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