SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended September 30, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 0-23435
-------
MEDFORD BANCORP, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3384928
------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
29 High Street
--------------
Medford, Massachusetts 02155
---------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 395-7700
--------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
YES X NO
--- - --
The number of shares outstanding of Medford Bancorp, Inc.'s common stock, $0.50
par value per share, as of September 30, 1998 was 8,717,328.
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets........................................1
Consolidated Statements of Income................................2-5
Consolidated Statements of Changes in Stockholders' Equity.........6
Consolidated Statements of Cash Flow.............................7-8
Notes to Consolidated Financial Statements......................9-10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................11-31
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.......................................................32
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings.................................................33
ITEM 2 - Changes in Securities and Use of Proceeds.........................33
ITEM 3 - Defaults Upon Senior Securities...................................33
ITEM 4 - Submission of Matters to a Vote of Security Holders...............33
ITEM 5 - Other Information.................................................33
ITEM 6 - Exhibits and Reports on Form 8-K..................................33
SIGNATURES........................................................34
Exhibit Index.....................................................34
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements
MEDFORD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $15,451 $13,376
Short-term investments 1,226 2,804
------ ------
Cash and cash equivalents 16,677 16,180
------ ------
Investment securities available for sale 456,298 402,723
Investment securities held to maturity 41,057 103,823
Restricted equity securities 8,436 6,872
Loans 585,098 577,577
Less allowance for loan losses (6,876) (6,733)
----- -----
Loans, net 578,222 570,844
------- -------
Banking premises and equipment, net 11,676 10,738
Accrued interest receivable 9,028 9,472
Goodwill and deposit-based intangibles 5,094 5,748
Other assets 7,614 9,172
------ ------
TOTAL ASSETS $1,134,102 $1,135,572
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $839,381 $821,706
Short-term borrowings 49,437 95,670
Long-term debt 136,445 110,109
Accrued taxes and expenses 2,680 3,988
Other liabilities 3,058 2,589
----- -----
Total liabilities 1,031,001 1,034,062
--------- ---------
Stockholders' equity:
Serial preferred stock, $.50 par value, 5,000,000 shares authorized;
none issued -- --
Common stock, 15,000,000 shares authorized;
$.50 par value, 9,122,596 and 4,541,148 shares issued, respectively 4,561 2,271
Additional paid-in capital 26,370 28,977
Retained earnings 75,585 68,938
------ ------
106,516 100,186
Treasury stock, at cost (405,268 shares) (8,409) --
Accumulated other comprehensive income 4,994 1,324
------ ------
Total stockholders' equity 103,101 101,510
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,134,102 $1,135,572
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
1998 1997
------ ------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $11,372 $11,638
Interest on debt securities 7,627 7,221
Dividends on equity securities 158 204
Interest on short-term investments 41 51
--- ---
Total interest and dividend income 19,198 19,114
------ ------
Interest expense:
Interest on deposits 8,132 8,104
Interest on short-term borrowings 820 817
Interest on long-term debt 1,924 1,664
----- -----
Total interest expense 10,876 10,585
------ ------
Net interest income 8,322 8,529
Provision for loan losses -- --
----- -----
Net interest income, after provision for loan losses 8,322 8,529
----- -----
Other income:
Customer service fees 469 505
Gain on sales of securities, net 186 119
Gain on sale of loans 53 --
Miscellaneous 247 140
--- ---
Total other income 955 764
---- ----
Operating expenses:
Salaries and employee benefits 2,813 2,589
Occupancy and equipment 551 571
Data processing 353 354
Professional fees 141 188
Amortization of intangibles 293 302
Advertising and marketing 177 156
Other general and administrative 491 637
--- ---
Total operating expenses 4,819 4,797
----- -----
Income before income taxes 4,458 4,496
Provision for income taxes 1,625 1,786
----- -----
Net income $2,833 $2,710
====== ======
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
2
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(concluded)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
1998 1997
------ ------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Earnings per share:
Basic $0.32 $0.30
Diluted $0.31 $0.28
Cash dividends declared per share $0.10 $0.09
Weighted average shares outstanding
Basic 8,802,423 9,082,296
Diluted 9,260,803 9,549,652
</TABLE>
See accompanying notes to consolidated financial statements.
(Remainder of this page intentionally left blank.)
3
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
September 30.
-----------------------
1998 1997
------ ------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $34,462 $34,439
Interest on debt securities 22,762 20,749
Dividends on equity securities 397 524
Interest on short-term investments 139 157
--- ---
Total interest and dividend income 57,760 55,869
------ ------
Interest expense:
Interest on deposits 23,754 23,286
Interest on short-term borrowings 2,802 2,783
Interest on long-term debt 5,433 4,396
----- -----
Total interest expense 31,989 30,465
------ ------
Net interest income 25,771 25,404
Provision for loan losses 75 125
-- ---
Net interest income, after provision for loan losses 25,696 25,279
------ ------
Other income:
Customer service fees 1,423 1,492
Gain on sales of securities, net 1,096 792
Gain on sale of loans 357 306
Miscellaneous 692 463
--- ---
Total other income 3,568 3,053
----- -----
Operating expenses:
Salaries and employee benefits 8,116 7,684
Occupancy and equipment 1,678 1,726
Data processing 1,064 1,053
Professional fees 401 451
Amortization of intangibles 884 908
Advertising and marketing 402 457
Other general and administrative 1,626 1,709
----- -----
Total operating expenses 14,171 13,988
------ ------
Income before income taxes 15,093 14,344
Provision for income taxes 5,775 5,711
----- -----
Net income $9,318 $8,633
====== ======
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
4
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(concluded)
<TABLE>
<CAPTION>
Nine Months Ended
September 30.
-----------------------
1998 1997
------ ------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Earnings per share:
Basic $1.04 $0.95
Diluted $0.99 $0.91
Cash dividends declared per share $0.30 $0.27
Weighted average shares outstanding
Basic 8,968,329 9,079,918
Diluted 9,458,855 9,523,538
</TABLE>
See accompanying notes to consolidated financial statements.
(Remainder of this page intentionally left blank.)
5
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other
Comprehensive Common Paid In Retained Comprehensive Treasury
Income Stock Capital Earnings Income Stock Total
-------- --------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $2,271 $28,977 $68,938 $1,324 $ -- $101,510
Comprehensive income:
Net income $ 9,318 -- -- 9,318 -- -- 9,318
Unrealized gain (loss) on available
for-sale securities, net of tax
and reclassification adjustment 3,670 -- -- -- 3,670 -- 3,670
-------
Comprehensive income $12,988
=======
Purchase of treasury stock -- -- -- -- (9,255) (9,255)
Issuance of common stock under
stock option plan and related income
tax benefits 20 (337) -- -- 846 529
Stock Split (2 for 1) 2,270 (2,270) -- -- -- --
Cash dividends declared ($.30 per share) -- -- (2,671) -- -- (2,671)
------ ------- ------- ------ ------- --------
Balance at September 30, 1998 $4,561 $26,370 $75,585 $4,994 $(8,409) $103,101
====== ======= ======= ====== ======= ========
<CAPTION>
Accumulated
Additional Other
Comprehensive Common Paid In Retained Comprehensive Treasury
Income Stock Capital Earnings Income Stock Total
-------- --------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $2,267 $28,848 $61,634 ($228) $ -- $92,521
Comprehensive income:
Net income $8,633 -- -- 8,633 -- -- 8,633
Unrealized gain (loss) on available
for-sale securities, net of tax
and reclassification adjustment 956 -- -- -- 956 -- 956
------
Comprehensive income $9,589
======
Issuance of common stock under
stock option plan and related income
tax benefits 4 76 -- -- -- 80
Cash dividends declared ($.27 per share) -- -- (2,452) -- -- (2,452)
------ ------- ------- ----- ------ -------
Balance at September 30, 1997 $2,271 $28,924 $67,815 $728 $ -- $99,738
====== ======= ======= ===== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
------ ------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $9,318 $8,633
Adjustments to reconcile net income to
net cash provided by operating activities:
Provisions for loan losses 75 125
Depreciation and amortization, net 1,698 1,721
Foreclosed real estate (gains), losses and provisions, net (22) (22)
Gain on sales of securities, net (1,096) (792)
Gain on sales of loans (357) (306)
Loss on sale of fixed assets -- 53
Increase in accrued interest receivable
and other assets (567) (1,170)
Increase (decrease) in accrued taxes and expenses
and other liabilities 102 90
------ -------
Net cash provided by operating activities 9,151 8,332
------ -------
Cash flows from investing activities:
Maturities of investment securities available for sale 42,180 43,685
Purchases of investment securities available for sale (228,473) (147,094)
Sales of investment securities available for sale 114,888 19,428
Maturities of investment securities held to maturity 62,803 34,034
Purchases of investment securities held to maturity
and FHLBB stock (1,564) (740)
Principal amortization of mortgage-backed investments
available for sale 24,787 5,427
Proceeds from sale of portfolio loans, net 11,209 11,613
Loans originated and purchased, net of amortization and payoffs (18,314) (31,127)
Purchases of bank premises and equipment, net (1,679) (842)
Sales of, and principal payments received on,
foreclosed real estate 69 425
------ -------
Net cash provided by (used in) investing activities 5,906 (65,191)
------ -------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
7
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
------ ------
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 17,675 32,042
Net decrease in borrowings with maturities of three
months or less (46,233) (16,308)
Proceeds from long-term debt 26,336 44,792
Issuance of common stock 356 34
Payments to acquire treasury stock (9,255) -
Cash dividends paid (3,439) (3,086)
------- -------
Net cash (used in) provided by financing activities (14,560) 57,474
------- -------
Net change in cash and cash equivalents 497 615
Cash and cash equivalents, beginning
of period 16,180 16,429
------- -------
Cash and cash equivalents, end of period $16,677 $17,044
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Note 1. Basis of Presentation
General:
Certain amounts have been reclassified in the September 30, 1997 financial
statements to conform to the 1998 presentation and to reflect the two-for-one
stock split in the form of a stock dividend distributed on September 15, 1998.
The consolidated interim financial statements of Medford Bancorp, Inc.
(the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the
"Bank"), presented herein are intended to be read in conjunction with the
consolidated financial statements presented in the Company's annual report for
the year ended December 31, 1997.
The consolidated financial information for the three months and the nine
months ended September 30, 1998 and 1997 is unaudited. In the opinion of
management, however, the consolidated financial information reflects all
adjustments (consisting solely of normal recurring accruals) necessary for a
fair presentation in accordance with generally accepted accounting principles.
Interim results are not necessarily indicative of results to be expected for the
entire year.
Comprehensive Income:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years
beginning after December 15, 1997. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Certain FASB statements, however, require entities to report specific changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, as a separate component of the equity section of
the balance sheet. Such items, along with net income, are components of
comprehensive income. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Additionally, SFAS No. 130 requires
that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company has adopted these disclosure
requirements for 1998 and retroactively for 1997.
9
<PAGE>
Earnings per share:
On September 15, 1998, the Company paid a two-for-one stock split in the
form of a stock dividend. All current and prior period per share data have been
restated herein to reflect this split.
In February 1997, FASB issued SFAS No. 128, "Earnings per Share," which
requires that earnings per share be calculated on a basic and a dilutive basis.
Basic earnings per share represents income available to common stock divided by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been issued, as well as
any adustment to income that would result from the assumed issuance. Potential
common shares that may be issued by the Company relate solely to outstanding
stock options, and are determined using the treasury stock method. The assumed
conversion of outstanding dilutive stock options would increase shares
outstanding but would not require an adjustment to income as a result of the
conversion. SFAS No. 128 is effective for interim and annual periods ending
after December 15, 1997, and requires the restatement of all prior-period
earnings per share data presented. Accordingly, the Company has restated all
prior period earnings per share data presented herein.
Note 2. Commitments
At September 30, 1998 the Company had outstanding commitments to originate
new residential and commercial real estate mortgage loans totalling
approximately $826,000 which are not reflected on the consolidated balance
sheet. Unadvanced funds on equity lines of credit were $25.5 million, unadvanced
construction loan funds were $15.6 million, and unadvanced funds on commercial
lines of credit were $9.5 million at September 30, 1998.
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
This form 10-Q contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company's actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors, of
changes in general national or regional economic conditions, changes in loan
default and charge-off rates, reductions in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
changes in the size and nature of the Company's competition, uncertainties
relating to the ability of the Company and its suppliers, vendors and other
third parties to resolve Year 2000 issues in a timely manner, and changes in the
assumptions used in making such forward-looking statements.
Consolidated net income was $2,833,000, representing basic earnings per share of
$0.32 ($0.31 diluted basis) for the three months ended September 30, 1998,
compared to $2,710,000 and $0.30 ($0.28 diluted basis) for the comparable prior
year period. This represents a 6.7% increase in basic earnings per share, a
10.7% increase in fully diluted earnings per share, and an increase in net
income of 4.5%. The increase in basic and fully diluted earnings per share for
the three month comparison resulted, in part, from the implementation of our
previously announced stock repurchase program.
Net interest income was $8,322,000 for the quarter ended September 30, 1998, as
compared to $8,529,000 for the comparable 1997 period, and represented a net
interest margin of 3.11% compared to 3.29% for the comparable 1997 period. Net
gains on sales of securities and loans totalled $239,000 for the 1998 third
quarter compared to $119,000 for the same quarter in 1997.
Total operating expenses were $4,819,000 for the third quarter of 1998, up
$22,000 or 0.5% from the comparable period in 1997. There were no provisions for
loan losses for the three month periods ended September 30, 1998 and 1997,
respectively.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
For the third quarter of 1998, the annualized return on assets was 1.00% and the
annualized return on equity was 11.17%, compared to 0.98% and 10.98% for the
comparable period in 1997.
Consolidated net income for the nine months ended September 30, 1998 was
$9,318,000, representing basic earnings per share of $1.04 ($0.99 diluted basis)
compared to $8,633,000 and $0.95 ($0.91 diluted basis) for the same prior year
period. Basic earnings per share increased 9.5%, fully diluted earnings per
share increased 8.8%, and consolidated net income increased 7.9% from the same
period in 1997. The increases in basic and fully diluted earnings per share for
the nine month comparison resulted, in part, from the implementation of our
previously announced stock repurchase program.
Net interest income totalled $25,771,000 for the nine months ended September 30,
1998, up $367,000 or 1.4% from the comparable 1997 period, and represented a net
interest margin of 3.19% compared to 3.29% for the nine months ended September
30, 1997. The net gain on sales of securities and loans totalled $1,453,000 for
the first nine months of 1998 compared to $1,098,000 for the same period in
1997.
Total operating expenses were $14,171,000 for the first nine months of 1998, up
$183,000 or 1.3% from the $13,988,000 incurred during the comparable period in
1997. The provision for loan losses for the nine months ended September 30, 1998
was $75,000 compared to $125,000 for the same prior year period.
For the first nine months of 1998, the annualized return on assets was 1.11% and
the annualized return on equity was 12.20%, compared to 1.08% and 12.13% for the
comparable period in 1997.
Total non-performing assets were $1,907,000 or 0.17% of total assets at
September 30, 1998 compared to $1,774,000 or 0.16% of total assets at December
31, 1997. The allowance for loan losses at September 30, 1998 was $6,876,000,
representing 361% of non-performing assets and 1.18% of total loans. At December
31, 1997, the allowance for loan losses was $6,733,000, representing 380% of
non-performing assets and 1.17% of total loans. Other real estate owned was
$135,000 at September 30, 1998 compared to $48,000 at December 31, 1997.
The Company had total assets of $1.1 billion and deposits of $839.4 million at
September 30, 1998, and its capital to assets ratio was 9.09%, exceeding all
regulatory requirements. As compared to reported balances at December 31, 1997,
12
<PAGE>
investment securities at September 30, 1998 decreased $7.6 million or 1.5% to
$505.8 million, total loans increased $7.5 million or 1.3% to $585.1 million,
deposits increased $17.7 million or 2.2% to $839.4 million, and borrowings
decreased $19.9 million or 9.7% to $185.9 million.
A more detailed discussion and analysis of the Company's financial condition and
results of operations follows.
INVESTMENT SECURITIES
Investment securities consist of the following:
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
Securities available for sale, at fair value $456,298 $402,723
Securities held to maturity, at amortized cost 41,057 103,823
Restricted equity securities:
Federal Home Loan Bank stock 7,322 5,758
Massachusetts Savings Bank Life Insurance stock 1,114 1,114
-------- --------
$505,791 $513,418
======== ========
The amortized cost and fair value of investment securities, excluding restricted
securities, at September 30, 1998 and December 31, 1997 with gross unrealized
gains and losses, follows:
September 30, 1998
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $187,207 $ 2,736 $ (36) $189,907
Mortgage - backed 190,900 3,544 (1) 194,443
U.S. Government and
federal agency 68,097 2,423 -- 70,520
-------- -------- -------- --------
Total debt securities 446,204 8,703 (37) 454,870
Marketable equity securities 1,837 2 (411) 1,428
-------- -------- -------- --------
Total securities
available for sale $448,041 $ 8,705 $(448) $456,298
======== ======== ======== ========
Securities Held to Maturity
U.S. Government
and federal agencies $ 41,057 $ 433 $ -- $ 41,490
-------- -------- -------- --------
Total securities
held to maturity $ 41,057 $ 433 $ -- $ 41,490
======== ======== ======== ========
13
<PAGE>
December 31, 1997
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $176,093 $ 1,102 $ (107) $177,088
Mortgage - backed 121,964 641 (158) 122,447
U.S. Government and
federal agency 95,277 482 (232) 95,527
-------- -------- -------- --------
Total debt securities 393,334 2,225 (497) 395,062
Marketable equity securities 7,233 482 (54) 7,661
-------- -------- -------- --------
Total securities
available for sale $400,567 $ 2,707 $ (551) $402,723
======== ======== ======== ========
Securities Held to Maturity
U.S. Government
and federal agency $ 95,052 $ 326 $ (59) $ 95,319
Corporate bonds 8,771 12 -- 8,783
-------- -------- -------- --------
Total securities
held to maturity $103,823 $ 338 $ (59) $104,102
======== ======== ======== ========
The amortized cost and fair value of debt securities by contractual maturity at
September 30, 1998 are as follows:
September 30, 1998
---------------------------------------------
Available for Sale Held to Maturity
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(In thousands)
Within 1 year $ 47,321 $ 47,518 $ 25,049 $ 25,254
After 1 year through 5 years 197,814 202,215 16,008 16,236
After 5 years through 10 years 10,169 10,694 -- --
-------- -------- -------- --------
255,304 260,427 41,057 41,490
Mortgage - backed securities 190,900 194,443 -- --
-------- -------- -------- --------
$446,204 $454,870 $ 41,057 $ 41,490
======== ======== ======== ========
14
<PAGE>
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1997 are as follows:
December 31, 1997
-----------------------------------------------
Available for Sale Held to Maturity
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(In thousands)
Within 1 year $ 46,073 $ 46,107 $ 69,689 $ 69,730
After 1 year through 5 years 217,230 218,451 34,134 34,372
After 5 years through 10 years 8,067 8,057 -- --
-------- -------- -------- --------
271,370 272,615 103,823 104,102
Mortgage - backed securities 121,964 122,447 -- --
-------- -------- -------- --------
$393,334 $395,062 $103,823 $104,102
======== ======== ======== ========
Investment securities decreased $7.6 million from $513.4 million at December 31,
1997 to $505.8 million at September 30, 1998. During the first nine months of
1998, management continued its program to improve portfolio yield by reducing
U.S. Government securities approximately $81 million (amortized cost) as they
matured or were sold and by increasing mortgage-backed securities approximately
$69 million (amortized cost). Holdings of marketable equity securities declined
$5.4 million during the nine months just ended to $1.8 million at September 30,
1998. The net decline in investments was offset by reduced short-term borrowings
as minimal spreads did not justify the interest rate risk. At September 30,
1998, the securities portfolio classified as "available for sale" reflected a
$8.3 million appreciation in market value as a result of fluctuations in market
rates as compared to $2.2 million at December 31, 1997. In accordance with the
Company's asset-liability strategies, investment securities are generally
short-term with maturities of five years or less.
Sales of securities produced gains of $186,000 during the 1998 third quarter
compared to gains of $119,000 for the third quarter ended September 30, 1997.
Sales of securities produced gains of $1,096,000 and $792,000 for the nine
months ended September 30, 1998 and 1997, respectively.
15
<PAGE>
LOANS
The following is a summary of the Company's outstanding loan balances as of
the dates indicated:
September 30, December 31,
1998 1997
------ ------
(In thousands)
Mortgage loans on real estate:
Residential 1-4 family $420,232 $389,593
Commercial 110,360 124,094
Construction 27,112 21,989
Second mortgages 1,160 1,539
Equity lines of credit 20,575 22,146
--------- ---------
579,439 559,361
Less: Unadvanced construction
loan funds (14,889) (10,711)
--------- ---------
564,550 548,650
--------- ---------
Other loans:
Commercial loans 15,599 14,941
Personal loans 2,207 2,432
Education and other 1,515 10,499
--------- ---------
19,321 27,872
--------- ---------
Add: Premium on loans acquired 238 270
Net deferred fees 989 785
--------- ---------
Total loans 585,098 577,577
Less: Allowance for loan losses (6,876) (6,733)
--------- ---------
Loans, net $578,222 $570,844
========= =========
Total loans outstanding at September 30, 1998 increased $7.5 million or 1.3% to
$585.1 million when compared to the December 31, 1997 level. Total real estate
mortgage loans increased $15.9 million during the period, led by the residential
1-4 family category, up $30.6 million. 1998 year-to-date new volume in this
residential 1-4 family category amounted to $111.0 million, including
substantial refinancings. This new volume was comprised of $51.9 million fixed
rate and $59.1 million adjustable rate mortgages. Commercial real estate loans
(excluding construction loans) were $110.4 million at September 30, 1998
compared to $124.1 million at December 31, 1997, a decline of $13.7 million or
11.1%. This decline reflects increasingly intense price competition over the
nine month period. Construction loans, net of unadvanced funds, were relatively
flat when comparing balances at September 30, 1998 to those at December 31,
1997. Unadvanced construction loan funds rose $4.2 million, however, as the
Company recently granted new lines for residential subdivisions within its'
market region. During the 1998 third quarter, the Company
16
<PAGE>
sold $1.6 million of education loans, producing a gain of $53,000. This sale,
combined with sales of $9.3 million in the first half of 1998, produced gains of
$357,000 year to date. All other loan categories remained essentially stable
during the quarter as new loan originations replaced amortization and payoffs,
and as the Company continues to experience intense competition for loans within
its geographic region.
NON-PERFORMING ASSETS
Total non-performing assets were $1.9 million, including $135,000 in other real
estate owned, at September 30, 1998, as compared to $1.8 million and $48,000,
respectively, at December 31, 1997. As a percentage of assets, these
non-performing assets equalled 0.17% and 0.16% at September 30, 1998 and
December 31, 1997, respectively. It is the Company's general policy to place
loans on a non-accrual basis when such loans become 90 days contractually
delinquent or when the collectability of principal or interest payments becomes
doubtful. When a loan is placed in non-accrual status, its interest income
accrual ceases and all income previously accrued but unpaid is reversed.
In accordance with SFAS No. 114, a loan is considered impaired when, based on
current information and events, it is probable that the borrower will be unable
to meet principal or interest payments as agreed in the original loan contract.
The principal balance of impaired loans at September 30, 1998 was $1.8 million,
all of which was included in the $1.9 million non-performing assets referenced
in the preceding paragraph. The loan loss reserve allocated to these impaired
loans was $160,000 at September 30, 1998.
ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses for
the indicated periods:
Nine Months Ended
-------------------
September 30, September 30,
1998 1997
------ ------
(In thousands)
Balance at the beginning
of the period $ 6,733 $ 7,231
Provisions 75 125
Recoveries 221 59
Less: Charge-offs (153) ( 814)
-------- --------
Balance at the end of the period $ 6,876 $ 6,601
======== ========
17
<PAGE>
The allowance for loan losses is established via provisions for loan losses
charged through the statement of income. Assessing the adequacy of the allowance
for loan losses involves substantial uncertainties and is based on management's
evaluation of the amount required to absorb estimated losses inherent in the
loan portfolio after weighing various factors. Among the factors that management
considers are the quality and underlying collateral values of specific loans,
risk characteristics of the loan portfolio generally, the level of
non-performing loans, current economic conditions, and current trends in
delinquency and chargeoffs. Ultimate loan losses may vary significantly from
current estimates.
The allowance for loan losses was $6.9 million at September 30, 1998, a reserve
coverage of 388% of non-accrual loans and 1.18% of total loans. At December 31,
1997, the allowance for loan losses was $6.7 million, representing 390% of
non-accrual loans and 1.17% of total loans.
Management considers the allowance for loan losses to be adequate at September
30, 1998, although there can be no assurance that the allowance is adequate or
that additional provisions will not be necessary.
DEPOSITS
Total deposits increased $17.7 million from December 31, 1997 levels to $839.4
million at September 30, 1998. This growth was principally derived from
increases in core savings and money market accounts while all other deposit
categories experienced more modest change.
Generally, the Company's strategy is to maintain stable deposit rates and to
increase deposit levels through selective core deposit and term deposit
promotions. To retain core deposits, the Company continues to promote its
"ComboPlus" account which combines a statement savings and a demand account.
This "ComboPlus" account has contributed to an increase in both savings and
related demand deposits. During the quarter the Company also offered special
rates on certain term deposit products.
The following table indicates the balances in various deposit accounts at the
dates indicated.
September 30, December 31,
1998 1997
------ ------
(In thousands)
Demand accounts $ 42,257 $ 44,196
NOW accounts 60,564 59,368
Savings & money market accounts 338,857 325,340
Term certificates 397,703 392,802
-------- --------
$839,381 $821,706
======== ========
18
<PAGE>
BORROWED FUNDS
Historically, the Company has selectively engaged in long-term borrowings to
fund loans and has entered into short-term repurchase agreements to fund
investment securities purchases. With the reductions in the investment portfolio
during the first quarter of 1998, short-term borrowed funds have also decreased
such that borrowed funds totalled $185.9 million at September 30, 1998, down
$19.9 million from the $205.8 million reported at December 31, 1997.
STOCKHOLDERS' EQUITY
The Company's capital to assets ratio was 9.09% at September 30, 1998 compared
to 8.94% at December 31, 1997.
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possible additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and/or the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Holding companies, such as the Company, are not subject to prompt
corrective action provisions. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital (as defined) to average assets (as defined). Management
believes as of September 30, 1998 that the Company and the Bank met all capital
adequacy requirements to continue to be categorized as well capitalized.
The Company's book value at September 30, 1998 was $11.83 per share, compared
with $11.18 per share at December 31, 1997.
19
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED September 30, 1998 vs QUARTER ENDED September 30, 1997
NET INTEREST INCOME
Interest and dividend income from loans and investments increased $84,000 or
0.4% to $19.2 million for the 1998 third quarter when compared to the same
quarter in 1997. For the 1998 third quarter, average earning assets totalled
$1.09 billion, an increase of $34.4 million, or 3.3%, over the comparable
average for 1997, with $30.5 million of that increase deriving from short and
long-term investment securities and $3.9 million from loans. The annualized
yields on earning assets were 7.07% and 7.27% for the third quarters in 1998 and
1997, respectively. The yield on investment securities was 6.21% for the third
quarter 1998 as compared to 6.32% for the third quarter 1997. The Company
purchased higher yielding mortgage-backed securities to replace matured and sold
U.S. Government securities, thereby protecting yield in a falling rate
environment. Investments contributed $350,000 of additional interest and
dividend income when comparing the third quarter of 1998 to the third quarter of
1997. The increase in the average balance on loans was more than offset by a
yield decline from 8.06% to 7.82% such that actual interest income on loans was
$266,000 lower for the third quarter 1998 compared to the same quarter in 1997.
Total interest expense for the three months ended September 30, 1998 was $10.9
million, reflecting an increase of $291,000 or 2.8% over the same period in
1997. This resulted, in part, from a $30.4 million increase in average interest
bearing liabilities over the comparable prior year period. This period-to-period
increase can be attributed to average deposit growth of $10.1 million, and
average borrowed funds growth of $20.3 million. Deposit growth in core savings
and interest bearing transaction accounts at modestly higher rates was partially
offset by a small decline in higher rate term deposits such that the average
cost of deposits declined to 4.06% from 4.10% for the third quarters of 1998 and
1997, respectively. Overall, interest expense on deposits increased $28,000 to
$8.1 million. Interest expense on borrowed funds increased $263,000 on higher
outstanding balances while the cost decreased to 5.77% for the third quarter of
1998 from 5.85% for the comparable quarter of 1997. The overall cost of interest
bearing liabilities decreased to 4.39% from 4.41% when comparing the two
quarters.
Net interest income decreased 2.4% or $207,000 to $8.3 million when comparing
the third quarter in 1998 to the same quarter in 1997, concurrent with an 18
basis point decline in both the interest rate spread and in the net interest
margin. The decrease in net interest income, spread and net interest margin are
primarily due to reduced yields on earning assets, reflecting lower market rates
generally, while interest rates on deposits remained more stable. The yield on
earning assets declined 20 basis points to 7.07% in the third quarter in 1998
versus the same quarter in 1997, while the cost of interest bearing liabilities
declined by 2 basis points to 4.39%. This resulted in an interest rate spread
and a net interest margin of 2.68% and 3.11%, respectively, for the three months
ended September 30, 1998.
20
<PAGE>
MEDFORD BANCORP, INC.
INTEREST RATE SPREAD
Three Months Ended
September 30,
-------------
1998 1997
---- ----
Weighted average yield earned on:
Short-term investments 5.36% 5.21%
Investment securities 6.21 6.32
Loans 7.82 8.06
---- ----
All earning assets 7.07% 7.27%
----- -----
Weighted average rate paid on:
Deposits 4.06% 4.10%
Borrowed funds 5.77 5.85
---- ----
All interest-bearing liabilities 4.39% 4.41%
----- -----
Weighted average rate spread 2.68% 2.86%
----- -----
Net interest margin 3.11% 3.29%
===== =====
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21
<PAGE>
PROVISION FOR LOAN LOSSES
For discussion of the methodologies utilized in establishing and maintaining the
provision and the reserve for loan losses, see "Allowance for Loan Losses"
on page 17-18 herein.
The Company did not record provisions for loan losses for the third quarters of
1998 and 1997. Net loan recoveries for the three months ended September 30, 1998
totalled $2,000 compared to net loan charge-offs of $1,000 for the same period
in 1997.
OTHER INCOME
Other income, such as customer service fees and gains and losses on sales of
assets totalled $955,000 in the third quarter of 1998 as compared to $764,000 in
the third quarter of 1997. See related discussions under "Investment Securities"
and "Loans" included in "Management's Discussion and Analysis" in Item 2 of Part
I of this report.
OPERATING EXPENSES
Operating expenses were $4.8 million, an increase of $22,000 or 0.5% for the
three months ended September 30, 1998 compared to the same period in 1997. The
most significant increases were in salaries and employee benefits, up $224,000
or 8.7%, reflecting, in part, commissions paid on residential mortgages issued
and sold. All other operating expenses were $202,000 or 9.1% lower as the
Company continues to manage for operating efficiencies. The Company's annualized
expense ratio, which is the ratio of non-interest expense to average assets, was
1.69% for the three months ended September 30, 1998, as compared to 1.74% for
the 1997 comparable period. The Company continues to focus on cost containment
with the intent to be a low cost provider of high quality banking products and
services.
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22
<PAGE>
NINE MONTHS ENDED September 30, 1998 vs NINE MONTHS ENDED September 30, 1997
NET INTEREST INCOME
Interest and dividend income from loans and investments increased $1.9 million
or 3.4% to $57.8 million for the nine months ended September 30, 1998 compared
to the same period in 1997. Over this nine month period, average earning assets
totalled $1.08 billion, an increase of $49.2 million, or 4.8%, over the
comparable average for 1997, with $42.5 million of that increase deriving from
short and long-term investment securities and $6.7 million from loans. The yield
on earning assets equalled 7.14% and 7.23% for the nine months ended September
30, 1998 and 1997, respectively. The yield on investment securities was 6.22%
for the nine month period ended September 30, 1998 compared to 6.26% for the
same period in 1997. The Company purchased higher yielding mortgage-backed
securities to replace matured and sold U.S. Government securities, thereby
protecting yield in a falling rate environment. Investments contributed $1.9
million of additional interest and dividend income when comparing the first nine
months of 1998 to the same period in 1997. The increase in the average balance
on loans, partially offset by a 9 basis points yield decline to 7.93%, caused
interest income on loans to increase $23,000 to total $34.5 million thus far in
1998.
Total interest expense for the nine months ended September 30, 1998 was $32.0
million, reflecting an increase of $1.5 million or 5.0% over the same period in
1997. This resulted, in part, from a $38.7 million increase in average interest
bearing liabilities over the comparable prior year period. This period-to-period
increase can be attributed to average deposit growth of $13.9 million and
average borrowed funds growth of $24.8 million. Deposit growth occurred in all
major categories of deposit products with total interest expense thereon
increasing $468,000 to $23.8 million. For the first nine months of 1998, the
weighted average cost of interest bearing deposits was 4.05% compared to 4.04%
for the comparable 1997 period. Interest expense on borrowed funds increased
$1.1 million to $8.2 million for the first nine months of 1998 compared to the
same period in 1997 while the cost declined 3 basis points to 5.82%. The overall
cost of interest bearing liabilities increased to 4.39% from 4.35% when
comparing the two periods.
Net interest income increased 1.4% or $367,000 to $25.8 million for the first
nine months of 1998 relative to the same period in 1997, despite a 13 basis
point decline in the interest rate spread and a 10 basis point decline in the
net interest margin. The increase in interest income is primarily due to
increased levels of earning assets while the basis point declines in interest
spread and margin reflect the changing mix of earning assets and of interest
bearing liabilities. The interest rate spread and net interest margin were 2.75%
and 3.19%, respectively, for the nine months ended September 30, 1998.
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23
<PAGE>
MEDFORD BANCORP, INC.
INTEREST RATE SPREAD
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
Weighted average yield earned on:
Short-term investments 5.34% 5.21%
Investment securities 6.22 6.26
Loans 7.93 8.02
---- ----
All earning assets 7.14% 7.23%
----- -----
Weighted average rate paid on:
Deposits 4.05% 4.04%
Borrowed funds 5.82 5.85
---- ----
All interest-bearing liabilities 4.39% 4.35%
----- -----
Weighted average rate spread 2.75% 2.88%
----- -----
Net interest margin 3.19% 3.29%
===== =====
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24
<PAGE>
PROVISION FOR LOAN LOSSES
For discussion of the methodologies utilized in establishing and maintaining the
provision and the reserve for loan losses, see "Allowance for Loan Losses"
on page 17-18 herein.
The Company recorded a $75,000 provision for loan losses for the first nine
months of 1998 compared to $125,000 provided for the same period in 1997. Net
loan recoveries for the nine months ended September 30, 1998 totalled $68,000
compared to net charge-offs of $755,000 for the same period in 1997.
OTHER INCOME
Other income, such as customer service fees and gains and losses on sales of
assets, equalled $3.6 million in the first nine months of 1998 as compared to
$3.1 million in the same period in 1997. See related discussions under
"Investment Securities" and "Loans" included in "Management's Discussion and
Analysis" in Item 2 of Part I of this report.
OPERATING EXPENSES
Operating expenses were $14.2 million, an increase of $183,000 or 1.3% for the
nine months ended September 30, 1998 compared to the same period in 1997. The
most significant increases were in salaries and employee benefits, up $432,000
or 5.6%, reflecting, in part, commissions on residential mortgages issued and
sold. All other operating expenses were $249,000 or 3.9% lower as the Company
continues to manage for operating efficiencies. The Company's annualized expense
ratio, which is the ratio of non-interest expense to average assets was 1.69%
for the nine months ended September 30, 1998, as compared to 1.75% for the prior
year comparable period. The Company continues to focus on cost containment with
the intent to be a low cost provider of high quality banking products and
services.
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25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are customer deposits,
amortization and payoff of existing loan principal, and sales or maturities of
various investment securities. The Company is a voluntary member of the Federal
Home Loan Bank of Boston ("FHLBB"), and as such may take advantage of the
FHLBB's borrowing programs to enhance liquidity and leverage its favorable
capital position. The Company also may draw on lines of credit at the FHLBB and
a large commercial bank, and it may pledge U.S. Government securities to borrow
from certain investment firms and the Mutual Savings Central Fund of
Massachusetts. These various sources of liquidity are used to fund withdrawals,
new loans, and investments.
Management continually seeks to optimize deposit growth while controlling
the Company's cost of funds. Sales oriented programs to attract new depositors
and the cross-selling of various products to its existing customer base are
currently in place, although not to the same extent as the first nine months of
1997. Management reviews, on an ongoing basis, possible new products, with
particular attention to products and services which will assist retention of the
Company's base of lower-costing deposits.
Maturities and sales of investment securities provide significant
liquidity to the Company. The Company's policy of purchasing debt instruments
generally maturing within five years reduces market risk in the bond portfolio
while providing significant cash flow. For the nine months ended September 30,
1998, cash flow from maturities and sales of securities was $219.9 million
compared to $97.1 million for the nine months ended September 30, 1997.
Principal payments received on mortgage-backed investments during the nine
months ended September 30, 1998 and 1997 totalled $24.8 million and $5.4
million, respectively. During periods of high interest rates, maturities in the
bond portfolio have provided significant liquidity at a lower cost than
borrowings.
Amortization, pay-offs and sales of loans also contribute significant
liquidity to the Company. Traditionally, the amortization and payoffs have been
reinvested into loans. When payoff rates exceed origination rates, excess
liquidity from loan payoffs is shifted into the investment portfolio.
The Company also uses borrowed funds as a source of liquidity. These
borrowings generally contribute toward funding over-all loan growth. At
September 30, 1998 the Company's outstanding borrowings from the FHLBB were
$136.4 million, as compared to $110.1 million at December 31, 1997. The Company
also utilizes repurchase agreements as a source of funding when management deems
market conditions to be conducive to such activities. Repurchase agreements
totalled $48.7 million at September 30, 1998 as compared to $93.6 million at
December 31, 1997.
Commitments to originate residential and commercial real estate mortgage
loans at September 30, 1998, excluding unadvanced construction funds of $15.6
million, were $826,000. Management believes that adequate liquidity is available
to fund loan commitments utilizing deposits, loan amortization, maturities of
securities, or borrowings.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
(continued)
Purchases of securities during the nine months ended September 30, 1998
totalled $230.0 million consisting of debt instruments generally maturing in
less than five years and equities. This compares with purchases of $147.8
million for the nine months ended September 30, 1997.
Residential and commercial real estate mortgage loan originations for the
nine months ended September 30, 1998 totalled $134.3 million, compared with
$85.5 million for the nine months ended September 30, 1997.
The Company's capital position (total stockholders' equity) was $103.1
million or 9.09% of total assets at September 30, 1998 as compared to $101.5
million or 8.94% of total assets at December 31, 1997. During the first nine
months of 1998, the Company purchased 444,968 shares of its common stock at a
cost of $9.3 million in accordance with its previously announced stock
repurchase program. The net cost of $8.4 million, reflecting reissuance of
$900,000 treasury stock under the Company's Stock Option Plan, has been recorded
as Treasury Stock in the Capital section of the Company's balance sheet. The
Company's capital position continues to exceed all regulatory requirements.
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27
<PAGE>
ASSET-LIABILITY MANAGEMENT
Through the Company's Asset-Liability Management Committee ("ALCO"), which
is comprised of certain senior and middle management personnel, the Company
monitors the level and general mix of interest rate-sensitive assets and
liabilities. The primary objective of the Company's ALCO program is to manage
the assets and liabilities of the Company to provide for optimum profitability
and capital at prudent levels of liquidity and interest rate, credit, and market
risk.
It is ALCO's general policy to closely match the maturity or rate
sensitivity of its assets and liabilities. In accordance with this policy,
certain strategies have been implemented to improve the match between interest
rate sensitive assets and liabilities. These strategies include, but are not
limited to: daily monitoring of the Company's changing cash requirements, with
particular concentration on investment in short term securities; originating
adjustable and fixed rate mortgage loans for the Company's own portfolio;
managing the cost and structure of deposits; and generally using matched
borrowings to fund specific purchases of loan packages and large loan
origination. Occasionally, management may choose to deviate from specific
matching of maturities of assets and liabilities, if an attractive opportunity
to enhance yields becomes available.
The Company actively manages its liability portfolio in order to
effectively plan and manage growth and maturities of deposits. Management
recognizes the need for strict attention to all deposits. Accordingly, plans for
growth of all deposit types are reviewed regularly. Programs are in place which
are designed to build multiple relationships with customers and to enhance the
Company's ability to retain deposits at controlled rates of interest, and
management has adopted a policy of reviewing interest rates on an ongoing basis
on all deposit accounts, in order to manage deposit growth and interest costs.
In addition to attracting deposits, the Company has selectively borrowed
funds using advances from the FHLBB and, upon occasion, reverse repurchase
agreements. These funds have generally been used to purchase loans typically
having a matched repricing date.
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial
data presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. The
primary effect of inflation on the operations of the Company is reflected in
increased operating costs. Unlike most industrial companies, virtually all
assets of a financial institution are monetary in nature. As a result, interest
rates have a more significant effect on a financial institution's performance
than the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services.
28
<PAGE>
Year 2000 Disclosure
The Year 2000 (Y2K) issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems may recognize the year 2000 as 1900, or,
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process critical financial and operational information
incorrectly.
A Year 2000 Task Force Committee (Task Force) represented by members of senior
management was formed in 1997 and is responsible for year 2000 compliance.
Diligent efforts, with management's full understanding and participation, are
being conducted by the Company to address Y2K concerns that affect its
operations. It is understood that Y2K compliance is the objective of these
efforts and that compliance shall mean that all of the internal sytems will be
able to function normally with dates prior to, during, or after the year 2000.
Addtitionally, compliance shall also include out-sourced systems upon which the
Company relies for normal bank operations. The Company will monitor compliance
efforts of these vendors to adequately assess readiness and will seek written
assurances from vendors of critical systems.
To become Y2K compliant, the Company is following the Federal Financial
Institutions Examination Council (FFIEC) interagency statement of Year 2000
project management issued May 1997. The statement outlines five phases essential
to the Year 2000 remediation process. The Company's Year 2000 Task Force
prepared a "Year 2000 Action Plan" to define the tasks and monitor its progress
in each of the five phases. The five phases and the Company's status in its
efforts in completing each follows:
1. Awareness Phase - To define the Y2K problem, gain executive level support for
resources, establish a Y2K program team, and develop an overall strategy that
encompasses potentially affected systems. The Year 2000 Task Force was formed in
1997 and has prepared a Year 2000 Action Plan to address the Y2K problem. The
Task Force has established and is maintaining ongoing communications with
employees, management, the Board of Directors and customers on Y2K awareness and
understanding. Progress updates on Y2K compliance are provided to the Board of
Directors and its Committees on a quarterly basis. The Year 2000 committee has
also established a "Customer Awareness Program" to provide updates and assurance
to its customer base on its efforts and progress on Y2K readiness.
Communication, training and awareness is ongoing and will continue throughout
the Y2K remediation process.
29
<PAGE>
2. Assessment Phase - Assess the size and complexity of the problem, identify
all hardware, software, networks, ATM's, and other various processing platforms.
The assessment also includes non-information systems dependent upon upon
embedded microchips. The Task Force has identified its third party vendor (Third
Party) of data processing for teller platform, deposit and loan information
systems as its critical computer application. The Task Force and Third Party
have established and are maintaining significant monitoring efforts of the their
Y2K compliance progress through newletters, user group interface and direct
communication. Additionally, the Task Force has also assessed and prepared
inventories of all non-critical software and hardware information systems and
non-computer related equipment. The inventories outline actions to be taken,
including the need for repair and/or replacement, need for testing and
establishment of contingency plans as deemed appropriate. Major vendors
identified in this assessment phase have been contacted and requested to provide
written correspondence on Y2K readiness and progress.
3. Renovation Phase - Includes code enhancements, hardware and software
upgrades, system replacements, vendor certifications, and other associated
changes. A Remediation Contingency Plan for the Third Party computer application
was prepared and received during the third quarter of 1998. The Task Force is
continuing its efforts to develop its Third Party Business Resumption
Contingency Plan which outlines how the Company would resume business if
unanticipated problems arise from non-performance of the Third Party. In August
1998, the Third Party's "Year 2000 Outsourcing Solution" was certified by the
Information Technology Association of America (ITAA). ITAA*2000 is the
industry's century date change certification program that examines processes and
methods used by companies to perform their Year 2000 software conversions. The
Company and Third Party have successfully completed a conversion to the "Year
2000 Outsourcing Solution" the year 2000-ready platform in early October 1998.
The Company is currently in the midst of replacement of in-house software and
hardware identified in its assessment phase and anticipates it will be
substantially complete before year-end 1998.
4. Validation Phase - Includes testing of incremental changes and upgrades to
hardware and software components. The Task Force has prepared a "Year 2000 Test
Plan" (Test Plan) document that defines the environment, methodology, human and
financial resources, critical test dates and scheduled testing dates for Third
Party and in-house software and hardware. The Test Plan incorporates the Third
Party's Year 2000 20XX proxy testing plan which outline the objectives, scope
and schedule for testing of their applications in the first quarter of 1999. In
conjunction with the Task Force's Test Plan, the Company has established an
in-house laboratory for testing Y2K readiness of all internal non-critical
software and hardware systems. Plans, test scripts, and actual testing dates for
the internal non-critical software and hardware systems are expected to be
completed by year-end 1998.
30
<PAGE>
5. Implementation Phase - In this phase, systems should be certified as Year
2000 compliant and be accepted by the Company. Given the Company's schedule for
renovation and validation, certification of Year 2000 compliance is anticipated
to be completed by the summer of 1999.
The Company's efforts to become Y2K compliant are being monitored by its federal
banking regulators. Failure to be Y2k compliant could subject the Company to
formal supervisory or enforcement actions.
Spending for the Year 2000 compliance effort during the first nine months ended
1998 approximate $20,000 and have been expensed as incurred. Additional costs of
$5,000 for the balance of 1998 and $50,000 for 1999 are expected to be expensed
as incurred. Based upon currently available information, these amounts will not
have a material impact on the Company's on-going results of operations. A
substantial part of the Year 2000 compliance effort will be accomplished by
reallocation of existing personnel and resources. In addition, investments in
new software and hardware planned by the Company in 1998 fall within the
ordinary course of business of maintaining industry technology standards, and
are not considered to be incremental to the Company within the context of the
Year 2000 project.
If the efforts initiated by the Task Force are not completed on time, third
parties experience Year 2000 compliance problems, and customer related Year 2000
issues arise, no assurance can be given with respect to the cost or timing of
such efforts or any potential adverse effects on the Company's business,
financial condition or results of operations.
The preceeding "Year 2000" discussion contains various forward-looking
statements which represent the Company's beliefs and expectations regarding
future events. When used in the Year 2000 discussion, the words "believes",
"expects", "estimates" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the phases of
the Plan; its estimated costs; and its belief that its internal systems will be
Year 2000 compliant in a timely manner. All forward-looking statements involve a
number of risks and uncertainties that could cause the actual results to differ
materially from the projected results. Factors that may cause these differences
include, but are not limited to, the availability of qualified personnel and
other information technology resources; the ability to identify and remediate
all date sensitive lines of computer code; and the actions of governmental
agencies or other third parties with respect to Year 2000 problems.
(The remainder of this page intentionally left blank.
31
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the Company's management of market risk exposure, see
"Asset-Liability Management" in Item 2 of Part I of this report and Item 7A of
Part II of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "1997 Annual Report").
For quantitative information about market risk, see Item 7A of Part II of the
Company's 1997 Annual Report.
There have been no material changes in the quantitative and qualitative
disclosures about market risk as of September 30, 1998 from those presented in
the Company's 1997 Annual Report.
32
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
There are no material legal proceedings to which the Company is a
party or to which any of its property is subject, although the
Company is a party to ordinary routine litigation incidental to its
business.
ITEM 2 - Changes in Securities and Use of Proceeds
Not applicable.
ITEM 3 - Defaults Upon Senior Securities
Not applicable.
ITEM 4 - Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5 - Other Information
Not applicable
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
month period ended September 30, 1998.
(The remainder of this page intentionally left blank.)
33
<PAGE>
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: November 12, 1998
/s/ Arthur H. Meehan
------------------------------------
Arthur H. Meehan
Chairman, President and Chief Executive Officer
Date: November 12, 1998
/s/ Phillip W. Wong
------------------------------------
Phillip W. Wong
Executive Vice President, Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
34
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