-----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, T396oqMJXeIrcnwFkQqr6sNhY77mLZWK490BuZlE/KEbRctZwhDAddtDdlRjxJNg EQJYY6yXRNiHkCo+HPabcA== 0001171520-02-000023.txt : 20020515 0001171520-02-000023.hdr.sgml : 20020515 20020515114354 ACCESSION NUMBER: 0001171520-02-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDFORD BANCORP INC CENTRAL INDEX KEY: 0001049895 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 043384928 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23435 FILM NUMBER: 02649337 BUSINESS ADDRESS: STREET 1: 29 HIGH ST CITY: MEDFORD STATE: MA ZIP: 02155 BUSINESS PHONE: 6173957700 MAIL ADDRESS: STREET 1: 29 HIGH ST CITY: MEDFORD STATE: MA ZIP: 02155 10-Q 1 d02-0008.txt MEDFORD BANCORP, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 |_| 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of shares outstanding of Medford Bancorp, Inc.'s common stock, $0.50 par value per share, as of March 31, 2002 was 7,795,152. TABLE OF CONTENTS PART I FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PAGE Consolidated Balance Sheets 1 Consolidated Statements of Income 2-3 Consolidated Statements of Changes in Stockholders' Equity 4 Consolidated Statements of Cash Flows 5-6 Notes to Consolidated Financial Statements 7 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-18 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18 PART II OTHER INFORMATION ITEM 1 - Legal Proceedings 19 ITEM 2 - Changes in Securities and Use of Proceeds 19 ITEM 3 - Defaults Upon Senior Securities 19 ITEM 4 - Submission of Matters to a Vote of Security Holders 19 ITEM 5 - Other Information 19 ITEM 6 - Exhibits and Reports on Form 8-K 19 SIGNATURES 20 PART I FINANCIAL INFORMATION ITEM 1 Financial Statements MEDFORD BANCORP, INC. CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2002 2001 ----------- ------------ (In thousands) ASSETS Cash and due from banks $ 15,739 $ 18,210 Interest-bearing deposits 48,389 28,280 ----------- ----------- Cash and cash equivalents 64,128 46,490 Securities available for sale 616,295 588,263 Securities held to maturity 48,678 57,022 Federal Home Loan Bank stock, at cost 11,920 11,920 Loans 679,076 682,263 Less allowance for loan losses (7,391) (7,080) ----------- ----------- Loans, net 671,685 675,183 ----------- ----------- Banking premises and equipment, net 11,688 11,578 Accrued interest receivable 9,758 9,596 Intangible assets 1,287 1,532 Other assets 10,728 11,187 ----------- ----------- Total assets $ 1,446,167 $ 1,412,771 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 1,126,799 $ 1,095,947 Short-term borrowings 1,460 10,206 Long-term debt 200,075 190,075 Accrued taxes and expenses 3,715 2,338 Other liabilities 2,612 2,640 ----------- ----------- Total liabilities 1,334,661 1,301,206 ----------- ----------- 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 21,309 21,985 Retained earnings 106,932 104,275 Accumulated other comprehensive income 2,485 5,627 Treasury stock at cost (1,327,444 and 1,388,948 shares, respectively) (23,781) (24,883) ----------- ----------- Total stockholders' equity 111,506 111,565 ----------- ----------- Total liabilities and stockholders' equity $ 1,446,167 $ 1,412,771 =========== ===========
See accompanying notes to consolidated financial statements. 1 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, --------------------------------- 2002 2001 ------- ------- (Dollars in thousands, except per share data) Interest and dividend income: Interest and fees on loans $11,698 $12,773 Interest on debt securities 9,504 9,168 Dividends on equity securities 110 227 Interest on short-term investments 151 221 ------- ------- Total interest and dividend income 21,463 22,389 ------- ------- Interest expense: Interest on deposits 7,856 9,539 Interest on short-term borrowings 75 390 Interest on long-term debt 2,748 3,250 ------- ------- Total interest expense 10,679 13,179 ------- ------- Net interest income 10,784 9,210 Other income: Customer service fees 576 538 Gain on sales of securities, net 96 216 Miscellaneous 279 328 ------- ------- Total other income 951 1,082 ------- ------- Operating expenses: Salaries and employee benefits 3,161 2,904 Occupancy and equipment 791 761 Data processing 463 422 Professional fees 142 105 Amortization of intangibles 245 268 Advertising and marketing 162 148 Other general and administrative 708 601 ------- ------- Total operating expenses 5,672 5,209 ------- ------- Income before income taxes 6,063 5,083 Provision for income taxes 2,237 1,824 ------- ------- Net income $ 3,826 $ 3,259 ======= =======
(continued) 2 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Concluded)
Three Months Ended March 31, ------------------------------------ 2002 2001 ---------- ---------- (Dollars in thousands, except per share data) Earnings per share: Basic $ 0.49 $ 0.41 Diluted $ 0.48 $ 0.40 Cash dividends declared per share $ 0.15 $ 0.13 Weighted averages shares outstanding: Basic 7,757,466 7,911,732 Diluted 7,958,904 8,108,694
See accompanying notes to consolidated financial statements. 3 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Three Months Ended March 31, 2002 and 2001
Accumulated Common Stock Additional Treasury Stock Other ------------------ Paid-In Retained ---------------------- Comprehensive Shares Dollars Capital Earnings Shares Dollars Income Total --------- ------- ---------- --------- ---------- -------- ------------- --------- (Dollars in thousands) Balance at December 31, 2001 9,122,596 $4,561 $ 21,985 $ 104,275 (1,388,948) $(24,883) $ 5,627 $ 111,565 --------- Comprehensive income: Net income -- -- -- 3,826 -- -- -- 3,826 Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- -- -- (3,142) (3,142) --------- Total comprehensive income 684 --------- Cash dividends declared ($.15 per share) -- -- -- (1,169) -- -- -- (1,169) Issuance of common stock under stock option plan -- -- (676) -- 61,504 1,102 -- 426 --------- ------ -------- --------- ---------- -------- ------- --------- Balance at March 31, 2002 9,122,596 $4,561 $ 21,309 $ 106,932 (1,327,444) $(23,781) $ 2,485 $ 111,506 ========= ====== ======== ========= ========== ======== ======= ========= Balance at December 31, 2000 9,122,596 $4,561 $ 22,705 $ 94,697 (980,048) $(17,422) $ 424 $ 104,965 --------- Comprehensive income: Net income -- -- -- 3,259 -- -- -- 3,259 Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- -- -- 3,616 3,616 --------- Total comprehensive income 6,875 --------- Cash dividends declared ($.13 per share) -- -- -- (1,013) -- -- -- (1,013) Repurchase of treasury stock -- -- -- -- (389,048) (6,852) -- (6,852) Issuance of common stock under stock option plan -- -- (377) -- 30,164 533 -- 156 --------- ------ -------- --------- ---------- -------- ------- --------- Balance at March 31, 2001 9,122,596 $4,561 $ 22,328 $ 96,943 (1,338,932) $(23,741) $ 4,040 $ 104,131 ========= ====== ======== ========= ========== ======== ======= =========
See accompanying notes to consolidated financial statements. 4 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, --------------------- 2002 2001 --------- -------- (In thousands) Cash flows from operating activities: Net income $ 3,826 $ 3,259 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, net 874 506 Gain on sales of securities (96) (216) Decrease (increase) in accrued interest receivable and other assets 2,297 (921) Increase in accrued taxes and expenses and other liabilities 1,340 1,518 --------- -------- Net cash provided by operating activities 8,241 4,146 --------- -------- Cash flows from investing activities: Activity in securities available for sale: Maturities 14,419 24,500 Sales 53,180 16,701 Purchases (120,201) (50,691) Principal amortization of mortgage-backed securities 19,325 12,486 Activity in securities held to maturity: Purchases -- (500) Principal amortization of mortgage-backed securities 8,400 -- Loans net of amortization and payoffs 3,362 5,854 Additions to banking premises and equipment, net (460) (634) --------- -------- Net cash provided by (used in) investing activities (21,975) 7,716 --------- --------
(continued) 5 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Three Months Ended March 31, -------------------- 2002 2001 -------- -------- (In thousands) Cash flows from financing activities: Net increase in deposits 30,852 22,646 Increase (decrease) in borrowings with maturities of three months or less (8,746) 9,618 Proceeds (repayments) of long-term debt 10,000 (10,000) Issuance of common stock 426 156 Payments to acquire treasury stock -- (6,852) Cash dividends paid (1,160) (1,304) -------- -------- Cash provided by financing activities 31,372 14,264 -------- -------- Net change in cash and cash equivalents 17,638 26,126 Cash and cash equivalents at beginning of period 46,490 22,258 -------- -------- Cash and cash equivalents at end of period $ 64,128 $ 48,384 ======== ========
See accompanying notes to consolidated financial statements. 6 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2002 AND 2001 Note 1. Basis of Presentation The consolidated interim financial statements of Medford Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the "Bank") presented herein are intended to be read in conjunction with the consolidated financial statements presented in the Company's annual report for the year ended December 31, 2001. The consolidated financial information as of and for the three months ended March 31, 2002 and March 31, 2001 is unaudited. In the opinion of management, however, the consolidated financial information reflects all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation in accordance with accounting principles generally accepted in the United States of America. Interim results are not necessarily indicative of results to be expected for the entire year. Note 2. Commitments At March 31, 2002, the Company had outstanding commitments to originate new residential and commercial real estate mortgage loans totaling approximately $21.8 million, which are not reflected on the consolidated balance sheet. Unadvanced funds on equity lines were $28.8 million, unadvanced construction loan funds were $8.6 million, and unadvanced funds on commercial lines of credit were $13.0 million at March 31, 2002. Note 3. 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 potential common shares had been issued, as well as any adjustment to income that would result from the assumed conversion. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. The assumed conversion of outstanding dilutive stock options would increase the shares outstanding but would not require an adjustment to income as a result of the conversion. Note 4. Accounting Change In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for business combinations initiated after June 30,2001. SFAS No. 142, effective for the Company on January 1, 2002, changes the accounting for goodwill from an amortization method to an impairment-only approach. In addition, this Statement requires that acquired identifiable intangible assets, as defined, be amortized over their useful lives. All of the Company's intangible assets pertain to acquisitions of banking or thrift institutions, where fair value of liabilities assumed exceeded the fair value of assets acquired and will continue to be amortized, as such transactions are outside the scope of SFAS No. 142. Thus the adoption of these Statements did not have an impact on the consolidated financial statements. 7 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operation GENERAL The discussions set forth below, elsewhere herein, in our press releases and in oral statements we make by or with the approval of our authorized executives contain certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1937, as amended. The Company may make written or oral forward-looking statements in other documents we file with the SEC and in our annual reports to stockholders. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "will," "should," and other expression which predict or indicate future events or trends and which do not relate to historical matters. You should exercise caution in interpreting and relying 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 of the Company to be materially different from the anticipated future results 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 including changes that adversely affect borrowers ability to service and repay loans; 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 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," as found in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 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 reflect our good faith beliefs based on information, plans and estimates at the date of this report, and we expressly disclaim any duty to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Consolidated net income was $3,826,000, or basic earnings per share of $0.49 ($0.48 diluted basis), for the three months ended March 31, 2002, compared to $3,259,000, or basic earnings per share of $0.41 ($0.40 diluted basis), for the comparable prior year period. Net interest income was $10,784,000 for the quarter ended March 31, 2002, up $1,574,000 or 17.1% from the comparable 2001 period, and represented a net interest margin of 3.10%, as compared to 2.86% for the comparable 2001 period. The net gain on sales of assets totaled $96,000 for the first quarter of 2002 compared to $216,000 for the same quarter of 2001. Total operating expenses were $5,672,000 for the quarter ended March 31, 2002, up $463,000 or 8.9% from $5,209,000 during the comparable period in 2001. There was no provision for loan losses recorded for either of the three-month periods ended March 31, 2002 or March 31, 2001. For the first quarter of 2002, the annualized return on assets was 1.09% and the annualized return on equity was 13.68%, compared to 1.01% and 12.75%, respectively, for the comparable period in 2001. 8 Total non-performing assets were $548,000 or 0.04% of total assets at March 31, 2002 compared to $976,000 or 0.07% at December 31, 2001. The allowance for loan losses at March 31, 2002 was $7,391,000, representing 1.09% of total loans. At December 31, 2001, the allowance for loan losses was $7,080,000, representing 1.04% of total loans. The Company had no foreclosed real estate at March 31, 2002 or December 31, 2001. The Company had total assets of $1.45 billion and capital of $111.5 million at March 31, 2002, representing a capital to assets ratio of 7.71%, exceeding all regulatory requirements. When compared to December 31, 2001, securities increased $19.7 million or 3.0% to $676.9 million, total gross loans decreased $3.2 million or 0.47% to $679.1 million, deposits increased $30.9 million or 2.8% to $1.13 billion, and borrowings increased $1.3 million or 0.63% to $201.5 million. A more detailed discussion and analysis of the Company's financial condition and results of operations follows. SECURITIES The amortized cost and fair value of investment securities, excluding restricted equity securities, at March 31, 2002 and December 31, 2001 with gross unrealized gains and losses, follows:
Gross Gross Amortized Unrealized Unrealized Fair March 31, 2002 Cost Gains Losses Value - --------------------------------------------- --------- ---------- ---------- -------- (In thousands) Securities Available for Sale Corporate bonds $280,539 $5,597 $(1,176) $284,960 Mortgage-backed 268,354 1,778 (1,494) 268,638 U. S. Gov't and federal agency obligations 63,468 59 (830) 62,697 -------- ------ ------- -------- Total securities available for sale $612,361 $7,434 $(3,500) $616,295 ======== ====== ======= ======== Securities Held to Maturity Federal agency obligations $ 4,903 $ 244 $ -- $ 5,147 Mortgage-backed 43,775 1,030 (132) 44,673 -------- ------ ------- -------- Total securities held to maturity $ 48,678 $1,274 $ (132) $ 49,820 ======== ====== ======= ========
9
Gross Gross Amortized Unrealized Unrealized Fair December 31, 2001 Cost Gains Losses Value - --------------------------------------------- --------- ---------- ---------- -------- (In thousands) Securities Available for Sale Corporate bonds $251,531 $ 7,760 $ (333) $258,958 Mortgage-backed 253,323 2,397 (863) 254,857 U.S. Gov't and federal agency obligations 73,458 334 (224) 73,568 -------- ------- ------- -------- Total debt securities 578,312 10,491 (1,420) 587,383 Marketable equity securities 874 98 (92) 880 -------- ------- ------- -------- Total securities available for sale $579,186 $10,589 $(1,512) $588,263 ======== ======= ======= ======== Securities Held to Maturity Federal agency obligations $ 4,884 $ 335 $ -- $ 5,219 Mortgage-backed 52,138 1,217 (93) 53,262 -------- ------- ------- -------- Total securities held to maturity $ 57,022 $ 1,552 $ (93) $ 58,481 ======== ======= ======= ========
The amortized cost and fair value of debt securities by contractual maturity at March 31, 2002 are as follows:
Available for Sale Held to Maturity ---------------------- --------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- -------- --------- ------- (In thousands) Within 1 year $ 71,689 $ 72,678 $ -- $ -- After 1 year through 5 years 263,818 266,568 4,903 5,147 After 5 years through 10 years 8,500 8,411 -- -- -------- -------- ------- ------- 344,007 347,657 4,903 5,147 Mortgage-backed securities 268,354 268,638 43,775 44,673 -------- -------- ------- ------- $612,361 $616,295 $48,678 $49,820 ======== ======== ======= =======
Securities increased $19.7 million from $657.2 million at December 31, 2001 to $676.9 million at March 31, 2002. At March 31, 2002, the securities portfolio classified as "available for sale" reflected a $3.9 million appreciation in market value as a result of the ongoing changes in market interest rates as compared to a $9.1 million appreciation in market value at December 31, 2001. In accordance with the Company's asset-liability strategies, purchases of mortgage-backed securities are primarily in fifteen-year mortgages with weighted-average lives of six years and other securities are generally short-term with maturities of five years or less. Sales of debt securities produced gains of $86,000 during the 2002 first quarter and gains of $156,000 for the three months ended March 31, 2001. Sales of equities produced gains of $10,000 during the three months ended March 31, 2002 compared to gains of $60,000 for the three months ended March 31, 2001. 10 LOANS A summary of the Company's outstanding loan balances as of the dates indicated follows: March 31, December 31, 2002 2001 ---------- ------------ (In thousands) Mortgage loans on real estate: Residential 1 - 4 family $ 486,136 $ 487,331 Commercial 130,763 130,207 Construction 15,406 17,228 Second mortgages 368 444 Equity lines of credit 26,817 25,199 --------- --------- 659,490 660,409 Other loans: Commercial 15,725 17,954 Personal 2,582 2,652 --------- --------- 18,307 20,606 --------- --------- Net deferred loan origination costs 1,279 1,248 --------- --------- Total loans 679,076 682,263 Less allowance for loan losses (7,391) (7,080) --------- --------- Loans, net $ 671,685 $ 675,183 ========= ========= Total gross loans outstanding at March 31, 2002 decreased $3.2 million to $679.1 million when compared to the December 31, 2001 level. As residential mortgage refinancing activity continued during the first quarter of 2002, it contributed to the decline in residential 1-4 family real estate mortgage loans of $1.2 million. Construction real estate and commercial and industrial loans also declined by $1.8 million and $2.2 million, respectively, from December 31, 2001 levels. NON-PERFORMING ASSETS Total non-performing assets were $548,000 and $976,000 at March 31, 2002 and December 31, 2001, respectively. There were no foreclosed assets at March 31, 2002 or December 31, 2001. As a percentage of total assets, nonperforming assets equaled 0.04% at March 31, 2002 and 0.07% at December 31, 2001. Fluctuations in total nonperforming assets occur from quarter to quarter but remain at historically low levels. It is the Company's general policy to place loans on a non-accrual status when such loans become 90 days contractually delinquent or when the collectibility of principal or interest payments becomes doubtful. When a loan is placed on non-accrual status, its interest income accrual ceases and all income previously accrued but unpaid is reversed. In accordance with SFAS No. 114, a loan is considered impaired when, based on current information and events, it is probable that the borrower will be unable to meet principal or interest payments as agreed in the original loan contract. The principal balance of impaired loans at March 31, 2002 was $667,000 of which $548,000 was included in the non-performing assets referenced in the preceding paragraph. 11 ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses follows: Three Months Ended March 31, -------------------- 2002 2001 ------- ------- (In thousands) Balance at beginning of period $ 7,080 $ 6,950 Recoveries 326 45 Loans charged-off (15) (34) ------- ------- Balance at end of period $ 7,391 $ 6,961 ======= ======= The allowance for loan losses is established 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 borrowers' 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 for loan losses was $7.4 million at March 31, 2002, representing a reserve coverage of 1.09% of total loans. At December 31, 2001, the allowance for loan losses was $7.1 million, representing 1.04% of total loans. DEPOSITS Total deposits increased $30.9 million from December 31, 2001 to $1.13 billion at March 31, 2002. Demand deposits and NOW accounts increased $1.6 million and $1.9 million, respectively, from year-end levels. For core deposit growth the Company emphasizes its "ComboPlus" account, which combines both a high rate savings account and a demand checking account. During the first quarter of 2002, savings and money market accounts increased $29.9 million as retail depositors shifted funds into "ComboPlus" accounts. 12 The following table indicates the balances in various deposit accounts at the dates indicated. March 31, December 31, 2002 2001 ---------- ------------ (In thousands) Demand $ 76,227 $ 74,602 NOW 66,599 64,686 Savings and money market accounts 561,915 532,031 Term certificates 422,058 424,628 ---------- ---------- Total deposits $1,126,799 $1,095,947 ========== ========== BORROWED FUNDS At March 31, 2002, the Company's long-term borrowings increased by $10.0 million to $200.1 million from $190.1 million at December 31, 2001. Short-term borrowings decreased by $8.7 million to $1.5 million from $10.2 million at year-end. At March 31, 2002, borrowed funds totaled $201.5 million, increasing $1.3 million from the $200.3 million reported at December 31, 2001. STOCKHOLDERS' EQUITY The Company's capital to assets ratio was 7.71% and 7.90% at March 31, 2002 and December 31, 2001, respectively. 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 the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and/or the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Holding companies, such as the Company, are not subject to prompt corrective action provisions. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2001, the Bank met all capital adequacy requirements to be categorized as well capitalized. No conditions or events occurred during the first three months of 2002 that management believes have changed the Bank's category. Management believes as of March 31, 2002 that the Company and the Bank met all capital adequacy requirements to continue to be categorized as well capitalized. The Company's book value at March 31, 2002 was $14.30 per share, compared with $14.43 per share at December 31, 2001. 13 RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 2002 VS QUARTER ENDED MARCH 31, 2001 NET INTEREST INCOME Interest and dividend income from loans and investments decreased $926,000 or 4.1% to $21.5 million for the 2002 first quarter when compared to the same quarter in 2001. For the 2002 first quarter, average earning assets totaled $1.4 billion, an increase of $110.4 million or 8.7% over the comparable average for 2001, with $104.3 million of that increase attributed to short and long-term securities and $6.1 million attributed to loans. The annualized yields on earning assets were 6.22% and 7.06% for the first quarters in 2002 and 2001, respectively. The yield on securities was 5.78% for the first quarter 2002 as compared to 6.47% for the first quarter 2001. Short and long-term investments contributed $149,000 of additional interest and dividend income when comparing the first quarter of 2002 to the first quarter of 2001, primarily as a result of higher average balances. The interest income from the increase in the average balance on loans was more than offset by a decrease in the yield, from 7.60% to 6.90%, causing interest income on loans to decrease by $1.1 million from its 2001 first quarter level. Total interest expense for the three months ended March 31, 2002 was $10.7 million, reflecting a decrease of $2.5 million or 19.0% over the same period in 2001. At March 31, 2002, average interest-bearing liabilities were $1.24 billion, an increase of $95.9 million or 8.4% over the comparable prior year period. This period-to-period increase can be attributed to average deposit growth of $120.0 million offset by average borrowed funds decreasing $24.1 million. Overall, interest expense on deposits decreased $1.7 million to $7.9 million primarily as a result of the decrease in rates paid from 4.26% to 3.10% for the quarters ended March 31, 2001 and 2002, respectively. Interest expense on borrowed funds decreased $817,000 as the average balances decreased and the rates paid on borrowed funds decreased 84 basis points to 5.42% in the first quarter of 2002 compared to the first quarter in 2001. The overall cost of interest-bearing liabilities decreased to 3.49% from 4.67% when comparing the two quarters. Net interest income increased 17.1% or $1.6 million to $10.8 million when comparing the first quarter in 2002 to the same quarter in 2001 as the weighted average rate spread increased by 34 basis points to 2.73% and the net interest margin increased 24 basis points to 3.10%. The increase in net interest income is primarily due to an increase in average earning assets as well as an improvement in both spread and margin. The yield on earning assets decreased 84 basis points to 6.22% in the first quarter 2002 as compared to the same quarter in 2001, while the cost of interest-bearing liabilities also decreased by 118 basis points to 3.49%. This resulted in an interest rate spread and a net interest margin of 2.73% and 3.10%, respectively, for the three months ended March 31, 2002. 14 MEDFORD BANCORP, INC. INTEREST RATE SPREAD Three Months Ended March 31, ---------------------- 2002 2001 ------- ------- Weighted average yield earned on: Short-term investments 1.68% 5.40% Securities 5.78 6.47 Loans 6.90 7.60 ------- ------- All earning assets 6.22% 7.06% ------- ------- Weighted average rate paid on: Deposits 3.10% 4.26% Borrowed funds 5.42 6.26 ------- ------- All interest-bearing liabilities 3.49% 4.67% ------- ------- Weighted average rate spread 2.73% 2.39% ======= ======= Net interest margin 3.10% 2.86% ======= ======= 15 PROVISION FOR LOAN LOSSES The provision for loan losses represents a charge against current earnings and an addition to the allowance for loan losses. The provision is determined by management on the basis of many factors, including the quality of specific loans, risk characteristics of the loan portfolio generally, the level of non-performing loans, current economic conditions, trends in delinquency and charge-offs, and value of the underlying collateral. Management considers the allowance for loan losses to be adequate at March 31, 2002, although there can be no assurance that the allowance is adequate or that additional provisions to the allowance for loan losses will not be necessary. The Bank recorded no provisions for loan losses for the first quarter of 2002 and 2001. The Company recorded net loan recoveries of $311,000 and $11,000 for the three months ended March 31, 2002 and 2001, respectively. OTHER INCOME Other income, including customer service fees and gains and losses on sales of assets equaled $951,000 for the first quarter of 2002 as compared to $1,082,000 in the first quarter of 2001, representing a decrease of $131,000 or 12.1%. This decrease is primarily due to a decrease in securities gains of $120,000. See related discussions under "Securities" included in "Management's Discussion and Analysis" in Item 2 of Part 1 of this report. OPERATING EXPENSES Operating expenses increased $463,000 or 8.9% to $5,672,000 for the three months ended March 31, 2002 when compared to the same period in 2001. Salaries and employee benefits increased $257,000 and other general and administrative expenses increased $107,000, when comparing the first quarter of 2002 to the first quarter of 2001. The Company's annualized expense ratio, which is the ratio of non-interest expense to average assets, was 1.61% for the three months ended March 31, 2002 and 2001. The Company continues to focus on cost containment with the intent to be a low cost provider of high quality banking products. PROVISION FOR INCOME TAXES The Company's effective tax rate for three months ended March 31, 2002 of 36.9% is comparable to 35.9% for the period ended March 31, 2001. 16 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 Federal Home Loan Bank of Boston ("FHLBB"), and as such may take advantage of the FHLBB's borrowing programs to enhance liquidity and leverage its favorable capital position. The Bank also may draw on lines of credit at the FHLBB and a large commercial bank, and it may pledge U.S. Government securities to borrow from certain investment firms and the Mutual Savings Central Fund of Massachusetts. These various sources of liquidity are used to fund withdrawals, new loans, and investments. Management 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 that will assist retention of the Bank's base of lower-costing deposits. Maturities and sales of 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. For the three months ended March 31, 2002, cash flow from maturities and sales of securities was $67.6 million compared to $41.2 million for the three months ended March 31, 2001. Principal payments received on mortgage-backed securities during the three months ended March 31, 2002 and 2001 totaled $19.3 million and $12.5 million, respectively. Amortization and payoffs of the loan portfolio also contribute significant liquidity to the Bank. Traditionally, the amortization and payoffs have been reinvested into loans. When payoff rates exceed origination rates, excess liquidity from loan payoffs is shifted into the investment portfolio. The Bank also uses borrowed funds as a source of liquidity. These borrowings generally contribute toward funding over-all loan growth as well as purchases of mortgage-backed securities. The Bank's outstanding borrowings from the FHLBB were $200.1 million at March 31, 2002 and December 31, 2001, respectively. The Bank also utilizes repurchase agreements as a source of funding when management deems market conditions to be conducive to such activities. Commitments to originate residential and commercial real estate mortgage loans at March 31, 2002, excluding unadvanced construction funds of $8.6 million, were $21.8 million. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. Purchases of securities during the three months ended March 31, 2002 totaled $120.2 million, consisting of debt instruments generally maturing in less than five years. This compares with purchases of $51.2 million for the three months ended March 31, 2001. Residential and commercial real estate mortgage loan originations for the three months ended March 31, 2002 totaled $67.1 million, compared with $20.4 million for the three months ended March 31, 2001. The Bank's capital position (total stockholders' equity) was $111.5 million or 7.7% of total assets at March 31, 2002 compared with $111.6 million or 7.9% of total assets at December 31, 2001. The Bank's capital position exceeds all regulatory requirements 17 ASSET-LIABILITY MANAGEMENT Through the Bank's Asset-Liability Management Committee ("ALCO"), which is comprised of certain senior and middle management personnel, the Bank monitors the level and general mix of interest rate-sensitive assets and liabilities. The primary objective of the ALCO is to manage the assets and liabilities of the Bank to provide for optimum profitability and capital at prudent levels of liquidity and interest rate, credit, and market risk. It is ALCO's general policy to closely match the maturity or rate sensitivity of its assets and liabilities. In accordance with this policy, certain strategies have been implemented to improve the match between interest rate sensitive assets and liabilities. These strategies include, but are not limited to: daily monitoring of the Bank's changing cash requirements, with particular concentration on investment in short term securities; originating adjustable and fixed rate mortgage loans for the Bank's own portfolio; managing the cost and structure of deposits; and generally using matched borrowings to fund specific purchases of loan packages and large loan origination. Occasionally, management may choose to deviate from specific matching of maturities of assets and liabilities, if an attractive opportunity to enhance yields becomes available. The Bank actively manages its liability portfolio in order to effectively plan and manage growth and maturities of deposits. Management recognizes the need for strict attention to all deposits. Accordingly, plans for growth of all deposit types are reviewed regularly. Programs are in place which are designed to build multiple relationships with customers and to enhance the Bank's ability to retain deposits at controlled rates of interest, and management has adopted a policy of reviewing interest rates on an ongoing basis on all deposit accounts in order to control deposit growth and interest costs In addition to attracting deposits, the Bank has selectively borrowed funds using advances from the FHLBB and, upon occasion, reverse repurchase agreements. These funds have generally been used to fund loans typically having a matched repricing date as well as purchases of mortgage-backed securities. 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. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk For a discussion of the Company's management of market risk exposure, see "Asset-Liability Management" in Item 2 of Part I of this report and Item 7A of Part II of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the "2001 Annual Report"). For quantitative information about market risk, see Item 7A of Part II of the Company's 2001 Annual Report. There have been no material changes in the quantitative and qualitative disclosures about market risk as of March 31, 2002 from those presented in the Company's 2001 Annual Report. 18 PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings There are no material legal proceedings to which the Company is a party or to which any of its property is subject, although the Company is a party to ordinary routine litigation incidental to its business. In the opinion of management, final disposition of these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 2 - Changes in Securities and Use of Proceeds Not applicable. ITEM 3 - Defaults Upon Senior Securities Not applicable. ITEM 4 - Submission of Matters to a Vote of Security Holders None ITEM 5 - Other Information None. ITEM 6 - Exhibits and Reports on Form 8-K (a) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the three-month period ended March 31, 2002. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDFORD BANCORP, INC. Date: May 15, 2002 /s/ Arthur H. Meehan ----------------------------------------------- Arthur H. Meehan Chairman, President and Chief Executive Officer Date: May 15, 2002 /s/ Phillip W. Wong ----------------------------------------------- Phillip W. Wong Executive Vice President, Treasurer and Chief Financial Officer 20 -----END PRIVACY-ENHANCED MESSAGE-----