SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
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, 1999 was 8,378,252
<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 Flows.......................... 7-8
Notes to Consolidated Financial Statements..................... 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 10-30
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................... 31
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings.............................................. 32
ITEM 2 - Changes in Securities and Use of Proceeds...................... 32
ITEM 3 - Defaults Upon Senior Securities................................ 32
ITEM 4 - Submission of Matters to a Vote of Security Holders............ 32
ITEM 5 - Other Information.............................................. 32
ITEM 6 - Exhibits and Reports on Form 8-K............................... 32
SIGNATURES..................................................... 33
Exhibit Index.................................................. 34
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements
MEDFORD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $18,010 $17,439
Interest-bearing deposits 356 4,563
---------- ----------
Cash and cash equivalents 18,366 22,002
---------- ----------
Investment securities available for sale 516,011 475,169
Investment securities held to maturity 8,000 29,043
Restricted equity securities 10,078 8,436
Loans 617,486 587,541
Less allowance for loan losses (6,772) (6,876)
---------- ----------
Loans, net 610,714 580,665
---------- ----------
Banking premises and equipment, net 11,766 12,008
Accrued interest receivable 9,333 8,230
Goodwill and deposit-based intangibles 3,956 4,807
Other assets 15,191 10,828
---------- ----------
TOTAL ASSETS $1,203,415 $1,151,188
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $901,678 $871,702
Short-term borrowings 69,376 38,463
Long-term debt 133,653 131,653
Accrued taxes and expenses 4,041 4,078
Other liabilities 2,235 3,025
---------- ----------
Total liabilities 1,110,983 1,048,921
---------- ----------
Stockholders' equity:
Serial preferred stock, $.50 par value, 5,000,000 shares authorized;
none issued; -- --
Common stock, 15,000,000 shares authorized;
$.50 par value, 9,122,596 shares issued 4,561 4,561
Additional paid-in capital 24,922 26,389
Retained earnings 83,738 76,770
Accumulated other comprehensive income (loss) (6,415) 3,058
Treasury stock, at cost (744,344 and 412,768 shares, respectively) (14,374) (8,511)
---------- ----------
Total stockholders' equity 92,432 102,267
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,203,415 $1,151,188
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
September 30,
----------------------
1999 1998
---- ----
(Dollars in thousands,
except per share data)
Interest and dividend income:
Interest and fees on loans $11,308 $11,372
Interest on debt securities 8,110 7,627
Dividends on equity securities 188 158
Interest on short-term investments 59 41
------- -------
Total interest and dividend income 19,665 19,198
------- -------
Interest expense:
Interest on deposits 8,132 8,132
Interest on short-term borrowings 862 820
Interest on long-term debt 1,887 1,924
------- -------
Total interest expense 10,881 10,876
------- -------
Net interest income 8,784 8,322
Provision for loan losses -- --
------- -------
Net interest income, after provision for loan losses 8,784 8,322
------- -------
Other income:
Customer service fees 457 469
Gain on sales of securities, net (6) 186
Gain on sales of loans -- 52
Miscellaneous 196 210
------- -------
Total other income 647 917
------- -------
Operating expenses:
Salaries and employee benefits 2,730 2,776
Occupancy and equipment 631 551
Data processing 370 353
Professional fees 103 141
Amortization of intangibles 282 294
Advertising and marketing 156 177
Other general and administrative 505 489
------- -------
Total operating expenses 4,777 4,781
------- -------
Income before income taxes 4,654 4,458
Provision for income taxes 1,626 1,625
------- -------
Net income $3,028 $2,833
======= =======
(Continued)
See accompanying notes to consolidated financial statements.
2
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(concluded)
Three Months Ended
September 30,
--------------------------
1999 1998
---- ----
(Dollars in thousands,
except per share data)
Earnings per share:
Basic $0.36 $0.32
Diluted $0.35 $0.31
Cash dividends declared per share $0.11 $0.10
Weighted average shares outstanding
Basic 8,377,148 8,802,423
Diluted 8,741,568 9,260,803
See accompanying notes to consolidated financial statements.
3
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
September 30,
----------------------
1999 1998
---- ----
(Dollars in thousands,
except per share data)
Interest and dividend income:
Interest and fees on loans $33,387 $34,462
Interest on debt securities 23,754 22,762
Dividends on equity securities 480 397
Interest on short-term investments 246 139
------- -------
Total interest and dividend income 57,867 57,760
------- -------
Interest expense:
Interest on deposits 24,505 23,754
Interest on short-term borrowings 1,549 2,802
Interest on long-term debt 5,914 5,433
Total interest expense 31,968 31,989
------- -------
Net interest income 25,899 25,771
Provision for loan losses -- 75
------- -------
Net interest income, after provision for loan losses 25,899 25,696
------- -------
Other income:
Customer service fees 1,376 1,423
Gain on sales of securities, net 1,522 1,096
Gain on sales of loans 3 357
Miscellaneous 626 595
------- -------
Total other income 3,527 3,471
------- -------
Operating expenses:
Salaries and employee benefits 7,959 8,020
Occupancy and equipment 1,879 1,678
Data processing 1,128 1,064
Professional fees 370 401
Amortization of intangibles 851 884
Advertising and marketing 445 402
Other general and administrative 1,560 1,625
------- -------
Total operating expenses 14,192 14,074
------- -------
Income before income taxes 15,234 15,093
Provision for income taxes 5,506 5,775
------- -------
Net income $9,728 $9,318
======= =======
(Continued)
See accompanying notes to consolidated financial statements.
4
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(concluded)
Nine Months Ended
September 30,
--------------------------
1999 1998
---- ----
(Dollars in thousands,
except per share data)
Earnings per share:
Basic $1.16 $1.04
Diluted $1.11 $0.99
Cash dividends declared per share $0.33 $0.30
Weighted average shares outstanding
Basic 8,397,677 8,968,329
Diluted 8,790,839 9,458,855
See accompanying notes to consolidated financial statements.
5
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-In Retained
Shares Dollars Capital Earnings
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1998 9,122,596 $ 4,561 $ 26,389 $ 76,770
Comprehensive income:
Net income -- -- -- 9,728
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and tax effects -- -- -- --
Total comprehensive income (loss)
Cash dividends declared ($.33 per share) -- -- -- (2,760)
Repurchase of treasury stock -- -- -- --
Issuance of common stock under stock option
plan and related income tax benfits -- -- (1,467) --
--------- --------- --------- ---------
Balance at September 30, 1999 9,122,596 $ 4,561 $ 24,922 $ 83,738
========= ========= ========= =========
Balance at December 31, 1997 4,541,148 $ 2,271 $ 28,977 $ 68,938
Comprehensive income:
Net income -- -- -- 9,318
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and tax effects -- -- -- --
Total comprehensive income
Cash dividends declared ($.30 per share) -- -- -- (2,671)
Stock split (2 for 1) 4,561,298 2,270 (2,270)
Repurchase of treasury stock -- -- -- --
Issuance of common stock under stock option
plan and related income tax benefits 20,150 20 (337) --
--------- --------- --------- ---------
Balance at September 30, 1998 9,122,596 $ 4,561 $ 26,370 $ 75,585
========= ========= ========= =========
<CAPTION>
Accumulated
Treasury Stock Other
--------------------- Comprehensive
Shares Dollars Income (Loss) Total
-------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 (412,768) $ (8,511) $ 3,058 $ 102,267
---------
Comprehensive income:
Net income -- -- -- 9,728
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and tax effects -- -- (9,473) (9,473)
---------
Total comprehensive income (loss) 255
---------
Cash dividends declared ($.33 per share) -- -- -- (2,760)
Repurchase of treasury stock (425,796) (7,689) -- (7,689)
Issuance of common stock under stock option
plan and related income tax benfits 94,220 1,826 -- 359
-------- --------- --------- ---------
Balance at September 30, 1999 (744,344) $ (14,374) $ (6,415) $ 92,432
======== ========= ========= =========
Balance at December 31, 1997 -- $ -- $ 1,324 $ 101,510
---------
Comprehensive income:
Net income -- -- -- 9,318
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and tax effects -- -- 3,670 3,670
---------
Total comprehensive income 12,988
---------
Cash dividends declared ($.30 per share) -- -- -- (2,671)
Stock split (2 for 1)
Repurchase of treasury stock (417,268) (9,255) -- (9,255)
Issuance of common stock under stock option
plan and related income tax benefits 12,000 846 -- 529
-------- --------- --------- ---------
Balance at September 30, 1998 (405,268) $ (8,409) $ 4,994 $ 103,101
======== ========= ========= =========
</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,
----------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,728 $ 9,318
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses -- 75
Depreciation and amortization, net 1,978 1,698
Foreclosed Real Estate (gains), losses and provisions, net -- (22)
Gain on sales of securities, net (1,522) (1,096)
Gain on sales of loans (3) (357)
Decrease (increase) in accrued interest receivable
and other assets 463 (567)
Increase (decrease) in accrued taxes and expenses
and other liabilities (7) 102
--------- ---------
Net cash provided by operating activities 10,637 9,151
--------- ---------
Cash flows from investing activities:
Maturities of investment securities available for sale 40,250 42,180
Purchases of investment securities available for sale (238,383) (228,473)
Sales of investment securities available for sale 104,802 114,888
Maturities of investment securities held to maturity 18,638 62,803
Purchases of investment securities held to maturity
and FHLBB stock (1,641) (1,564)
Principal amortization of mortgage-backed investments
available for sale 40,482 24,787
Proceeds from sale of loans, net 82 11,209
Loans originated and purchased, net of amortization and payoffs (29,982) (18,314)
Purchases of bank premises and equipment, net (613) (1,679)
Sales of, and principal payments received on,
foreclosed real estate 116 69
--------- ---------
Net cash provided by (used in) investing activities (66,249) 5,906
--------- ---------
</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,
--------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 29,976 17,675
Increase (decrease) in borrowings with maturities of three
months or less 30,913 (46,233)
Proceeds from long-term debt 2,000 26,336
Issuance of common stock 359 356
Payments to acquire treasury stock (7,689) (9,255)
Cash dividends paid (3,583) (3,439)
-------- --------
Net cash provided by (used in) financing activities 51,976 (14,560)
-------- --------
Net change in cash and cash equivalents (3,636) 497
Cash and cash equivalents, beginning of period 22,002 16,180
-------- --------
Cash and cash equivalents, end of period $ 18,366 $ 16,677
======== ========
</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, 1999 AND 1998
Note 1. Basis of Presentation
The consolidated interim financial statements of Medford Bancorp, Inc.
(the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the
"Bank") presented herein are intended to be read in conjunction with the
consolidated financial statements presented in the Company's annual report for
the year ended December 31, 1998.
The consolidated financial information for the three and nine months ended
September 30, 1999 and 1998, respectively, 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.
Certain amounts have been reclassified in the September 30, 1998 financial
statements to conform to the 1999 presentation.
Note 2. Commitments
At September 30, 1999, the Company had outstanding commitments to
originate new residential and commercial real estate mortgage loans totalling
approximately $12.5 million, which are not reflected on the consolidated balance
sheet. Unadvanced funds on equity lines were $24.8 million, unadvanced
construction loan funds were $18.1 million, and unadvanced funds on commercial
lines of credit were $8.5 million at September 30, 1999.
Note 3. Earnings per share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
conversion. Potential common shares that may be issued by the Company relate
solely to outstanding stock options, and are determined using the treasury stock
method. The assumed conversion of outstanding dilutive stock options would
increase the shares outstanding but would not require an adjustment to income as
a result of the conversion.
9
<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.
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and related notes included in this
report.
Consolidated net income was $3,028,000 or basic earnings per share of $0.36
($0.35 diluted basis) for the three months ended September 30, 1999, compared to
$2,833,000 or basic earnings per share of $0.32 ($0.31 diluted basis) for the
comparable prior year period.
Net interest income was $8,784,000 for the quarter ended September 30, 1999, up
$462,000 or 5.6% from the comparable 1998 period, and represented a net interest
margin of 3.06% compared to 3.11% for the comparable 1998 period. Net loss on
sales of assets totalled $6,000 for the 1999 third quarter compared to a
$238,000 gain for the same quarter in 1998.
Total operating expenses were $4,777,000 for the third quarter of 1999,
essentially unchanged from $4,781,000 during the comparable period in 1998.
There was no provision for loan losses recorded for the three month periods
ended September 30, 1999 and 1998.
For the third quarter of 1999, the annualized return on assets was 1.00% and the
annualized return on equity was 13.25%, compared to 1.00% and 11.17%,
respectively, for the comparable period in 1998.
Consolidated net income for the nine months ended September 30, 1999 was
$9,728,000, representing basic earnings per share of $1.16 ($1.11 diluted basis)
compared to $9,318,000 and $1.04 ($0.99 diluted basis), respectively, for the
same prior year period. Basic and diluted earnings per share have increased
11.5% and 12.1%, respectively, while consolidated net income increased $410,000
or 4.4% for the nine month comparative 1998 period.
10
<PAGE>
Net interest income totalled $25,899,000 for the nine months ended September 30,
1999, up $128,000 or .05% from the comparable 1998 period, and represented a net
interest margin of 3.04% compared to 3.19% for the nine months ended September
30, 1998. The net gain on sales of assets totalled $1,525,000 for the first nine
months of 1999 compared to $1,453,000 for the same period in 1998.
Total operating expenses were $14,192,000 for the first nine months of 1999, up
$118,000 or .84% from the $14,074,000 during the comparable period in 1998. The
provision for loan losses for the nine months ended September 30, 1999 was zero
compared to $75,000 for the same prior year period.
For the first nine months of 1999, the annualized return on assets was 1.10% and
the annualized return on equity was 13.83%, compared to 1.11% and 12.20%,
respectively, for the comparable period in 1998.
Total non-performing assets were $3,158,000 or 0.26% of total assets at
September 30, 1999, compared to $1,932,000 or 0.17%, respectively, at December
31, 1998. The allowance for loan losses at September 30, 1999 was $6,772,000,
representing 1.10% of total loans. At December 31, 1998, the allowance for loan
losses was $6,876,000, representing 1.17% of total loans. The Company had no
foreclosed real estate at September 30, 1999, compared to $119,000 at December
31, 1998.
The Company had total assets of $1.2 billion and capital of $92.4 million at
September 30, 1999, representing a capital to assets ratio of 7.68%, exceeding
all regulatory requirements. As compared to December 31, 1998, investment
securities increased $21.4 million or 4.2% to $534.0 million, total loans
increased $30.0 million or 5.2% to $610.7 million, deposits increased $30.0
million or 3.4% to $901.7 million, and borrowings increased $32.9 million or
19.3% to $203.0 million.
A more detailed discussion and analysis of the Company's financial condition and
results of operations follows.
11
<PAGE>
INVESTMENT SECURITIES
Investment securities consist of the following:
September 30, December 31,
1999 1998
---- ----
(In thousands)
Securities available for sale, at fair value $516,011 $475,169
Securities held to maturity, at amortized cost 8,000 29,043
Restricted equity securities:
Federal Home Loan Bank 8,933 7,322
Northeast Retirement Services 31 --
Massachusetts Savings Bank Life Insurance 1,114 1,114
-------- --------
$534,089 $512,648
======== ========
The amortized cost and fair value of investment securities, excluding restricted
equity securities, at September 30, 1999 and December 31, 1998 with gross
unrealized gains and losses, follows:
September 30, 1999
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $245,443 $ 257 $ (1,772) $243,928
Mortgage - backed 225,831 41 (7,289) 218,583
U.S. Government and
federal agency 53,137 -- (1,347) 51,790
-------- -------- -------- --------
Total debt securities 524,411 298 (10,408) 514,301
Marketable equity securities 2,097 3 (390) 1,710
-------- -------- -------- --------
Total securities
available for sale $526,508 $ 301 $(10,798) $516,011
======== ======== ======== ========
Securities Held to Maturity
U.S. Government
and federal agency $ 8,000 $ 21 -- $ 8,021
======== ======== ======== ========
12
<PAGE>
December 31, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $188,087 $ 1,966 $ (33) $190,020
Mortgage - backed 215,933 2,392 (129) 218,196
U.S. Government and
federal agency 63,591 1,190 (89) 64,692
-------- -------- -------- --------
Total debt securities 467,611 5,548 (251) 472,908
Marketable equity securities 2,532 45 (316) 2,261
-------- -------- -------- --------
Total securities
available for sale $470,143 $ 5,593 $ (567) $475,169
======== ======== ======== ========
Securities Held to Maturity
U.S. Government
and federal agency $ 29,043 $ 286 $ -- $ 29,329
======== ======== ======== ========
The amortized cost and fair value of debt securities by contractual maturity at
September 30, 1999 are as follows:
September 30, 1999
-----------------------------------------
Available for Sale Held to Maturity
------------------ -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In thousands)
Within 1 year $ 65,037 $ 65,202 $ 8,000 $ 8,021
After 1 year through 5 years 228,154 225,661 -- --
After 5 years through 10 years 5,389 4,855 -- --
-------- -------- -------- --------
298,580 295,718 8,000 8,021
Mortgage - backed securities 225,831 218,583 -- --
-------- -------- -------- --------
$524,411 $514,301 $ 8,000 $ 8,021
======== ======== ======== ========
13
<PAGE>
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1998 are as follows:
December 31, 1998
-----------------------------------------
Available for Sale Held to Maturity
------------------ -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In thousands)
Within 1 year $ 42,335 $ 42,549 $ 24,043 $ 24,241
After 1 year through 5 years 193,752 196,394 5,000 5,088
After 5 years through 10 years 10,446 10,528 -- --
After 10 years 5,145 5,241 -- --
-------- -------- -------- --------
251,678 254,712 29,043 29,329
Mortgage - backed securities 215,933 218,196 -- --
-------- -------- -------- --------
$467,611 $472,908 $ 29,043 $ 29,329
======== ======== ======== ========
Investment securities increased $21.4 million from $512.6 million at December
31, 1998 to $534.0 million at September 30, 1999. At September 30, 1999, the
securities portfolio classified as "available for sale" reflected an unrealized
pre-tax loss of $10.5 million as a result of rising market rates as compared to
an unrealized pre-tax gain of $5.0 million at December 31, 1998. In accordance
with the Company's asset-liability strategies, purchases of mortgage-backed
securities are primarily in fifteen year mortgages with weighted average lives
of six years and other investment securities are generally shorter term with
maturities of five years or less.
Sales of debt securities produced losses of $6,000 during the 1999 third quarter
and gains of $1,486,000 for the nine months ended September 30, 1999 compared to
gains of $186,000 and $764,000 for the third quarter and nine months ended
September 30, 1998, respectively. Sales of equities produced gains of $39,000
during the nine months ended September 30, 1999 compared to gains of $332,000
for the nine months ended September 30, 1998. There were no sales of equities
recorded in either of the quarterly periods ended September 30, 1999 and 1998.
14
<PAGE>
LOANS
A summary of the Company's outstanding loan balances as of the dates indicated
follows:
September 30, December 31,
1999 1998
---- ----
(In thousands)
Mortgage loans on real estate:
Residential 1-4 family $ 458,056 $ 421,462
Commercial 103,916 109,561
Construction 30,203 28,647
Second mortgages 840 1,111
Equity lines of credit 19,783 20,606
--------- ---------
612,798 581,387
Less: Unadvanced construction
loan funds (18,091) (15,574)
594,707 565,813
--------- ---------
Other loans:
Commercial loans 18,523 17,358
Personal loans 2,027 2,076
Education and other 878 1,069
--------- ---------
21,428 20,503
--------- ---------
Add: Premium on loans acquired 214 223
Net deferred origination costs 1,137 1,002
--------- ---------
Total loans 617,486 587,541
Less: Allowance for loan losses (6,772) (6,876)
--------- ---------
Loans, net $ 610,714 $ 580,665
========= =========
Total gross loans outstanding at September 30, 1999 increased $29.9 million to
$617.5 million when compared to the December 31, 1998 level. As mortgage rates
increased, residential refinancing activity has slowed aiding the $36.6 million
growth in residential 1-4 family real estate loans. During the same period,
commercial real estate loans decreased $5.6 million from the December 31, 1998
level due to ongoing intense pricing competition from both bank and non-bank
competitors. Changes in all other loan categories during the nine months ended
September 30, 1999 are representative of net activity in new loan originations
and amortization and payoffs.
NON-PERFORMING ASSETS
Total non-performing assets were $3.2 million and $1.9 million at September 30,
1999 and December 31, 1998, respectively. Included in non-performing assets at
December 31, 1998 was a single foreclosed real estate property carried at
$119,000 that was sold during the quarter ended March 31, 1999. There were no
other foreclosed real estate properties added during the 1999 third quarter. As
a percentage of total assets, non-performing assets
15
<PAGE>
equaled 0.26% and 0.17% at September 30, 1999 and December 31, 1998,
respectively. Fluctuations in total non-performing assets occur from quarter to
quarter but remain at historically low levels. It is the Company's general
policy to place loans on a non-accrual basis when such loans become 90 days
contractually delinquent or when the collectibility of principal or interest
payments becomes doubtful. When a loan is placed on non-accrual status, the
accrual of interest income 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, 1999 was $3.1 million,
all of which was included in the $3.2 million non-performing assets referenced
in the preceding paragraph. The loan loss allowance allocated to these impaired
loans was $245,000 at September 30, 1999.
ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses follows:
Nine Months Ended
--------------------------------
September 30, September 30,
1999 1998
---- ----
(In thousands)
Balance at beginning
of period $ 6,876 $ 6,733
Provisions -- 75
Recoveries 49 219
Less: Charge-offs (153) (151)
------- -------
Balance at end of period $ 6,772 $ 6,876
======= =======
The allowance for loan losses is established through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the collectibility of the loan balance is unlikely.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, known inherent risks in the nature and volume of
the loan portfolio, levels of non-performing loans, adverse situations that may
affect the borrowers' ability to repay, trends in delinquencies and charge-offs,
estimated value of
16
<PAGE>
any underlying collateral, and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. Ultimate losses may
vary from current estimates and future additions to the allowance may be
necessary.
The allowance for loan losses was $6.8 million at September 30, 1999, or 1.10%
of total loans. At December 31, 1998, the allowance for loan losses was $6.9
million, representing 1.17% of total loans.
DEPOSITS
Total deposits increased $30.0 million from December 31, 1998 to $901.7 million
at September 30, 1999 due primarily to an increase in core deposits.
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 its related
savings and demand deposits of $40.5 million and $1.5 million, respectively, in
the first nine months of 1999. The following table indicates the balances in
various deposit accounts at the dates indicated.
September 30, December 31,
1999 1998
---- ----
(In thousands)
Demand accounts $ 51,551 $ 51,936
NOW accounts 60,468 64,888
Savings & money market accounts 388,187 351,047
Term certificates 401,472 403,831
-------- --------
$901,678 $871,702
======== ========
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. At September 30, 1999, the Company's long-term
borrowings increased by $2 million to $133.7 million from $131.7 million at
December 31, 1998 while its short-term borrowings increased by $30.9 million to
$69.4 million from $38.5 million at year end. At September 30, 1999, borrowed
funds totalled $203.0 million, increasing $32.9 million from the $170.1 million
reported at December 31, 1998.
17
<PAGE>
STOCKHOLDERS' EQUITY
The Company's capital to assets ratio was 7.68% and 8.88% at September 30, 1999
and December 31, 1998, respectively.
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and 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, 1998, the Company and the Bank met all capital adequacy requirements to be
categorized as well capitalized. No conditions or events occurred during the
first nine months of 1999 that management believes have changed the Company's or
the Bank's category. Therefore, management believes as of September 30, 1999
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, 1999 was $11.03 per share, compared to
$11.74 per share at December 31, 1998.
18
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 vs QUARTER ENDED SEPTEMBER 30, 1998
NET INTEREST INCOME
Interest and dividend income from loans and investments increased $467,000 or
2.4% to $19.7 million for the 1999 third quarter when compared to the same
quarter in 1998. For the 1999 third quarter, average earning assets totaled $1.2
billion, an increase of $77.0 million or 7.1% over the comparable average for
1998, with $48.5 million of that increase attributed to short-term investments
and investment securities and $27.0 million attributed to loans. The annualized
yields on earning assets were 6.76% and 7.07% for the third quarters in 1999 and
1998, respectively. The yield on investment securities was 6.04% for the third
quarter 1999 as compared to 6.21% for the third quarter 1998. Short-term
investments and investment securities contributed $531,000 of additional
interest and dividend income when comparing the third quarter of 1999 to the
third quarter of 1998, primarily as a result of higher average balances. The
increase in the average balance on loans was more than offset by a yield
decline, from 7.82% to 7.43%, such that interest income on loans decreased by
$64,000 from its 1998 third quarter level.
Total interest expense for the three months ended September 30, 1999 was $10.9
million, reflecting a modest increase of $5,000 or .05% over the same period in
1998. At September 30, 1999 average interest bearing liabilities were $1.1
billion, an increase of $73.4 million or 7.5% over the comparable prior year
period. This period-to-period increase can be attributed to average deposit
growth of $61.9 million and average borrowed funds increase of $11.5 million.
Deposit growth occurred even as rates paid declined from 4.06% to 3.77% for the
quarters ended September 30, 1998 and 1999, respectively. Overall, interest
expense on deposits remained flat at $8.1 million as increases in average
deposits offset the lower rate environment. Interest expense on borrowed funds
increased $5,000 as the average balances increased and the rates paid declined
33 basis points to 5.44% in the third quarter of 1999 compared to the third
quarter in 1998. The overall cost of interest bearing liabilities decreased to
4.08% from 4.39% when comparing the two quarters.
Net interest income increased 5.6% or $462,000 to $8.8 million when comparing
the third quarter in 1999 to the same quarter in 1998, as the growth in average
earning assets more than offset the decrease in net interest margin of 5 basis
points. The weighted average rate spread remained unchanged at 2.68% as the
yield on earning assets declined 31 basis points to 6.76% in the third quarter
1999 as compared to the same quarter in 1998, while at the same time, the cost
of interest bearing liabilities also decreased by 31 basis points to 4.08%. The
decline in yield on earning assets reflect lower yields in investment securities
and on residential and commercial real estate loans resulting from refinancings
and competition for loans. Lower rates on both deposits and borrowings reflect
changes attributable to the lower rate market environment during the periods.
19
<PAGE>
MEDFORD BANCORP, INC.
INTEREST RATE SPREAD
Three Months Ended
September 30,
------------------
1999 1998
---- ----
Weighted average yield earned on:
Short-term investments 5.02% 5.36%
Investment securities 6.04 6.21
Loans 7.43 7.82
---- ----
All earning assets 6.76 7.07
---- ----
Weighted average rate paid on:
Deposits 3.77 4.06
Borrowed funds 5.44 5.77
---- ----
All interest-bearing liabilities 4.08 4.39
---- ----
Weighted average rate spread 2.68 2.68
---- ----
Net interest margin 3.06% 3.11%
==== ====
20
<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 September 30, 1999, 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 no provision for loan losses for the third quarter of 1999
and the third quarter of 1998. Net loan charge-offs for the three months ended
September 30, 1999 were $75,000 compared to net loan recoveries of $2,000 for
the same period in 1998.
OTHER INCOME
Other income, including customer service fees and gains and losses on sales of
assets equaled $647,000 in the third quarter of 1999 as compared to $917,000 in
the third quarter of 1998, representing a decrease of $270,000 or 29.4%. The
$244,000 decrease in combined gains on sales of securities and loans, when
comparing the third quarters of 1999 to 1998, principally accounts for the
decrease in other income. See related discussions under "Investment Securities"
included in "Management's Discussion and Analysis" in Item 2 of Part I of this
report.
OPERATING EXPENSES
Operating expenses decreased a modest $4,000 or 0.1% to $4,777,000 for the three
months ended September 30, 1999 when compared to the same period in 1998.
Although overall operating expenses declined, increases in occupancy, equipment
and data processing expenses amounted to $97,000. The increase in these costs
can be principally explained by the added expenses from the reopening of our
North Reading branch and the opening of our Tewksbury branch office in September
1998. Overall decreases in the other operating expenses more than offset the
aforementioned increases. The Company's annualized expense ratio, which is the
ratio of non-interest expense to average assets, was 1.58% for the three months
ended September 30, 1999, as compared to 1.68% 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.
PROVISION FOR INCOME TAXES
The Bank's effective tax rate for the three months ended September 30, 1999 was
34.9% as compared to 36.5% for the period ended September 30, 1998. The impact
of state taxation has been reduced as a result of investment activity in the
Bank's security corporation.
21
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 vs NINE MONTHS ENDED SEPTEMBER 30, 1998
NET INTEREST INCOME
Interest and dividend income from loans and investments increased $107,000 or
0.2% to $57.9 million for the nine months ended September 30, 1999 compared to
the same period in 1998. Over the nine month period in 1999 average earning
assets totalled $1.14 billion, an increase of $58.3 million, or 5.4%, over the
comparable average for 1998, with $42.8 million of that increase derived from
short-term investments and investment securities and $15.5 million from loans.
The yield on earning assets equaled 6.78% and 7.14% for the nine months ended
September 30,1999 and 1998, respectively. The yield on investment securities was
6.03% for the nine month period ended September 30, 1999, a decrease of 19 basis
points from 6.22% for the same period in 1998. Primarily as a result of a higher
average balance, short-term investments and investment securities contributed
$1.1 million of additional interest and dividend income when comparing the first
nine months of 1999 to the same period in 1998. Interest income on loans
decreased $1.1 million to total $33.4 million from the nine month period ended
September 30, 1999 to the comparable 1998 period as the increase in the average
balance on loans was more than offset by the 45 basis point yield decline to
7.48%.
Average interest bearing liabilities increased $58.7 million over the comparable
prior year period as average deposits increased $65.4 million while average
borrowed funds decreased $6.7 million. Total interest expense for the nine
months ended September 30, 1999 was $32.0 million, which was essentially
unchanged from the same period in 1998. This resulted from increases in interest
expense on deposits being offset by the decrease in interest expense on borrowed
funds. Total interest expense on deposits increased $751,000 to $24.5 million as
the decline in weighted average cost of interest bearing deposits to 3.86% from
4.05% for the nine months ended September 30, 1999 and 1998, respectively, was
more than offset by the increase in average deposits. Interest expense on
borrowed funds decreased $772,000 or 9.4% as both average balances and rates
paid declined by $6.7 million and 35 basis points, respectively. The overall
cost of interest bearing liabilities decreased to 4.14% from 4.39% when
comparing the two periods.
Net interest income totaled $25.9 million for the nine months ended September
30, 1999, up $128,000 or .50% and represented a net interest margin of 3.04%
compared to $25.8 million and 3.19% for the nine months ended September 30,
1998, respectively. Average earning assets continued to grow; however, net
interest margin declined fifteen (15) basis points from last year. During these
comparable periods, yields on earning assets declined at a faster pace than
rates paid on interest-bearing liabilities. The decrease in asset yields can be
attributed to the prepayment of commercial real estate loans due to intense
pricing competition and significant residential real estate refinancing related
to the decline in home mortgage rates. Declines in interest-bearing deposits can
be accounted for by lower rates paid on core accounts as well as on matured
certificates of deposits. The decrease in the rate paid on borrowings can be
accounted for by the higher rate FHLB borrowings at lower funding costs.
22
<PAGE>
MEDFORD BANCORP, INC.
INTEREST RATE SPREAD
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
Weighted average yield earned on:
Short-term investments 4.74% 5.34%
Investment securities 6.03 6.22
Loans 7.48 7.93
---- ----
All earning assets 6.78 7.14
---- ----
Weighted average rate paid on:
Deposits 3.86 4.05
Borrowed funds 5.45 5.80
---- ----
All interest-bearing liabilities 4.14 4.39
---- ----
Weighted average rate spread 2.64 2.75
---- ----
Net interest margin 3.04% 3.19%
==== ====
23
<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 September 30, 1999, 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 no provision for loan losses for the nine months ended
September 30, 1999 compared to $75,000 provided for the same period in 1998. Net
charge-offs for the nine months ended September 30, 1999 totalled $104,000
compared to net recoveries of $67,000 for the same period in 1998.
OTHER INCOME
Other income, such as customer service fees and gains and losses on sales of
assets, equaled $3.5 million in the first nine months of 1999 remaining level
with the same period in 1998. See related discussions under "Investment
Securities" 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 $118,000 or .84% for the
nine months ended September 30, 1999 compared to the same period in 1998. The
most significant increases were in occupancy, equipment and data processing, up
$265,000 or 9.7% resulting from the additional operating expenses associated
with the reopening and opening, respectively, of our North Reading and Tewksbury
branch sites. All other operating expenses were $147,000 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 1.63%
for the nine months ended September 30, 1999, as compared to 1.69% for the prior
year comparable period.
PROVISION FOR INCOME TAXES
The Bank's effective tax rate for the nine months ended September 30, 1999 was
36.1% as compared to 38.3% for the period ended September 30, 1998. The impact
of state taxation has been reduced as a result of investment activity in the
Bank's security corporation.
24
<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 seeks to promote 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. 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 shorter-term debt securities
reduces market risk in the bond portfolio while providing significant cash flow.
For the nine months ended September 30, 1999 cash flow from maturities and sales
of securities was $163.7 million compared to $219.9 million for the nine months
ended September 30, 1998. Principal payments received on mortgage-backed
investments during the nine months ended September 30, 1999 and 1998 totalled
$40.5 million and $24.8 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 payoffs 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 September 30, 1999
the Company's outstanding borrowings from the FHLBB were $178.6 million, as
compared to $131.6 million at December 31, 1998. 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
$24.2 million at September 30, 1999 as compared to $38.3 million at December 31,
1998.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
(continued)
Commitments to originate residential and commercial real estate mortgage loans
at September 30, 1999 excluding unadvanced construction funds of $18.1 million
were $12.5 million. Management believes that adequate liquidity is available to
fund loan commitments utilizing deposits, loan amortization, maturities of
securities, or borrowings.
Purchases of securities during the nine months ended September 30, 1999 totalled
$240.0 million consisting of debt instruments generally maturing in less than
five years and equities. This compares with purchases of $230.0 million for the
nine months ended September 30, 1998.
Residential and commercial real estate mortgage loan originations for the nine
months ended September 30, 1999 totalled $113.9 million, compared with $134.3
million for the nine months ended September 30, 1998.
The Company's capital position (total stockholders' equity) was $92.4 million or
7.68% of total assets at September 30, 1999 compared with $102.3 million or
8.88% of total assets at December 31, 1998. During the nine months ended
September 30, 1999 the Company completed a second 5% stock repurchase plan. A
total of 425,796 shares of common stock were repurchased. The Company's capital
position exceeds all regulatory requirements.
26
<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.
27
<PAGE>
YEAR 2000 DISCLOSURE
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the "Year 2000 Information and Readiness Disclosure Act."
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 Y2K compliance. Diligent
efforts, with management's participation, are being conducted by the Company to
address Y2K concerns that affect its operations. The objective of the Company's
Y2K compliance efforts is to enable its internal systems to function normally
with dates prior to, during, or after the year 2000. Additionally, compliance
shall also include out-sourced systems upon which the Company relies for normal
bank operations. The Company monitors compliance efforts of these vendors to
adequately assess readiness and has sought and received 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 in May 1997. The statement outlines five phases
essential to the Y2K remediation process. The Company's 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 follow:
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 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.
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
embedded microchips. The Task Force has identified its third party vendor
("Third Party") of data processing for
28
<PAGE>
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 Y2K compliance progress through newsletters,
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, to which
satisfactory responses have been received.
3. Renovation Phase - Includes code enhancements, hardware and software
upgrades, system replacements, vendor certifications, and other associated
changes. 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 Y2K software
conversions. The Company and Third Party successfully completed a conversion to
the "Year 2000 Outsourcing Solution," the Y2K-ready platform, in early October
1998. Replacement of in-house software and hardware identified in its assessment
phase was substantially complete at 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 outlines the
objectives, scope and completed 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 were
completed at year-end 1998.
5. Implementation Phase - In this Phase, systems should be certified as
Y2K compliant and be accepted by the Company. The Company's implementation and
certification of Y2K compliance is substantially complete.
Costs of the Y2K compliance effort during 1998 totaled $20,440 and were expensed
as incurred. Additional costs of approximately $43,000 have been expensed during
the first nine months of 1999 out of $50,000 budgeted for 1999. Based upon
currently available information, this 1999 amount will not have a material
impact on the Company's on-going results of operations. A substantial part of
the Y2K 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
29
<PAGE>
ordinary course of business of maintaining industry technology standards, and
are not considered to be instrumental to the Company within the context of the
Y2K project.
A Remediation Contingency Plan for the Third Party computer application was
prepared and reviewed during the third quarter of 1998. During the 1999 first
quarter, the Task Force determined that activation of the Remediation
Contingency Plan would not be necessary given the Third Party's progress in Y2K
compliance. The Task Force finalized and the Board of Directors approved its
Third Party Business Resumption Contingency Plan which outlines how the Company
would resume business if unanticipated problems arise from nonperformance of the
Third Party.
In addition to the Third Party Business Resumption Contingency Plan, the Company
has developed a Liquidity Contingency Plan to address liquidity problems that
may arise from customer concerns relating to Y2K. To mitigate such concerns, the
Company will continue its efforts to provide updates and assurance to its
customer base through its customer awareness program. Although the Company has
taken reasonable steps to anticipate Y2K-related problems, no assurance can be
given that the Company, or vendors, governmental agencies, companies, etc. that
interface with the Company will resolve their Y2K issues in a successful and
timely fashion or that the costs of the Company's efforts will not exceed
current estimates. If the Company does not resolve such issues, or does not do
so in a timely manner, the Y2K issue could have a material adverse impact on the
Company's business, future operating results and financial condition. In
addition, 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 enforcement actions.
The preceding Y2K discussion contains various 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. These
forward-looking statements represent the Company's beliefs and expectations
regarding future events. When used in the Y2K 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
Y2K 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 Y2K problems.
30
<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, 1998 (the "1998 Annual Report").
For quantitative information about market risk, see Item 7A of Part II of the
Company's 1998 Annual Report.
There have been no material changes in the quantitative and qualitative
disclosures about market risk as of September 30, 1999 from those presented in
the Company's 1998 Annual Report.
31
<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
None.
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, 1999.
32
<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 10, 1999
/s/ Arthur H. Meehan
-----------------------------------------------
Arthur H. Meehan
Chairman, President and Chief Executive Officer
Date: November 10, 1999
/s/ Phillip W. Wong
-----------------------------------------------
Phillip W. Wong
Executive Vice President, Treasurer and Chief Financial Officer
33
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 18,010
<INT-BEARING-DEPOSITS> 356
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 516,011
<INVESTMENTS-CARRYING> 8,000
<INVESTMENTS-MARKET> 0
<LOANS> 617,486
<ALLOWANCE> (6,772)
<TOTAL-ASSETS> 1,203,415
<DEPOSITS> 901,678
<SHORT-TERM> 69,376
<LIABILITIES-OTHER> 6,276
<LONG-TERM> 133,653
0
0
<COMMON> 4,561
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<INTEREST-INCOME-NET> 25,899
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 1,522
<EXPENSE-OTHER> 14,192
<INCOME-PRETAX> 15,234
<INCOME-PRE-EXTRAORDINARY> 15,234
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,728
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 6.78
<LOANS-NON> 3,158
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