- (In thousands) Interest on short-term investments with Medford Savings Bank $ 96 $ 40 $ 142 Dividends from Medford Savings Bank 11,200 11,200 9,600 -------- -------- -------- 11,296 11,240 9,742 Operating expenses 86 199 147 -------- -------- -------- Income before income taxes and equity in undistributed net income of Medford Savings Bank 11,210 11,041 9,595 Applicable income tax provision (benefit) 4 (55) (3) -------- -------- -------- 11,206 11,096 9,598 Equity in undistributed net income of Medford Savings Bank 2,563 1,555 2,654 -------- -------- -------- Net income $ 13,769 $ 12,651 $ 12,252 ======== ======== ========
STATEMENTS OF CASH FLOWS
Years Ended December 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Cash flows from operating activities: Net income $ 13,769 $ 12,651 $ 12,252 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of Medford Savings Bank (2,563) (1,555) (2,654) Decrease (increase) in due from Medford Savings Bank 3,500 (1,725) (125) Other, net 2 (306) 52 -------- -------- -------- Net cash provided by operating activities 14,708 9,065 9,525 -------- -------- -------- Cash flows from financing activities: Issuance of common stock 494 372 359 Payments to acquire treasury stock (6,428) (7,689) (9,378) Cash dividends paid (4,430) (4,501) (4,313) -------- -------- -------- Net cash used by financing activities (10,364) (11,818) (13,332) -------- -------- -------- Net change in cash and cash equivalents 4,344 (2,753) (3,807) Cash and cash equivalents at beginning of year 468 3,221 7,028 -------- -------- -------- Cash and cash equivalents at end of year $ 4,812 $ 468 $ 3,221 ======== ======== ========
54 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded) 16. QUARTERLY DATA (UNAUDITED) A summary of consolidated operating results on a quarterly basis is as follows:
Year Ended December 31, 2000 ----------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter -------- -------- -------- -------- (In thousands, except per share data) Interest and dividend income $ 22,461 $ 21,894 $ 21,179 $ 20,516 Interest expense (13,397) (12,884) (12,087) (11,546) -------- -------- -------- -------- Net interest income 9,064 9,010 9,092 8,970 Provision for loan losses (100) -- -- (75) -------- -------- -------- -------- Net interest income, after provision for loan losses 8,964 9,010 9,092 8,895 Pension plan curtailment gain -- -- -- 1,195 Pension plan settlement gain 3,604 -- -- -- Other income (loss) (126) 641 745 691 Operating expenses (5,136) (4,997) (4,958) (4,900) -------- -------- -------- -------- Income before income taxes 7,306 4,654 4,879 5,881 Provision for income taxes (3,390) (1,638) (1,749) (2,174) -------- -------- -------- -------- Net income $ 3,916 $ 3,016 $ 3,130 $ 3,707 ======== ======== ======== ======== Earnings per share: Basic $ 0.48 $ 0.37 $ 0.39 $ 0.45 ======== ======== ======== ======== Diluted $ 0.47 $ 0.36 $ 0.37 $ 0.43 ======== ======== ======== ========
Year Ended December 31, 1999 ----------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter -------- -------- -------- -------- (In thousands, except per share data) Interest and dividend income $ 19,982 $ 19,665 $ 19,250 $ 18,952 Interest expense (11,141) (10,881) (10,758) (10,329) -------- -------- -------- -------- Net interest income 8,841 8,784 8,492 8,623 Other income 675 647 990 1,890 Operating expenses (5,109) (4,777) (4,752) (4,663) -------- -------- -------- -------- Income before income taxes 4,407 4,654 4,730 5,850 Provision for income taxes (1,484) (1,626) (1,728) (2,152) -------- -------- -------- -------- Net income $ 2,923 $ 3,028 $ 3,002 $ 3,698 ======== ======== ======== ======== Earnings per share: Basic $ 0.35 $ 0.36 $ 0.36 $ 0.44 ======== ======== ======== ======== Diluted $ 0.33 $ 0.35 $ 0.34 $ 0.41 ======== ======== ======== ========
55 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT With the exception of certain information regarding the executive officers of the Company and the Bank, the response to this item is incorporated by reference from the discussion under the captions "Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 30, 2001 (the "Proxy Statement"), to be filed with the SEC pursuant to Regulation 14A of the Exchange Act Rules. Information regarding the executive officers of the Company and the Bank is contained in Item I of Part I to this Report under the caption "Executive Officers of the Company and Bank." ITEM 11. EXECUTIVE COMPENSATION The response to this item is incorporated by reference from the discussion under the captions "Executive Compensation" and "The Board of Directors, its Committees and Compensation" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is incorporated by reference from the discussion under the caption "Ownership by Management and Other Stockholders" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is incorporated by reference from the discussion under the caption "Relationships and Transactions with the Company" in the Company's Proxy Statement. 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Contents: (1) Financial Statements: All financial statements are included in Item 8 of Part II to this Report. (2) Financial Statement Schedules: All financial statement schedules have been omitted because they are not required, not applicable or are included in the consolidated financial statements or related notes. (3) Exhibits: EXHIBIT INDEX Exhibit Description 2.1 Plan of Reorganization and Acquisition dated as of July 29, 1997 between the Company and the Bank (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on November 26, 1997, and incorporated herein by reference) 3.1 Amended Articles of Organization of the Company (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on May 15, 1998, and incorporated herein by reference) 3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K filed with the SEC on March 23, 1998, and incorporated herein by reference) 4.1 Specimen certificate for shares of Common Stock of the Company (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on November 26, 1997, and incorporated herein by reference) 4.2 Articles IV, VI(A), VI(C), VI(I)-(J) of the Amended Articles of Organization of the Company (see Exhibit 3.1) 4.3 Articles II and V of the Amended and Restated By-laws of the Company (see Exhibit 3.2) 4.4 Amended and Restated Shareholder Rights Agreement, dated November 26, 1997, between Medford Bancorp, Inc. and State Street Bank and Trust Company, as Rights Agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on November 26, 1997, and incorporated herein by reference) 10.1 Amended and Restated Employment Agreement with Arthur H. Meehan (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K filed with the SEC on March 23, 1998, and incorporated herein by reference) 10.2 Amended and Restated Special Termination Agreement with Arthur H. Meehan (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K filed with the SEC on March 23, 1998, and incorporated herein by reference) 10.3 Amended and Restated Special Termination Agreement with Phillip W. Wong (filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K filed with the SEC on March 23, 1998, and incorporated herein by reference) 10.4 Amended and Restated Special Termination Agreement with George A. Bargamian (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K filed with the SEC on March 23, 1998, and incorporated herein by reference) 10.5 Amended and Restated Special Termination Agreement with Eric B. Loth (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K filed with the SEC on March 23, 1998, and incorporated herein by reference) 10.6 Amended and Restated Special Termination Agreement with William F. Rivers (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K filed with the SEC on March 23, 1998, and incorporated herein by reference) 57 10.7 Supplemental Executive Retirement Plan and Corresponding Adoption Agreement with Arthur H. Meehan (filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K filed with the SEC on March 23, 1998, and incorporated herein by reference) 10.8 Executive Supplemental Benefit Agreement with Arthur H. Meehan (filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K filed with the SEC on March 23, 1998, and incorporated herein by reference) 10.9 Deferred Investment Plan for Outside Directors (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8 filed with the SEC on December 24, 1997, and incorporated herein by reference) 10.10 First Amendment to Deferred Investment Plan for Outside Directors (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8 filed with the SEC on December 24, 1997, and incorporated herein by reference) 10.11 Medford Savings Bank 1986 Stock Option Plan (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8 filed with the SEC on November 26, 1997, and incorporated herein by reference) 10.12 Medford Bancorp, Inc. Stock Option Plan (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8 filed with the SEC on November 26, 1997, and incorporated herein by reference) 10.13 Discretionary Bonus Plan (not set forth in a formal document -- a description of the plan is contained in both the Proxy Statement to be filed with the SEC, and incorporated herein by reference, under the caption "Compensation Committee Report on Executive Compensation" and in the "Notes to Consolidated Financial Statements" under the caption "Employee Benefit Plans -- Incentive Plan" in Item 8 to this Report) 11 Statement Regarding Computation of Per Share Earnings -- Such computation can be clearly determined from the material contained in this Report. 12 Statement Regarding Computation of Ratios -- As the Company does not have any debt securities registered under Section 12 of the Securities and Exchange Act of 1934, no ratio of earnings to fixed charges appears in this Report. 13 Medford Bancorp, Inc. 2000 Annual Report, which, except for those portions expressly incorporated herein by reference, is furnished only for the information of the SEC and is not deemed to be filed. 21 Subsidiaries of the Company -- The Company has one direct subsidiary: Medford Savings Bank, a Massachusetts-chartered savings bank in stock form. Medford Savings Bank has one subsidiary: Medford Securities Corporation, a Massachusetts corporation. 23 Consent of Wolf & Company, P.C. as independent certified public accountants (b) Reports on Form 8-K: None. 58 Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ Arthur H. Meehan ------------------------------------------ Arthur H. Meehan Chairman, President, Chief Executive Officer and Director Date: March 5, 2001 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/ Arthur H. Meehan Chairman, President, Chief Executive Officer - ------------------------------- and Director March 5, 2001 Arthur H. Meehan /s/ Phillip W. Wong Executive Vice President, - ------------------------------- Chief Financial Officer and Treasurer March 5, 2001 Phillip W. Wong /s/ Edward D. Brickley Director March 5, 2001 - ------------------------------- Edward D. Brickley Director , 2001 - ------------------------------- David L. Burke /s/ Deborah A. Burke-Santoro Director March 5, 2001 - ------------------------------- Deborah A. Burke-Santoro /s/ Paul J. Crowley Director March 5, 2001 - ------------------------------- Paul J. Crowley Director , 2001 - ------------------------------- Mary L. Doherty /s/ Edward J. Gaffey Director March 5, 2001 - ------------------------------- Edward J. Gaffey /s/ Andrew D. Guthrie, Jr. Director March 5, 2001 - ------------------------------- Andrew D. Guthrie, Jr. /s/ Robert A. Havern, III Director March 5, 2001 - ------------------------------- Robert A. Havern, III Clerk and Director , 2001 - ------------------------------- Eugene R. Murray /s/ Francis D. Pizzella Director March 5, 2001 - ------------------------------- Francis D. Pizzella
59 EX-13 2 0002.txt ANNUAL REPORT the heart of community banking is the branch office and the connection to the customer [Logo] Medford Bancorp, Inc. Annual Report 2000 build long-term relationships with customers by meeting their financial needs throughout life financial highlights - -------------------------------------------------------------------------------- (Dollars in Thousands) 2000 1999 Total Assets $ 1,309,690 $ 1,224,912 Investment Securities 582,964 534,713 Net Loans 668,747 626,751 Deposits 975,857 911,328 Total Borrowings 223,843 215,724 Net Income 13,769 12,651 Stockholders' Equity 104,965 90,870 Shares Outstanding 8,142,548 8,383,252 Per Common Share: Basic Earnings $ 1.69 $ 1.51 Diluted Earnings 1.64 1.44 Book Value 12.89 10.84 Cash Dividends Declared 0.52 0.51 Financial Ratios: Return on Average Assets 1.09% 1.07% Return on Average Equity 15.06 13.52 Stockholders' Equity to Assets 8.01 7.42 Net Interest Rate Spread 2.49 2.63 Net Yield on Average Earning Assets 2.93 3.03 Employees (at year end), Full-Time Equivalent 256 254 Shareholders of Record 1,046 1,126 Annual Meeting The Annual Meeting of Shareholders will be held April 30, 2001 at 10 a.m. at Anthony's of Malden, 105 Canal Street, Malden, Massachusetts. Corporate Information Medford Bancorp, Inc. Medford Bank 29 High Street Medford, MA 02155 781.395.7700 www.medfordbank.com Accessing Information Additional copies of this Annual Report and Form 10-K may be obtained without charge by writing to the Company's Shareholder Relations Department. These reports are also available to the public on request as required by the Securities and Exchange Commission (SEC). These statements have not been reviewed or confirmed for accuracy or relevance by the SEC. On the Cover: Branch Officer Kelly Hannify manages our new Somerville Office. dear shareholders Completing another year of continued strong financial performance, Medford Bancorp, Inc. increased diluted earnings per share by 13.9% in 2000. We reported diluted earnings per share of $1.64 in 2000, compared to diluted earnings per share of $1.44 for the prior year. We achieved an annualized return on assets of 1.09% and an annualized return on equity of 15.06% for 2000. Also notable, even as we completed our third stock repurchase program, increased the regular dividend, and announced our eighth consecutive special dividend, our capital grew to $105 million. This capital growth was achieved through earnings retention and improvement in the valuation of the AFS investment portfolio increasing book value per share by 19% to $12.89 at year-end. Our branch network was focused on deposit generation throughout the year as we gained $64.5 million in deposits in 2000. We were well positioned to capture new business with the fallout from the merger of Fleet and BankBoston and Sovereign Bank entering the marketplace. In particular, we experienced a significantly higher growth rate in our suburban communities of Wilmington, North Reading and Tewksbury. We continue to be dominant in Medford and Malden with ten locations and a number one deposit market share of 48.26% and 41.05% respectively. Also, our municipal banking department continued to grow with a portfolio of $40 million at year-end. As part of our strategic plan, we actively pursue new branch opportunities that will enhance our franchise. In January 2001, we opened our eighteenth branch office in Somerville, Massachusetts. Somerville is an attractive market both in proximity and demographics to our primary market area. We have served Somerville indirectly for many years by providing deposit products, mortgages and commercial loans to the area. The new branch office will allow us to penetrate the consumer and commercial markets much more effectively and provide local service to our existing customers. As previously announced, a new full service branch, our nineteenth, opens at 430 Massachusetts Avenue in Arlington Center this June. It will be situated at the entrance of the new Legacy Apartment complex and allow us to better serve Arlington residents and area businesses. Our branch network remains critical to our success as a leading community bank. We will continue to look for new branch opportunities in locations that we believe have high growth potential. During 2000, we promoted a number of employees to officer level positions rewarding them for their hard work. I congratulate William L. Marshall, III for his promotion to executive vice president and also extend congratulations to Laurence J. Packenham and Elizabeth J. Stodolski for their promotions to senior vice president. Moreover, I would like to thank each employee for their efforts and dedication throughout the year. Their collective contributions help make us one of the leading community banks in Massachusetts. In closing, I thank our Board of Directors for their dedication and guidance and thank you, our shareholders, for your continued support and confidence. Sincerely, /s/ Arthur H. Meehan Arthur H. Meehan Chairman of the Board, President and Chief Executive Officer [The following tables were represented as bar charts in the printed material.] return on equity 1998 11.99% 1999 13.52% 2000 15.06% return on assets 1998 1.09% 1999 1.07% 2000 1.09% regular cash dividends 1998 $0.40 1999 $0.44 2000 $0.48 diluted earnings per share 1996 $1.10 1997 $1.19 1998 $1.31 1999 $1.44 2000 $1.64 lasting value, the year in review Retail Banking Connecting with customers is at the heart of community banking. Although alternative delivery channels are growing in popularity, the branch office remains the single most valuable asset to us as a community bank. In 2000, we made improvements to our branch network. We constructed our new Somerville Office to expand our primary market area, we upgraded and added ATM equipment at some locations for greater customer convenience and we refurbished several customer lobby areas for a more updated appearance. The customer experience in the branch office is also a critical element to our overall success as a community bank. We pay strict attention to the quality of the interaction between the employee and the customer by hiring an independent firm to monitor and rate our service quality. Our branch employees are well trained and consistently receive top ratings. The bank also rates highly as a whole when compared to other financial institutions. For many consumers, time saving conveniences are a must. Banking is just a point and a click away for customers connected to the internet. Medford Bank Online, our new internet banking service, is easily accessed from our web site at: www.medfordbank.com. Using Medford Bank Online, customers can view account activity, make transfers between accounts or even pay bills. We also enhanced our web site with added functionality, expanded content and interactive elements. New features enable users to open accounts, apply for loans, obtain current stock quotes, reorder checks and more. InfoLine, our 24-hour automated banking service, now handles tens of thousands of calls monthly. Our Call Center at 1-888-MEDFORD, provides convenience by allowing customers to open or service accounts or apply for loans without having to visit a branch. We are also seeing marked growth in our ATM and debit card base due to our acquisition of new customers. Transaction volumes have also increased with our participation in the SUM network. Whether it is the high level of service or convenience that brings customers to Medford Bank, we also offer a broad range of products to meet their needs. We license most of our platform staff to sell Savings Bank Life Insurance (SBLI) and have ranked number one in the state for the sale of SBLI annuities for ten consecutive years. We consistently earn Bauer Financial's Five-Star rating and Veribanc's Blue Ribbon status in recognition of financial strength and performance. Overall, Medford Bank is recognized as a leading community bank. [The following table was depicted as a pie chart in the printed material.] Deposit Mix as of December 31, 2000 (in thousands) Term CDs $458,974 47.03% Savings $323,298 33.13% Demand & Official Checks $128,228 13.14% Money Market $65,357 6.70% create value for customers and shareholders alike a financial partner committed to helping local businesses succeed Commercial Lending In 2000, we restructured our commercial lending group. Commercial and industrial, asset based and commercial real estate were aligned under the direction of our Executive Vice President William Marshall, III. With a renewed focus on developing commercial business, much of Mr. Marshall's work during the year has been setting the foundation for future growth. Our Commercial Lending Division is better positioned to serve companies in the small to mid-size business market with annual sales up to $25 million. By concentrating on the local market only, we are able to provide a high-service alternative to the Boston-based banks. In today's market, businesses need a fast, responsive financial resource to stay competitive. We pride ourselves on our personalized service, experience and our innovative approach to financing. Our range of lending solutions helps local businesses expand or operate more efficiently. From lines of credit to the purchase of fixed assets, a seasoned C&I lender works closely with the business owner to structure a financing plan that meets their needs. By having a dedicated asset based lending group, we offer a financing alternative for companies in need of loans between $1 and $6 million. We are able to design a flexible program that leverages the equity in a company's balance sheet to solve cash flow problems. Companies that are in need of ongoing working capital lines of credit, seasonal inventory support or financing for acquisitions, benefit with an asset based lending solution. We maintained our high credit quality standards and added $12 million to our commercial real estate portfolio in 2000. At year-end, the commercial real estate portfolio totaled $124 million, excluding construction mortgages. Our commercial real estate lenders handle all types of properties including apartment complexes, office buildings, retail and mixed-use property, warehouse and industrial facilities, residential subdivisions and other new construction. The potential to generate new business through our commercial lending division remains strong. Our commercial lenders are dedicated to helping local businesses succeed and are very responsive to the business owner or manager. This approach, combined with resources of a $1.3 billion bank, enables us to serve the local market very effectively. [The following table was depicted as a pie chart in the printed material.] Loan Mix as of December 31, 2000 (in thousands) Residential Mortgages $489,106 72.39% Commercial Mortgages $124,201 18.38% Second Mortgages & Equity Lines $22,311 3.30% Construction Mortgages $19,913 2.95% Commercial Loans $17,241 2.55% Consumer Loans $2,925 0.43% [MAP] Tewksbury North Reading Wilmington Burlington Medford Malden Arlington Belmont Somerville Waltham Boston Residential Lending Our Residential Lending Division is a major asset generator for the bank with $489 million in loans comprising 72% of the total loan portfolio. During 2000, more than $90 million in new loans were originated, the majority of which were for new purchases. With inventory relatively low in the real estate market, home prices reached an all-time-high in many communities, frustrating many home shoppers. Medford Bank was able to make home buying easier for most families. We dedicated a total of $7.5 million to first time home buyer programs, giving the pride of home ownership to a number of local families. Additionally, we helped other families with our Pre-Approval Program. Our Pre-Approval Program gives home buyers tremendous buying power and a stronger position when negotiating the purchase of a new home. In a competitive market, Pre-Approval is an essential tool enabling the home buyer to act fast. We also held a series of home buying seminars in 2000 for the general public. These informative sessions included expert advice from real estate attorneys, home inspectors and other professionals. Medford Bank is a leading lender in several communities. We hold the number two market share position in both Medford and Malden, and rank fourth in our primary market overall. Our entire lending area extends beyond our primary market, throughout Eastern Massachusetts with each of our mortgage originators assigned to key segments of this territory. Much of the success we have experienced in residential mortgage lending is a result of the high level of personal service that our originators provide. Our lenders are available to meet with home buyers at the time and place most convenient for them. This one-on-one interaction is just one of the ways we stay in touch with the needs of our mortgage customers. For consumers who prefer to search for a mortgage online, we have greatly expanded the home mortgage section on our web site. In addition to current rates, mortgage shoppers can review program options and details, calculate mortgage payments, determine the maximum loan amount they qualify for or even apply for their mortgage online. By offering versatile mortgage programs, competitive interest rates, personalized service and the convenience of online information and applications, home buyers have many choices at Medford Bank. We are dedicated to making home ownership possible. Arlington Route 60 & Mystic Valley Parkway 781.393.6355 Arlington Center 430 Massachusetts Ave. (opening June 2001) Belmont 4 Hill Road, Corner of Brighton St. 781.393.6320 Burlington 258 Cambridge St. 781.272.5700 Malden Malden Center 399 Main St. 781.393.6386 Broadway 44 Broadway 781.393.6334 Maplewood 28 Lebanon St. 781.393.6329 Oak Grove 876 Main St. 781.393.6326 West Side 443 Charles St. 781.393.6337 Medford Main Office 29 High St. 781.395.7700 Loan Center 5 High St. 781.395.7700 Haines Square 257 Spring St. 781.393.6380 South Medford 448 Main St. 781.393.6340 Wellington 499 Riverside Ave. 781.393.6350 West Medford 501 High St. 781.393.6344 North Reading 80 Main St. 978.664.5581 Somerville 328 Broadway 617.666.4521 Tewksbury 295 Main St. 978.851.0841 Waltham 695 Main St. 781.647.4848 Wilmington 240 Main St. 978.658.9134 a rich heritage [Logo] and a leading community bank today Directors Arthur H. Meehan* Chairman of the Board, President and Chief Executive Officer, Medford Bank Edward D. Brickley Manager of Corporate International Accounting at Polaroid Corporation Cambridge, MA (Retired) David L. Burke President and Treasurer, Boston Steel & Manufacturing Co. Malden, MA Deborah A. Burke-Santoro Marketing and Communications Director, Office of the Mayor, City of Malden Paul J. Crowley* President, CSC Consulting Group Cambridge, MA (Retired) Mary Lou Doherty Assistant Principal, Medford School System (Retired) Edward J. Gaffey* President, Country Way Trust Belmont, MA Andrew D. Guthrie, Jr., M.D. Physician, President of Mistick Pediatrics Associates (Retired) Robert A. Havern, III Attorney, Arlington, MA Member of State Legislature of Commonwealth of Massachusetts Eugene R. Murray* Underwriting Manager of the Boston Office of Cigna Special Risk Facility (Retired) Francis D. Pizzella* Attorney and President of The Savings Bank Life Insurance Company of Massachusetts, President of The Savings Bank Employees Retirement Association (Retired) Officers of MedfordBank Arthur H. Meehan** Chairman, President and Chief Executive Officer Vincent Gargano Senior Vice President, Strategic Planning and Risk Management Paula M. McNabb Vice President, CRA/Compliance Officer Administration William F. Rivers Senior Vice President David L. Korp Senior Vice President, Operations Officer Joan P. Cronholm Vice President, Loan Operations Officer Jane M. Quercia Vice President, Director of Human Resources Maria A. Leo Assistant Vice President, EFT Services Officer Charles E. Samour Assistant Vice President, Security Officer Joanne Teixeira Assistant Vice President, Deposit Operations Officer Finance Phillip W. Wong** Executive Vice President, Chief Financial Officer Mary E. Auterio Vice President, Controller Jane E. Cybulski Vice President, Investment/ALCO Officer Martin J. Heneghan Vice President, Senior Audit Officer Christine Panno-West Assistant Vice President, Assistant Controller Lending William L. Marshall, III Executive Vice President, Commercial Lending Eric B. Loth Senior Vice President Laurence J. Packenham Senior Vice President, Commercial Real Estate Donald L. Cullen Vice President, Collections Officer Mary Ann Devlin Vice President, Commercial Real Estate Kim S. Foster Vice President, Commercial Loan Officer Joanne M. Franco Vice President, Senior Credit Officer Richard P. Lane Vice President, Commercial Loan Officer Michael D. MacDonald Vice President, Commercial Loan Officer Deborah Sousa Vice President, Residential Lending Anne M. Barry Assistant Vice President, Mortgage Representative Harold L. Goldsmith Assistant Vice President, Mortgage Representative Charles M. Byron Mortgage Loan Officer Joanne M. Fitzpatrick Mortgage Officer Cathryn L. Kent Credit Officer Deborah M. Ofcharsky Mortgage Officer Retail George A. Bargamian Executive Vice President Elizabeth J. Stodolski Senior Vice President, Marketing Director Anthony R. Visco Senior Vice President, Branch Administrator Theresa R. Barile Vice President, Pension Officer Anna Beaudoin Vice President, Retail Systems Administrator Kathleen M. Beasley Assistant Vice President, Regional Branch Officer Cheryl A. Cannon Assistant Vice President, Retail Training and Support Teresa Cunha Assistant Vice President, Call Center Officer Judith A. Gilligan Assistant Vice President, Regional Branch Officer Lea Hamel Assistant Vice President, Regional Branch Officer Dana Mann Assistant Vice President, Municipal Officer Christine Santapaola Assistant Vice President, Regional Branch Officer Andree Brulhart Branch Officer Kelly A. Hannify Branch Officer Catherine Masiello Branch Officer Kathleen Pasquale Branch Officer Barbara Purcell Branch Officer Zoe RajBhandary Marketing Officer Stephanie M. Tiernan Branch Officer Deborah R. White Branch Officer [LOGO] * Member of Executive Committee ** Officer of Medford Bancorp, Inc. people you know. experience you trust. [LOGO] Medford Bancorp, Inc. 781.395.7700 www.medfordbank.com Shareholder Information The Company's common stock trades on the Nasdaq Stock Market under the symbol MDBK. The stock is listed under various abbreviations in the Wall Street Journal and other newspapers. There were 1,046 shareholders of record as of December 31, 2000. Quarterly Stock Performance The following tabulation shows the range of price quotations per share as reported by Nasdaq for the periods indicated: (adjusted for stock split). 2000 High Low - ------------------------------------------ First Quarter $ 16.50 $ 12.13 Second Quarter $ 15.63 $ 13.75 Third Quarter $ 16.13 $ 13.88 Fourth Quarter $ 15.63 $ 13.38 Dividend Reinvestment And Stock Purchase Plan Stockholders may obtain a detailed brochure of the plan by writing to the Company's Shareholder Relations Department. Transfer Agent Contact our stock transfer agent directly for assistance regarding: change of address; transfer of stock certificates; replacement of lost, stolen, or destroyed certificates or dividend checks; elimination of duplicate mailing. Boston EquiServe P.O. Box 43011 Providence, RI 02940-3011 800.426.5523 Legal Counsel Goodwin Procter LLP Exchange Place Boston, MA 02109 617.570.1000 Independent Certified Public Accountant Wolf & Company, P.C. One International Place Boston, MA 02110 617.439.9700 EX-23 3 0003.txt CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Number 333-41161 (dated November 26, 1997, on Form S-8), Registration Statement Number 333-43271 (dated December 24, 1997, on Form S-8), Registration Statement Number 333-43273 (dated December 24, 1997, on Form S-8), and Registration Statement Number 333-62555 (dated August 31, 1998, on Form S-8) of our report dated January 19, 2001 on the consolidated financial statements of Medford Bancorp, Inc. and subsidiaries, appearing in the Annual Report on Form 10-K of Medford Bancorp, Inc. for the year ended December 31, 2000. /s/ Wolf & Company, P.C. Boston, Massachusetts March 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----